Shell's Radical Rig

Jesse Bogan 10.30.08, 6:00 PM ETForbes Magazine dated November 24, 2008

Records are short-lived in the game of global hydrocarbons. The latest contender on the world stage is the Gulf of Mexico’s Perdido Development, which stands to become the deepest offshore oil-and-gas drilling and production hub. Shell, the lead operator, is angling 200 miles from shore in water starting at 7,500 feet deep. The oil in some areas is at least another mile below the seafloor. Perdido’s 50,000- ton hulk is being built so far from the pack that fuel for its helicopters is likened to water in the desert, its engineering to work on the moon. A fourth of the nation’s oil production comes from the Gulf, 1.3 million barrels a day. Perdido, which means “lost” in Spanish, will show how feasible it is to go after pockets of the estimated 3 billion to 15 billion barrels in the Lower Tertiary Trend, a geological play that extends from offshore Alabama to Mexico. Shell won’t say how much Perdido will cost or estimate its reserves down there, but energy consultancy Wood Mackenzie suspects a $6.7 billion tab to develop the three fields adjacent to the platform. Combined, they may hold the equivalent of 500 million barrels of recover able oil. Shell made its first discovery in these waters in 2002, when oil was $30 and 3,000 feet of water was deep. The collapse of oil’s price from $146 to $67 greatly lessens the profitability of deepwater drilling but does not eliminate it. Says Russell Ford, Shell vice president of technology for exploration and production in the Americas: “Shell takes a long-term view on oil prices in its investment decisions. Short-term price volatility will not impact the Perdido project.” When completed, Perdido will look like a giant hat on a 118-foot ( diameter) beer-can-shaped spar that’s tied down to the seafloor and designed to withstand a thousand-year storm. Shell will drill below the spar with spaghetti-like shafts tapping the seafloor in a 250-foot radius. Through subsea tiebacks, the spar will process oil and gas from wells drilled by a mobile unit as far as 9 miles away. The 22 wells directly beneath the spar will be drilled from the spar, which will be built to handle 130,000 barrels a day. First oil is expected around 2010. Out where Perdido floats, the subseafloor geology is like nothing else in the Gulf, so it’s unclear what types of wells will be needed, or how or if the medium-quality crude will flow between multiple fault lines. “We don’t have another next - door neighbor that says, ‘Well, this guy produces this way, so it will produce that way,’” says Bill Townsley, Shell’s development venture manager for Perdido. “Is the reservoir the size of this room or this building?” Shell hopes it won’t have to drill too often to find out if the pockets have mill ions of barrels or tens of millions. Noble Corp.’s monstrous floating machine called the Clyde Boudreaux began drilling wells for Perdido in July 2007. Such work can fetch $1 mill ion a day. Inside a container compartment on the steel island, Clay Groves, a 50-year- old superintendent for Oceaneering International, nears the end of a three-week shift. Sitting before a series of monitors, he “flies” a remotely operated vehicle the size of an elevator along the seabed. The robot is an industrial gofer that can retrieve 900 pounds of equipment, tighten valves with manipulator arms and relay video of progress or setbacks from below. At 9,300 feet the robot sub caught a lone shrimp in its headlights, and the frightened creature flitted out into the darkness, perhaps to avoid being eaten. Groves has seen “gelatinized blobs,” enormous squid and sharks, but he shrugs his shoulders at the latest reaches of the oil industry. “I am sure they will go deeper and deeper.” Extreme weather is one risk; the 2008 Hurricanes Ike and Gustav caused 75% of the oil production in the Gulf to be shut for a month. Technological uncertainty is another, as Shell combines old and untested techniques to get to deeper, more complex reservoirs. “The oil business has always been about taking risk— you just hope it is exploration risk, not project risk,” says Julie Wilson, Mackenzie’s senior analyst for Gulf of Mexico research. “Increasingly operators have to think about project risk and how to mitigate it. Very few have gone without a glitch.” BP’s Thunder Horse, 150 miles southeast of New Orleans, is claimed as the world’s largest floating platform. It is the size of a city block. Sitting on 6,200 feet of water, it is designed to process 250,000 barrels of oil and 200 mill ion cubic feet of natural gas per day. The estimated $8.3 bill ion project opened in June after being delayed three years when the 2005 Hurricane Dennis hobbled the structure. Later subsea welds on the well equipment didn’t hold under the extreme pressure. Chevron’s Tahiti project, also in the Gulf and a $4.7 billion investment, was delayed a year by metallurgical problems discovered after the mooring shackles were set in 4,000 feet of water. Lessons learned there are being applied to Perdido, says Rick A. Wright, deepwater manager for Chevron, which has a 37.5% interest in Perdido, along with Shell’s 35% and BP’s 27.5%. But Perdido hasn’t been immune to mistakes. An enormous blowout preventer broke free of its riser as it was being lowered. It crashed on the seafloor. Logistics are also a bit of a challenge. The 555-foot-long spar, costing perhaps $1.8 bill ion, was set in place in August. Nine polyester mooring lines, each 2.4 miles long, tether it to the seafloor. The spar was built in Finland and then shipped 8,200 miles to Ingleside, Tex., where Peter Kiewit Sons’ is constructing the production platform and living quarters for 150 people. Heerema Marine’s Thialf, the only construction vessel in the world stout enough for the job, will lift the topside in one hoist onto the spar next year. Thialf is off the coast of Africa at the moment. Shell had to get in line three years in advance. The heart of Perdido will be in the darkness of 40-degree Fahrenheit water. There will be enough natural pressure in the wells to move oil and gas to the seafloor but not to the spar. Oil and gas will be separated below, then boosted up top by 1,500hp pumps powered by gas turbines on the spar. The U.S. Minerals Management Service (MMS) welcomes Perdido because it brings infrastructure to an isolated section of the Lower Tertiary Trend, says Lars Herbst, director of the Gulf region. He expects the development will expedite fut re projects because a new platform won’t be needed. Other companies could link to it several miles away through subsea tiebacks. Williams Inc. of Tulsa is investing $480 mill on, including 184 miles of new oil and gas pipeline, to hook Perdido up to the existing network that brings oil and gas to refineries onshore. Perdido is Shell’s largest effort yet in the Gulf, and a sizable portion of the stress behind its success or failure rests on the back of Ford, the vice president. Inflation in the oil industry has doubled since 2004, but he says Shell is fine with the cost and timing. “The challenge is you are the first one there, but the reward is, you’ll understand more than anybody else.”