Deep Water: The Future of Oil and Gas Exploration

It feels like a long time since I’ve seen this:

Last month, oil giant BP announced a significant discovery off the Brazilian coast, near Rio de Janeiro.

It was in an area known as the Santos Basin.

A spot where ocean depths exceed 2,000 metres! Almost two kilometres below the water line.

So, why bring it up?

I think there’s an emerging (but important) trend underway in oil and gas exploration: It’s going deep.

Why?

Easy sources of crude have been tapped.

Reserves sitting close to shore (or on land) have, for the most part, been discovered.

That’s why O&G companies are heading further offshore to uncover the next generation of discoveries.

But of course, that comes with inflated costs.

Exploring, as well as developing, oil and gas wells hundreds of kilometres offshore brings logistical challenges.

Transporting crude from wells to refineries in hazardous, exposed oceanic waters is one challenge.

But it also means tapping into frontiers where humans have never ventured.

Oil firms exploring these deep oceanic waters off the continental shelf sit at the edge of technological innovation… Like undertaking repairs thousands of metres below the water line.

With extreme pressures, these wells are far too deep for commercial divers; the contractors that would usually repair or maintain shafts, valves, and the many other parts exposed to extreme conditions.

Deep offshore O&G exploration and development lives on the edge!

Often relying on remotely operated vehicles (ROVs) as the only option to access deepwater wells:

Source: Deep Ocean

So, it doesn’t take too much to understand that these particular sources of oil and gas sit on the higher cost curve for companies looking to bring them into production.

That’s why when oil prices began to fall after 2014, the deepwater oil and gas industry was hit especially hard.

In many cases, crude prices fell BELOW breakeven for deepwater producers, sending smaller players out of business.

In fact, because of the costs and the fact that these projects are barely viable, for the moment, only the majors are participating in the hunt for deep offshore sources. According to Wood Mackenzie:

“As fields get deeper and increasingly technically challenging, deepwater will remain an industry for those with deep pockets. It’s significant that 74% of the projected US$250 billion of pre-FID spend sits on the books of eight companies.”

Of those eight, include giants like Shell, Chevron, and BP; the only companies capable of playing in this lavish, seemingly self-destructive and capex-intensive game of deepwater O&G development.

So why do it?

Mining Memo’s Take

Clearly, finding future reserves of oil and gas means going into new frontiers, just like mineral exploration.

But for the oil and gas industry, that means moving further offshore into places never explored by humans.

But if these deepwater projects barely break even, why are the big players like BP bothering to look?

Especially given that the death knell for the oil and gas industry is seemingly around the corner, thanks to the global net-zero pledge.

Why spend hundreds of millions exploring for an asset that could potentially be stranded with no buyers?

In my mind, that’s the key question to ask. Do these multi-billion-dollar giants see something the rest of us don’t?

Hunting down and securing rights to deepwater basins.

Undoubtedly, they’re pouring money into these projects for a reason. That’s because they’re potentially preparing for what comes next…

Higher prices!

Why else would some of the world’s most influential and powerful companies risk so much capital in marginal projects?

For better or worse, oil and gas giants know we still live in an oil-fuelled economy, and that’s likely to exist longer than most anticipate. Perhaps decades.

So, why not plant their flag in basins that could one day become much more valuable?

Discover, then sit on these deepwater assets and wait for higher prices to warrant their development.

That’s the strategy I think they’re playing.

And as an investor, you should also consider this long-game tactic.

Accumulate a list of cheap oil and gas stocks with long-life projects, and wait for the inevitable recovery in oil and gas prices.

And that could arrive far sooner than most anticipate.

I’ll have more to say on that later in the week.

Stay tuned!