Big oil has been very successful at developing sophisticated technology to access oil in some pretty remote areas. Consider the technological skill necessary to drill several miles below the seabed at staggering depths, or the processing equipment needed to transform viscous bitumen into usable fuel — these are impressive feats of engineering and science.
But after years of spending billions of dollars on these challenges, the world’s largest oil companies are running into a serious problem; many projects are not profitable and won’t be anytime soon.
The Carbon Tracker Initiative (CTI) has put together an impressive report that outlines the biggest and riskiest oil projects around the world being pursued by the oil majors. Many of them will not even break even unless oil prices rise by $30 to $40 dollars per barrel above the current price, which is around $100.
So, why then are oil majors putting shareholders’ money at risk by chasing such costly projects? CTI’s research identified a list of the costliest projects being pursued by the oil majors, which can be loosely grouped into five regions around the world. These projects are unprofitable, yet oil companies continue to pour money into them.
1. Canadian Oil Sands
Canada holds 173.6 billion barrels of oil, the third largest total in the world. But 98 percent of those reserves (170 billion barrels) are in the form of heavy bitumen, or oil sands. Oil sands are a semi-solid mixture of sand and viscous petroleum, and working with them is more similar to open-pit mining than traditional oil drilling. Once the oil sands are extracted, they need to be upgraded and refined in order for the oil to be able to flow through a pipeline. The effort means that Canada’s oil sands are some of the most expensive projects — not to mention dirtiest — in the world. The CTI report says that the world’s six most expensive projects being pursued by Big Oil are all located in Alberta’s oil sands. ConocoPhillips’ Foster Creek project tops the list, with a whopping breakeven price of $159 per barrel.
2. Offshore West Africa
After the oil sands, a slew of projects under consideration off the coast of Nigeria and the Ivory Coast are next in line as the world’s most expensive. They are in deep water (up to 5,000 feet) and ultra-deepwater (deeper than 5,000 feet). As such, they are expensive. But it’s more than just technical challenges that put a high price on West African drilling. Security threats, from piracy to sabotage, add additional layers of expense. French oil giant Total is considering drilling a well near the Ivory Coast, but it has a breakeven price of $127 per barrel. Exxon Mobil (NYSE:XOM) and Shell (NYSE:RDS.A) are contemplating spending billions in Nigerian waters with similar cost figures.
3. Offshore Brazil
Brazil offers a much safer environment to work in, with little threat from gangs or pirates. But Brazil’s pre-salt is one of the most technically challenging areas in which to operate. The oil is located beneath a thick layer of salt, which itself is located thousands of feet below the surface of the sea. Brazilian state-owned oil company Petrobras (NYSE:PBR) is doing much of the heavy lifting, but BP (NYSE:BP) and Shell are also looking at pouring money into Brazilian ultra-deepwater projects, with breakeven prices above $120 per barrel.
4. The Arctic
The far north offers oil companies a different set of challenges than most other places. A lack of infrastructure, severe cold, sea ice, and harsh storms can hinder development and inflate costs. Shell found this out the hard way after spending several years and nearly $6 billion to drill in the Arctic, with little success. CTI assessed other Arctic projects, such as BP’s Liberty prospect, and Chevron (NYSE:CVX) and ConocoPhillips’ (NYSE:COP) Amauligak project, each in the Beaufort Sea. Both projects have breakeven prices between $109 and $113 per barrel.
5. Gulf of Mexico
In much more hospitable climes, like the Gulf of Mexico, companies can drill for oil profitably. The Gulf of Mexico accounts for 16 percent of total oil production in the United States. But costs are rising there, and not all projects are profitable given current price levels. Shell made a 2013 discovery of oil near the Yucatan, but it was located in the “lower tertiary” reservoirs buried extra deep. As other wells mature, the lower tertiary offers one of the last frontiers for oil exploration. But drilling that deep is expensive, and Shell’s project has a breakeven price hovering around $99 per barrel.
Originally written for OilPrice.com, a website that focuses on news and analysis on topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.