Aug 31 (Reuters) – Global oil companies are pumping billions into offshore drilling, reversing a long decline in spending on decades-old projects, including some in iceberg-away waters off Canada’s Atlantic coast .
Soaring oil prices are encouraging investment, along with Europe’s growing energy demand as the war between Ukraine and Russia drags on.
Offshore production sites are more expensive to build than onshore shale, the investment darling of the past decade. But once they’re up and running, they can generate profits at lower prices than other forms of generation, according to consultancy Rystad Energy.
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They’re also designed to pump oil for decades, a counter-intuitive move that could increase financial risk for projects as the world pushes for net-zero greenhouse gas emissions by 2050 to slow climate change. .
Offshore projects generate fewer emissions per barrel than other forms of oil production due to their massive scale, but they would still increase global air pollution. Environmental groups warn that offshore spills are difficult to clean up.
One of the most remote developments is near Canada, where Norwegian company Equinor ASA (EQNR.OL) is set to make a final decision on its Bay du Nord project 500 kilometers (311 miles) offshore Newfoundland and Labrador.
The site is so far from shore that it falls into international waters, requiring Canada to pay royalties to the United Nations. It would be a world first, according to Energy Regulation Quarterly, illustrating how far producers are willing to go for oil supplies that could last up to three decades.
Canada has set a goal of reducing its emissions by 40% to 45% by 2030 compared to 2005 levels, but Ottawa still approved Equinor’s North Bay of 16 billion Canadian dollars (12 .37 billion) in April, saying it raised no significant environmental concerns.
Ottawa could approve more such projects as long as they produce low emissions, have best-in-class technology and can become net zero by 2050, said Jonathan Wilkinson, Canada’s Minister of Natural Resources. Bay du Nord is expected to produce less than 8 kilograms per barrel of carbon dioxide, Equinor estimates, less than half the international average.
“These facilities that produce oil and gas with zero or near-zero production emissions will be the last ones standing,” Wilkinson said.
Bay du Nord, which could first produce oil by the end of the decade, could be the first of several massive projects off Newfoundland. OilCo, a Newfoundland government corporation, has identified 20 potential projects with 1 billion barrels of reserves each, CEO Jim Keating said.
Such projects come with challenges not seen on land.
The Bay du Nord floating production, storage and offloading unit would measure more than a city block, producing crude in icy waters known for waves up to 15 meters high in winter, according to Equinor. Icebergs drift through the area between March and July, and two endangered species of sea turtles inhabit its waters.
“Canada already has profitable producing fields away from the coast with similar weather conditions,” said Wood Mackenzie upstream analyst Marcelo de Assis, noting that the project’s water depth of 650 to 1,170 meters is much lower than wells elsewhere at 3,000 meters.
According to Rob Strong, a longtime consultant to the Newfoundland oil industry, Bay du Nord is so far from shore that helicopters carrying workers on three-week shifts might carry only eight people, the half the usual number, to account for extra fuel.
Despite the high initial construction cost, projects like Bay du Nord are of interest to companies because the 500 million barrels of recoverable reserves would be enough to last 20 years.
Equinor declined to provide an estimate of production costs, though it said major projects coming through the end of 2030 will, on average, break even with oil below $35 a barrel.
Production from offshore projects has an average equilibrium price of $18.10 per barrel of oil equivalent, compared to $28.20 per barrel for onshore, according to Rystad.
Other companies invested in Canadian offshore projects this spring. BP PLC (BP.L) bought a stake in Bay du Nord and Cenovus Energy (CVE.TO) revived a stalled project. Read more
Global offshore investment is expected to rise 27% from 2021 levels to reach $173 billion in 2024, reversing a decade of decline and growing slightly faster than onshore investment, Rystad estimates.
“I went through ups and downs like a yo-yo,” said Strong, who has been called “the grandfather of Newfoundland’s offshore oil industry.” He added: “Two years ago I was in the depths of depression. Today I am very optimistic.”
The profitability of offshore projects depends on future oil demand and forecasts vary widely. The International Energy Agency (IEA) in 2021 advised against new fossil fuel projects for the world to reach net zero emissions by 2050 if global transportation is powered entirely by electric vehicles and renewable fuels from by mid-century, oil demand would drop 75% to around 25 million barrels a day, the IEA said.
Bay du Nord could become a stranded asset before the end of its life if oil demand peaks between 2025 and 2030 and global crude needs are met by lower-cost regions like the Middle East, Jean said. -François Mercure, Associate Professor of Political Climate Change with the University of Exeter, England.
“The financial risk will be very high,” Mercury said.
However, Wood Mackenzie estimates that oil demand is only expected to fall by half even in its most ambitious 2050 energy transition scenario – and could even increase.
‘PRECIOUS AND FRAGILE’
Offshore production emits less carbon per barrel than onshore because the massive scale of projects and new technologies make it easier to reduce flaring and methane emissions and recycle heat.
Offshore projects always carry huge environmental risks, said Gretchen Fitzgerald, director of Sierra Club Atlantic. After a spill, Equinor would be unlikely to contain oil due to intense wave action and would instead use chemicals to disperse it. Such an approach could harm northern bottlenose whales and deep-sea corals, she said.
“Because it’s so far offshore, it’s hard for people to imagine what the environment is like. But it’s quite precious and fragile,” Fitzgerald said.
Equinor will only approve projects if they are “convinced they are safe and environmentally friendly”, spokesman Ola Morten Aanestad said, adding that he has a long history of working in harsh environments.
Other European oil majors are setting similar targets. Shell PLC (SHEL.L) and BP plan to cut crude output over time, but say they will continue to invest heavily overseas. Each adds a new Gulf of Mexico platform this year.
“We believe that hydrocarbons will be part of the energy mix for many decades to come,” said Paul Goodfellow, Shell’s executive vice president for global deep waters.
Offshore represents about a third of the world’s oil production, but this could increase in the years to come.
“The energy transition is expected to take about 25, 30 years,” Assis of WoodMac said. “It will be difficult to eliminate oil. The energy crisis in Europe reminds us of this.”
($1 = 1.2935 Canadian dollars)
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Reporting by Rod Nickel in Winnipeg and Sabrina Valle in Houston; additional reporting by Steve Scherer in Ottawa and Nerijus Adomaitis in Oslo; Editing by David Gregorio
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