Deepwater risk

The new frontier: Deepwater exploration

The market for deepwater and ultra-deepwater exploration and production is forecasted to continue growing rapidly over the next several years. These projects require technological and infrastructure advancements from this new frontier. Michael Venturella, Practice Leader-Marine Group, (Top left) and Guillermo Ramirez, (Bottom left) Principal Engineer-Major Loss, of Envista Forensics provide an analysis of potential risks for insurers to consider

Deepwater offshore oil and gas exploration and production takes place at depths of 1,640 feet or more. Ultra-deepwater activities involve depths over 4,921 feet. Deepwater operations present unique challenges involving changes to offshore rigs, support vessels, and technology, which become further complicated in an ultra-deepwater environment.

MARKET SUPPORTS GROWTH

The US Energy Information Administration Short-Term Energy Outlook produced in June 2021 demonstrates that world fuel consumption, which dipped slightly during the COVID-19 pandemic, will continue to increase beyond pre-pandemic numbers by the year 2022.

The 2022 forecast of 101.31 million barrels per day will increasingly come from deepwater production. Global deepwater production has grown 13% annually since 1990, as the depth of unexplored fields gets deeper.

Wood Mackenzie, a global research and consultancy business, forecasts that by 2023 more than half of the deepwater production will be ultra-deepwater, with Brazil, Guyana, and the US leading the way. Through cost-cutting and efficiency gains, deepwater projects experienced cost reductions of approximately 30-40% between 2014 and 2017 per Mordor Intelligence, a market intelligence organisation. Oil prices have rebounded and, combined with this cost reduction, has made additional deepwater projects viable options.

“The 2022 forecast of 101.31 million barrels per day will increasingly come from deepwater production. Global deepwater production has grown 13% annually since 1990, as the depth of unexplored fields gets deeper.’’

EVOLUTION OF OFFSHORE RIGS

The technology first developed in the 1950s for the extraction of oil in shallow waters cannot be fully translated to deep and ultra-deepwater without major modifications.

For example, fixed platforms and jackup rigs would be cost prohibitive to develop and implement at such depths, not to mention the technological challenges that would come with those systems. This, in addition to necessary modifications to the topsides for production in this environment, created the need to develop new approaches for exploration and extraction.

Mobile systems became the new holy grail of deepwater exploration starting in the early 1960s with Shell Oil Company recognizing the advantage of Mobile Offshore Drilling Units (MODUs) for fields in the Gulf of Mexico with its deeper waters and harsh weather.

Shell converted a first generation submersible MODU to a semisubmersible unit for work in the Gulf. However, even this system showed its limitations as the water depth increased.

This new MODU saw several modifications and improvements from the 1960s to the late 1990s. Today, this technology continues to improve and adapt to the increasing water depths, in addition to the use of ship and barge systems for drilling and compliant systems, such as Floating Production Storage and Offloading (FPSO), Tension Leg Platforms (TLP), and Single Point Anchor Reservoirs (SPAR). These are creating new viable opportunities in deepwater exploration and production.

The oil industry has had success drilling in water depths over 10,000 feet and operating in the most severe environments. Originally, all of this came at a very high cost that ran into hundreds of thousands of dollars per day. Ultra-deepwater wells costing more than $50m have become common, and some wells have reached more than $100m.

However, costs went down between 2014 and 2017, making these conditions more attractive to producers. For insurers, it would be difficult to justify wells at a steep cost without appropriate handling of the risks involved in drilling at these depths.

DEEPWATER EXPLORATION RISKS

Exploration in deep and ultra-deepwater results in new challenges and consequently brings about new risks for the industry. For example, the Gulf of Mexico deepwater wells are at more than 5,280 feet in depth, with some wells extending past 20,000 feet.

Plans to explore in deeper and more hazardous regions in the US and around the globe are in development and the success will depend on continuing technological advances.

With greater depth comes higher pressure and temperature demands on the materials and technologies used for downhole operations. These increased physical demands of the environment, and the necessary changes to the systems used, result in an increase in risk for operators.

“The use of compliant systems, such as TLPs, guyed towers, SPARS, FPSO’s etc., which present significant motion due to the action of wind, wave, and current loads, also bring about the use of new materials and control and

operating systems, materials like advanced composites and alloys, due to their force demands and their dependance on weight reduction for increased storage.” Other operating risks include the need of precision from a distance, contact with the subsea floor and drilling conditions, all of which bring about more opportunities for weak links in the business chain.

Regulatory entities, such as the US Bureau of Ocean Energy Management (BOEM) and the US Bureau of Safety and Environmental Enforcement (BSEE), assign leases and regulate energy activities on the Outer Continental Shelf (OCS) where deepwater fields exist.

Other federal agencies contribute biological, geological, environmental, and security expertise, as well as regulatory authority. However, currently neither BOEM nor BSEE have extensive experience with the new environments that will come into play.

With these new variables, insurers must consider the typical risks of operating offshore facilities, not only at the structure level but also in the production systems used.

New extraction conditions may result in product variations previously unseen by operators and may have a detrimental effect on the production infrastructure. Proper inclusion of qualified professionals in the decision-making process will be essential for carriers to determine risk and coverage.

These new areas of production will result in more complex infrastructure, requiring revisions to policies and coverages. With the proper inclusion of risk safeguards, the increasing push for deepwater and ultra-deepwater oil installations will continue to open a lucrative market for energy policy carriers.

SUPPORT VESSEL REQUIREMENTS

The traditional offshore supply vessel (OSV) carries goods, supplies, offshore workers, and equipment including belowdeck cargo, such as dry bulk, liquid mud, freshwater, and excess fuel.

With the increasing exploration and production in deepwater fields, OSVs are required to provide support for specialty services not provided by the original OSVs.

These vessels are substantially larger, have more endurance, and have more advanced technology onboard. Until the Coast Guard Authorization Act of 2010, US statutes limited OSVs to less than 500 gross tons domestic or 6000 gross tons under the International Tonnage Convention (ITC).

Per the Coast Guard’s 2014 interim rule, demand existed for “larger, multi-purpose OSVs capable of operating at greater distances from shore and for more extended periods, using more advanced propulsion or machinery systems and carrying more cargo and more people on board.”

There are currently nine US flag OSVs over 6000 gross tons ITC currently operating that were built since 2010.Their operating descriptions include multi-purpose supply vessel, subsea construction support vessel, multi-service vessel, and well stimulation vessel.

The deepwater environment is driving this change in service capabilities, which now includes Remotely Operated Vehicle (ROV) operations, flowline, umbilical, and pre- and post-mat installation, hydrate remediation, subsea pumping, well stimulation and intervention, inspection, maintenance, and repair (IMR) activities, tree installation and removal, well abandonment and wireline services, and heavy lift cranes enabling delivery of loads to water depths up to 12,000 feet.

As the depths get deeper and OSVs become larger with more multi-service platforms, the risk of accidents, spills, fires, and personnel injury or death significantly increases. The complex equipment, automation, advanced dynamic positioning, and related crew inexperience, especially at extreme depths, make these vessel operations more challenging and a risk to the vessel itself, personnel onboard, and the environment.

“Mobile systems became the new holy grail of deepwater exploration starting in the early 1960s with Shell Oil Company recognizing the advantage of Mobile Offshore Drilling Units (MODUs) for fields in the Gulf of Mexico with its deeper waters and harsh weather.’’

CONCLUSION

The new frontier of deepwater and ultra-deepwater exploration and production is a unique opportunity for innovation in offshore rigs, support vessels and involved technology. Recent success in deepwater is driving operators to drill in deeper depths despite the significant challenges economically, technically, and environmentally. The risks involved will continue to increase until experience and technology with the new depths catches up. Energy and marine insurers must consider these new risks when underwriting related energy and ocean marine insurance.