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Aug 31 (Reuters) - Global oil companies are pumping billions of dollars into offshore drilling, reversing a long decline in spending on the decades-long projects including some in the remote iceberg waters far off Canada's Atlantic coast.
Surging oil prices are encouraging the investments, along with Europe's mounting energy demand as the Ukraine-Russia war drags on.
Offshore production sites are more expensive to build than onshore shale, the last decade's investment darling. But once they are up and running, they can turn profits at lower prices than other forms of production, according to consultancy Rystad Energy.
They are also designed to pump oil for decades, a counterintuitive move that could increase financial risk for the 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 spills far offshore are hard to clean up.
One of the most remote developments is near Canada, where
Norway's Equinor ASA is close to a final decision on
its Bay du Nord project 500 kilometers (311 miles) offshore of
Newfoundland and Labrador.The site is so far from shore that it falls in international waters, requiring Canada to pay United Nations royalties. It
would be a global first, according to Energy Regulation
Quarterly, illustrating how far producers are willing to go for
oil supplies that could last up to three decades.'LAST ONES STANDING'
Canada has set a goal of lowering its emissions by 40% to 45% by 2030 from 2005 levels, but Ottawa approved Equinor's C$16
billion ($12.37 billion) Bay du Nord in April anyway, saying it
raised no significant environmental issues.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
natural resources minister. Bay du Nord is expected to produce
below 8 kilograms per barrel of carbon dioxide, Equinor
estimates, less than half the international average."Those facilities that are producing oil and gas with zero or near-zero production emissions are going to be the last ones
standing," Wilkinson said.Bay du Nord, which could first produce oil by decade's end, might be the first of several massive Newfoundland offshore
projects. OilCo, a Newfoundland government corporation, has
identified 20 prospective projects with 1 billion barrels in
reserves each, CEO Jim Keating said.Such projects come with challenges not seen onshore.
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 metres high in winter,
according to Equinor. Icebergs drift across the area between
March and July, and two species of endangered sea turtles
inhabit its waters."Canada already has profitable producing fields far from the coast with similar weather," Wood Mackenzie upstream analyst
Marcelo de Assis said, noting that the project's water depth of
650 to 1,170 metres is much less than wells elsewhere at 3,000
metres.Bay du Nord would be so far from shore that helicopters flying in workers for three-week shifts might carry only eight
people, half the usual number, to account for extra fuel,
according to Rob Strong, a longtime Newfoundland oil industry
consultant.Despite the high upfront construction cost, projects like Bay du Nord interest companies because the 500 million barrels
of recoverable reserves would be enough to last 20 years.Equinor declined to provide a production cost estimate, though it said that major projects coming by the end of 2030
will, on average, break even with oil below $35 per barrel.Producing offshore projects average a break-even price of $18.10 per barrel of oil equivalent, compared with $28.20 per
barrel for onshore, according to Rystad.Other companies bought into offshore Canadian projects this spring. BP PLC purchased a Bay du Nord stake and Cenovus
Energy restarted a stalled project.
Global offshore investment should rise 27% from 2021 levels to $173 billion in 2024, reversing a decade of decline and
growing slightly faster than onshore investment, Rystad
estimates."I've been up and down like a yo-yo," said Strong, who has been called the "grandfather of the Newfoundland offshore oil
industry." He added: "Two years ago I was at the depths of
depression. Today, I'm 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 fully supplied by electric vehicles and
renewable fuels by mid-century, oil demand would drop 75% to
about 25 million barrels per day, IEA said.Bay du Nord could become a stranded asset before the end of its lifetime if oil demand peaks between 2025 and 2030 and the
world's crude needs are supplied by lower-cost regions like the
Middle East, said Jean-Francois Mercure, an associate professor
in climate change policy with the University of Exeter, England."Financial risk will be very high," Mercure said.
However, Wood Mackenzie estimates oil demand is only likely to halve even in its most ambitious 2050 energy transition
scenario - and could even rise.'PRECIOUS AND FRAGILE'
Producing offshore emits less carbon per barrel than onshore as projects' massive scale and new technology make it easier to
curb flaring and methane emissions and recycle heat.Offshore projects still carry huge environmental risks, said Gretchen Fitzgerald, Sierra Club's Atlantic director. After a
spill, Equinor would be unlikely to contain oil due to intense
wave action and instead use chemicals to disperse it. Such an
approach may 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 pretty precious
and fragile," Fitzgerald said.Equinor will only approve projects if "convinced they are safe and environmentally responsible," spokesperson Ola Morten
Aanestad said, adding it has long experience in harsh
environments.Other European oil majors are setting similar goals. Both Shell PLC and BP plan to reduce crude output over time
"We believe that hydrocarbons will be part of the energy mix for many decades to come," said Shell's executive-vice president for global deepwater, Paul Goodfellow.
Offshore accounts for about one-third of world oil output, but that could increase in coming years.
"The energy transition should take some 25, 30 years, WoodMac's Assis said. "It will be difficult to eliminate oil. Europe's energy crisis is a reminder of that." ($1 = 1.2935 Canadian dollars)
