Energy Special: How low can they go?

By John Reed

Financial Times

Published: March 26 2005

One muggy afternoon, I stood on the deck of the Girassol, a floating oil-production and storage vessel moored in deep sea some 200km northwest of Luanda. I watched as a supertanker finished the 32-hour-long process of loading a million barrels of oil - equivalent to Angola’s entire daily output - destined for a refinery in France. Time is of the essence and mistakes are costly. Total, Girassol’s operator, runs it with balletic precision. An orange speedboat was lowered from the deck to help disconnect the pipelines from the tanker moored a nautical mile away. A second supertanker lurked greedily on the horizon. Girassol produces on average 240,000 barrels of crude a day, and tankers visit every four days. Moored by 16 anchors, in water deeper than the height of four Eiffel Towers, Girassol is the length of three football pitches.

I recommend a visit to the Girassol as a soothing antidote to oil-anxiety - a growing modern phenomenon. Today’s offshore oilmen exude the easy optimism of the railroad barons of a century ago. Deep-water drilling, one of the industry’s biggest growth areas, is pumping more oil than ever, and at a safe remove from the pipeline attacks of Iraq, Nigeria and Colombia. Meanwhile, improving technology is allowing the industry to drill at greater depths than ever, pushing supply forecasts into the future. Better seismic imaging and real-time data processing allow geologists to locate and exploit reservoirs more accurately. Engineers are learning to fashion pipes that can turn corners to negotiate tricky geology. Remote-operated vehicles can trouble-shoot at depths of 2km or more, so costly equipment stays in working condition for longer.

Water deeper than 500m accounts for more than 60 per cent of the world’s surface. Even modest jumps in the industry’s capabilities could significantly push back estimates on global reserves. The Girassol project was green-lit at a conservative break-even assumption of $17 a barrel; but though Total recently adjusted its break-even for projects to $21 a barrel, prices are more than double that at the moment. “Deepwater offshore is the single most important exploitable resource within the grasp of our generation,” Peter Odell, author of a recent book on carbon fuels says. “It’s the flavour of the decade,” he adds, in a world where an estimated two-thirds of proven oil reserves remain unexploited.

Two days after I visited Girassol, I flew to Block 31, one of Angola’s outermost deep-sea oil patches. Water depths there exceed 2km, and drill “strings” - when both water and the seabed are included - extend to 4km or more. The industry informally defines deep water as below 500m, and anything below 1,500m as “ultra-deep”. BP, which operates Block 31, drilled at a depth of 2,020m in June 2002, a record for Angola, so Block 31 can accurately be called an industry frontier.

My visit had begun in Soyo, a sleepy port town at the mouth of the River Congo, which in recent years has become a logistics hub for Angola’s burgeoning offshore industry (and surely one of the world’s remotest places with a $200-a-night hotel). From there I joined eight riggers and geologists in boarding a chopper for the 45-minute flight to the Leiv Eiriksson, a floating rig operated by Norwegian drilling contractor Ocean Rig.

In the drilling control cabin, the platform’s nerve centre, known in roughneck parlance as the “doghouse”, I watched as John Hughes, a Scots driller with North Sea experience, operated a joystick to manipulate machinery to lift a 9.56m drill joint (about the size of six men standing on each other’s shoulders) so that it could be connected by two Angolan employees on the drilling floor below him. Old-style doghouses were claustrophobic places with rudimentary technology: the driller worked, essentially, with a clutch and a massive brake. But Ocean Rig’s is glass-walled, roomy and fully electronic, with computerised indicators. “It’s like sitting on a spaceship,” said Hughes. I visited the platform’s bridge and spoke to two exquisitely bored men in charge of monitoring this technology. “It took me 10 years to get my captain’s ticket, and now I’m sitting here,” joked Juha Salonen from Finland. His Swedish colleague Stefan Skobowitsh described what they do as “the science of going nowhere”.

BP, like Total, has been spending roughly a billion dollars a year in Angola. When the investment pays dividends, it does so handsomely. In mid-February, BP, with its partner Sonangol, the Angolan state-owned oil company, announced its fifth successful discovery in the ultra-deep waters of Block 31. The well, in 1,602m of water, was tested at a maximum rate of 5,330 barrels of oil a day.

A relative latecomer to oil markets, Angola is spoken of by industry experts as an oil province that could rival the North Sea, or even Alaska. Over millions of years, the River Congo deposited the sediment that became oil in present-day Angola’s deep waters. Chevron-Texaco has been drilling in Angola since the country was a Portuguese colony. But technological hurdles and Angola’s civil war, which lasted in fits and starts from 1975 until 2002, deterred most of the majors from exploring until the 1990s. Angola’s output is now expected to match Kuwait’s by 2010.

On the Leiv Eiriksson I watched as a remote-operated vehicle (ROV) sent back pictures from its 40-minute descent to the seabed to inspect drilling equipment, which it can install or remove if necessary. Harry Brennan, its operator, manipulated the ROV with clicks of a mouse and flicks of a joystick. “When I came here, this was the lowest depth I’d ever seen,” he told me, peering at two screens on the ROV’s control panel. The ocean’s depths are bitterly cold and pitch-dark. But the ROV camera has spotted tuna as far down as 1,000m, and Brennan once had to arm-wrestle an octopus. Photogenic gadgets such as ROVs - a new generation of which is now being developed - get lots of attention. Yet the industry’s ability to plumb new depths also owes something to more prosaic, if equally important factors. Improved seismic imaging means wildcatters are likelier than ever to hit oil. Imaging is now available not just in three dimensions, but in what geologists call “4-D” - the ability to track reservoirs, and adjust exploitation, over time.

Are there any limits to how deep and how far the industry can go? Some oilmen speak of exploiting the “ultra-ultra-deep” - in Angola’s case the next swathe of waters west of Blocks 31 and 32. Turbulent geopolitics in the world’s main onshore oil-producing areas are likely to keep the offshore industry pumping at record levels in years to come. A recent article in Petroleum Economist referred, with refreshing candour, to what it called offshore oil’s “isolation factor”, defined as “a more comfortable operating climate, free from vociferous communities and sabotage”.

But the dream of isolation is still that. In Angola’s case at least, onshore politics could, with time, intrude on the offshore business’s splendid isolation. Oil is Angola’s largest industry by far, contributing more than 80 per cent of GDP. Oil revenues helped President dos Santos’ MPLA party win the war against the rebel group Unita, and could play a role in postwar reconstruction.

But all evidence indicates that much of the oil money ends up squandered or stashed away by top officials. The International Monetary Fund and Human Rights Watch have separately concluded that some $4bn of the country’s oil money has gone unaccounted for in recent years. Angola remains one of the world’s poorest countries, where one in four children die before their first birthday. Luanda, a city designed to accommodate half a million people, now houses some four and a half million, the majority of them in noisome, rubbish-strewn slums. Foreign and Angolan oil executives inhabit walled villas on the city’s outskirts, not unlike the Portuguese colonialists of old.

”The oil industry is offshore in every sense of the word - the money doesn’t come to Angola,” Rafael Marques told me the day after my return from Girassol. A journalist and political activist who until recently headed George Soros’s Open Society Institute in Angola, he has in the past antagonised the Angolan government and at one point served a brief jail sentence. “Even the expats come here in a pattern of 28 days in, 28 days out,” he said. “The experts are offshore, which leaves very little to the local economy.”

The oil companies have, justifiably or not, become a lightning-rod for the disaffection some Angolans feel for their government. On a separate visit last year to Cabinda, Angola’s richest oil region, I observed the industry as many Angolans do: peering over the hermetic, barbed wire-protected walls of an expat compound. Gas flares from Chevron’s shallow offshore wells light the night sky of the region, a non-contiguous piece of Angolan territory wedged between Congo-Brazzaville and the Democratic Republic of Congo. On a walkabout through the enclave, Agostinho Chicaia, a local activist, pointed scornfully at the sky, where a helicopter ferried Chevron people - who rarely set foot in town - overhead en route to Luanda or Houston. “They could invest their money for the development of this country,” he said. “Instead, there they are, living in a compound.”

The oil companies avoid discussing Angolan politics on the record but privately point out, with some justification, that Angola is for the Angolans to govern. BP, Total and other companies have, in keeping with global trends, been stepping up their social responsibility programmes and commitments to “Angolanise” their operations by hiring more local employees. In May last year, when Chevron-Texaco signed an agreement extending its concession in Cabinda for another 30 years, the company pledged an $80m “social bonus”, some of it to be spent in Cabinda.

That African politics and Big Oil do not mix is confirmed by a series of scandals and allegations involving the majors in Congo-Brazzaville, Nigeria and Equatorial Guinea. In Angola, whether the companies are helpless bystanders or parties to poor governance, local activists remain, on balance, unimpressed. As Marques put it: “The oil companies are the life jacket that keeps this government floating.”

On my second and final day aboard the Leiv Eiriksson, I waited in the platform’s TV lounge for a meeting with Stan Van de Cappelle, BP’s company man aboard Ocean Rig’s vessel. Cappelle, a Canadian, has been in the industry for 33 years, and joined BP in 1998. He recalled working on his first deep-water well in 1978, when “deep water” was 1,200ft. Divers sent down to work on the rig often had to be isolated in decompression for up to 10 days.

The block where we were sitting, he noted, was the outer limit of what had been put up for sale. Formations this far offshore are more faulty and trickier to exploit. However, he said: “The future is going to be deep water: it’s the last exploration frontier we have.” Predicting more “big discoveries” offshore, he said: “We’ll keep going farther until we don’t find anything more.”