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Algora Publishing - Offshore drilling
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Offshore drilling

Published: May 27 2010 15:04 | Last updated: May 27 2010 18:45

ChartLike moths to a flame, energy companies cannot shake an occasionally fatal attraction to situations where they have been badly burnt before. This has been true for unstable petro-states such as Nigeria, serial resource nationalisers such as Venezuela and it certainly will be for deepwater drilling, no matter what costs US authorities heap on the industry following the Gulf of Mexico catastrophe.

Consumer advocates such as the International Energy Agency are nervous about stringent new regulations, emphasising that the world’s marginal oil supply must still be found deep offshore or in unexplored Arctic waters.

Fears of a slump in offshore production appear overblown, though, since these projects are already so expensive that the costs of installing the latest equipment would be a “rounding error”, says one industry veteran. The risk of poor geological estimates is far more significant. Take another huge BP project in the Gulf of Mexico, Thunder Horse, which cost billions to develop and was expected to produce 250,000 barrels a day or 1bn barrels of oil over its life. It has peaked about a third below expectations. Extrapolated over the project’s life, the shortfall, including lower gas production, could be more costly than the highest damage estimates from the recent accident.

US regulations could become so onerous that offshore activity dries up in North America, but this would boost the appeal of fields off West Africa, Brazil and in the Barents Sea. And, though it seems callous with crude still fouling the Gulf, keeping North American offshore drilling viable may pose less environmental risk than other options. Incremental barrels would come from abroad by tankers statistically more likely to spill, or from ecologically damaging oil sands, today’s marginal supplier.

The economic attractions of offshore drilling are just too compelling for the industry to be spooked even by BP’s debacle. Oilmen will go where the oil is, however painful their burns.

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Offshore drilling