INGLESIDE, Texas—Political uncertainty is clouding prospects for new drilling in the Gulf of Mexico, but Shell SHEL 2.00% PLC—the Gulf’s biggest producer—is still investing billions of dollars in its waters to pump oil for years to come.
Shell’s continued ambitions in the Gulf are on full display in a sprawling fabrication yard in southeast Texas. There, the company is putting the finishing touches on Vito, its 13th major offshore project in the region, with a cost of around $3 billion, according to energy consulting firm Wood Mackenzie, shared by Shell and its partner, Norway’s Equinor AS EQNR 3.80% A. Later this month, three tugboats will tow Vito to waters around 4,000 feet deep some 150 miles southeast of New Orleans, where it will start pumping oil and gas from eight wells.
The investment decision on Vito was made in 2018, and Shell will need to invest billions of dollars more in years to come just to maintain current Gulf production levels, said Paul Goodfellow, the U.K. oil company’s global head of deep-water operations. He said the company is confident in a long-term future of steady returns in the Gulf, despite mixed signals from the Biden administration.
“It’s vital that we have the opportunity to restock, replenish the portfolio as we continue to invest a huge amount of money exploring and then developing projects [in the Gulf],” Mr. Goodfellow said in an interview.
President Biden campaigned on a pledge to block new oil drilling on federal territory, including the Gulf, but his resolve is being tested by steep increases in costs of gasoline and other fuels, a political liability as midterm elections draw near. Late last week, the administration outlined a delayed five-year plan proposing to block new oil drilling in the Atlantic and Pacific oceans while allowing limited expansion in the Gulf of Mexico and Alaska’s south coast.
The oil industry has pressed for a minimum of two annual lease sales for the next five years in the Gulf, and the administration’s plan outlines a maximum of 10 sales in the Gulf over that period, plus one in Cook Inlet, Alaska. But administration officials also said they could still move to block all new offshore-drilling lease sales.
Environmental groups quickly criticized the plan as a retreat from Mr. Biden’s campaign pledges, while oil and gas lobbying groups criticized it for leaving open the possibility of no new offshore-lease sales.
Shell and rival BP PLC, the Gulf’s second-largest producer, are moving ahead with current development plans. A BP spokesman said the company was encouraged that the administration released a five-year plan, and Mr. Goodfellow said he was hopeful that the administration would proceed with Gulf lease sales.
Shell, like BP, says it is shifting some investment away from fossil fuels to lower-carbon energy sources. Shell has said it expects to decrease oil production by 1% to 2% a year through this decade and use oil and gas profits to fund renewable energy. But the process will take years, and in the interim, Shell shows no signs of slowing down in the Gulf, which typically provides about 10% of all of Shell’s global oil and gas production.
Production last year from Gulf of Mexico projects operated or partly owned by Shell was around 588,000 barrels a day, up by about 12% since 2017, according to Shell, and its fully owned share was 337,000 barrels. That is the same total volume, roughly, that the company expects to pump this year and next, according to Mr. Goodfellow. But the way the company is building new platforms gives it room to increase production in the future, he said.
Production from existing wells typically declines 15% to 20% a year, according to Shell, and just keeping production flat will cost billions of dollars. Maintaining production requires investment tied to older wells and, within a few years, discovering more oil on new leases, Mr. Goodfellow said.
BP plans to increase its production in Gulf waters, 12 years after the Deepwater Horizon explosion and oil spill created an environmental disaster and cost BP more than $60 billion. Last year it produced about 290,000 fully owned barrels a day in the Gulf, and it aims to increase production by about 38% to 400,000 barrels a day by mid-decade, according to a spokesman.
“Our strategy is rooted in continued investment in the region,” he said.
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Environmental groups want oil and gas production curtailed immediately, including in federal waters off the U.S. coast. They and climate forecasters say countries must make major, rapid shifts away from fossil fuels to reduce carbon-dioxide emissions and meet the goals in the 2015 Paris climate agreement.
“We urge the administration to finalize a plan that commits to no new offshore drilling leases, period,” Athan Manuel, director of the Sierra Club’s lands-protection program, said of last week’s Interior Department plan.
BP and Shell say they are cutting emissions from offshore drilling. Both are launching new, multibillion-dollar platforms this year they say will run more efficiently than existing projects. Energy analysts say oil produced in the Gulf emits lower levels of climate-harming greenhouse gases than most foreign barrels.
Shell plans to build smaller, cheaper platforms and to streamline and duplicate how it builds them. Vito, Shell’s newest project, is only about one-quarter the size of Appomattox, its predecessor and Shell’s largest floating unit in the Gulf. Shell has a 63% stake in Vito, which cost billions of dollars less than Appomattox, with the rest owned by Equinor.
Vito is expected to consume about 40% of the power needed by Appomattox at full capacity, according to Kurt Shallenberger, Vito’s project manager. Because Vito’s anticipated field life is 25 years—compared with 40 years for Appomattox—Mr. Shallenberger expects it will have a lighter carbon footprint than past projects. “You have half the size [of] a plant burning energy for half the years,” he says.
No amount of innovation in offshore drilling changes the fact that what’s being extracted from the ocean floor are carbon-intensive fossil fuels, environmentalists say.
Vito will produce more relative to its size, Shell says—an estimated 100,000 barrels of oil equivalent a day at its peak, compared with 175,000 barrels from Appomattox.
Shell is already building another platform modeled after Vito, called Whale, that is predominantly a replica. That is expected to be in production in the Gulf of Mexico southwest of Houston in 2024. Mr. Goodfellow called the replication approach a “franchising model” that could standardize production of more platforms at lower cost.
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