As Oil Hits $75, Shell Seeks Deepwater Costs at $40 or Below

File Photo: Aerial view of Shell’s Auger Tension Leg Platform in the deepwater US Gulf of Mexico. Noble Jim Thompson drilling rig in background. Photo credit: Royal Dutch Shell

By Kevin Crowley (Bloomberg) — The Big Oil playbook has been straightforward for decades: Higher prices mean offshore projects that are further, deeper, more complex than ever before. It’s different this time, according to Royal Dutch Shell Plc.

Deepwater projects need to break even at $40 a barrel, or preferably lower, said Harry Brekelmans, Shell’s project and technology director, in an interview Monday, That’s almost half the cost of some projects commissioned before the 2014 oil-price crash, he said. On Monday, Brent crude, the global benchmark, rose to more than $75 a barrel in London.

“You’ve got to think about that 35-40 range,” Brekelmans said at the Offshore Technology Conference in Houston. “It’s something we want to be very disciplined around because it gives you reassurance that going forward, your portfolio is resilient.”

Shell, the second-largest publicly-traded oil major, is attempting to practice what it preaches and last week unveiled its long-awaited Vito project in the Gulf of Mexico which will produce 100,000 barrels of oil equivalent a day at its peak at a cost of less than $35 a barrel.

The project was close to getting the go-ahead in 2014 but then had to be re-engineered post crash. Project planners managed to bring the costs down by 70 percent, Shell has said, without specifying the overall capital expenditure.

How is this possible? Mostly simple things, Brekelmans said. Cutting out waste, simplifying the design, buying standardized equipment from suppliers rather than bespoke items. The new Vito design will recover less oil than the original design but at higher profit margins.

Talk is cheap and the key question for investors is whether this is sustainable across deepwater globally. Brekelmans says it is — about three quarters of the cost cuts are “structural,” he said.

“In the end investors will say, ‘show us, show us, show us,”’ Brekelmans said. “You have to demonstrate how you’re going to sustain it.”

© 2018 Bloomberg L.P

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