Ultra-deepwater plays in the Gulf of Mexico offer vast potential for oil and gas production. There are now more than 1,650 active leases in the Gulf of Mexico in water depths exceeding 5,000 ft. and, with 24 drill rigs capable of drilling at this depth now working in the Gulf, activity on these leases is about to take off. In a recent study, we have identified more than 160 fields in ultra-deepwater that are likely to be explored over the next 5 to 10 years and expect at least a third of these will ultimately be developed.
But Transport Remains An Issue
Until now, pipeline has been used to transport oil from fields in the Gulf of Mexico to refineries along the Gulf. There are almost 27,000 miles of pipeline infrastructure on the Gulf seabed and field operators in the Gulf have grown very comfortable with this form of transport. But many of the ultra-deepwater fields are remote from existing infrastructure, requiring installation of new pipelines in water depths exceeding one mile.
Much of the topography of the seabed beyond the shelf is rugged, presenting spanning issues and pipeline installation difficulties, and there is need for innovative and expensive techniques to assure fluid flow. Cold temperature at the sea bottom at 5,000 ft. or greater can turn viscous oil to solid mass, requiring pipeline heating and/or other aggressive procedures to keep the fluid moving. Hydrostatic pressure at this water depth also produces a requirement for thick wall pipe, which is expensive to fabricate and install.
So despite the propensity until now to favor pipeline, operators are being forced to consider shuttle tankers as the transport solution for transporting oil from many of the remote ultra-deepwater fields in the Gulf of Mexico.
Pipeline vs. Shuttle Tanker Economics
The decision as to whether pipeline or shuttle tanker will be utilized for transport from ultra-deepwater fields will ultimately be driven by the economics of the two options. Surrounding terrain over the pipeline route, proximity to infrastructure and charges to utilize connecting pipelines will influence pipeline economics. Shuttle tanker economics will be influenced by the cost to build and operate ships qualified for the domestic trade and the need to have sufficient capacity to ensure offtake capability is available in all weather conditions.
There are substantial differences in the terrain of various sections of the ultra-deepwater Gulf of Mexico. Some portions of the ultra-deepwater Gulf are characterized by relatively smooth, sloping terrain. While pipeline installation will continue to be impacted by issues related to flow assurance in ultra-deepwater, in these areas the issue of spanning and dealing with steep inclines and declines is of less concern. Other portions of the Gulf are in extraordinarily irregular terrain that presents difficulties for pipeline installation. These areas, which have been characterized as looking like the surface of the moon, can be considered "pipeline unfriendly." This is not to say that export pipelines can't be installed, just that the installation will certainly be more difficult, and more expensive, given the terrain over or around which the pipe must be routed.
Proximity to infrastructure
To minimize capital cost, the general concept is to construct a pipeline from the new field to a nearby existing pipeline and use the existing pipeline for subsequent movement to shore. The cost of constructing a pipeline in ultra-deepwater increases with distance at roughly $1.0 to 1.8 million per mile, depending on pipe diameter and seabed conditions. There are several trunk pipelines installed at the edge of ultra-deepwater that could be used as connection points. In the Mississippi Canyon, for example, the Ursa and Mars pipelines could be connection points, as could the Hoover/Diana pipeline in the East Breaks area of the Gulf. Additionally, several new trunk pipelines are being planned for the Central Gulf area
(Crazy Horse, Na Kika, Mad Dog, Atlantis and Holstein fields) that could be future connection points. In fact, these existing and planned pipelines are designed with the expectation that other fields will be spliced in at a later date. But not all will have available capacity and differences in quality of oil may preclude mixing flows with production from other fields. To the extent there is ability to tie into a nearby pipeline, the economics of using pipeline as the transport solution will be enhanced.
Connecting pipeline charges
To calculate the cost of transporting crude from a field in the Gulf of Mexico to a specific point on shore, the connecting charges of each pipeline to be entered along the route must be added to get an aggregate cost. For example, published charges of the several connecting pipelines that would be entered from the Genesis field to the Citgo Refinery in Lake Charles add to $1.60 per barrel. But these charges may be negotiated downward, depending on the volume of crude to be transported, timing of the requirement and length of contract commitment. Higher discounts are achievable where a connecting pipeline has lots of excess capacity; lower discounts are possible where the pipeline company needs to incur extra cost to handle the added flow. In the end it comes down to negotiating with a pipeline company for the best available rate.
The outcome of these negotiations will have a major impact on the economics of the pipeline option, as these connecting charges can be a substantial portion of the total transport cost per barrel.
Cost of shuttle tankers
Transportation of crude from a floating production facility on the Outer Continental Shelf to a point in the U.S. (refinery terminal, LOOP or any other receiving facility on land or attached to the seabed) is subject to the restrictions of the 1920 Jones Act. As the production unit is attached to the seabed, it becomes a point on the Outer Continental Shelf and transportation from this point to another point in the U.S. is defined as domestic trade. This means that a shuttle tanker used for transportation in the Gulf of Mexico must be built in the U.S. and owned and crewed by U.S. citizens. Given the higher costs associated with U.S. construction and operation, the cost to build and operate a shuttle tanker in the Gulf will be higher than in other areas. Construction of an Aframax size shuttle tanker in the U.S. will probably cost in the range of $100 to $120 million. The cost to operate this ship, including voyage related costs but excluding debt amortization, would probably be on the order of $9 to 10 million annually. An equivalent ship built in Korea for the North Sea would cost in the range of $45 to 50 million and it would be crewed by seamen of various nationalities. This added cost has a direct impact on the economics of using shuttle tankers in the Gulf of Mexico.
Fog is a continuing seasonal problem in the Gulf of Mexico, particularly between February and April. It creates scheduling havoc and can cause supply disruptions. In early March of this year, there were 50 ships at one time waiting for clearance to enter the Houston Ship Channel. Some ships were forced to remain at anchor for up to five days. The likelihood that fog will occasionally impact shuttle tanker delivery must be taken into consideration in determining the capacity needed for field offloading. Extended fog conditions could back-up the receiving ports to the point where the offshore production facility
(ies) must shut down
for lack of offtake capability. Preventing this from occurring entails building excess capacity into the shuttle tanker delivery system to ensure sufficient off-take capability is available under the worst possible conditions. So it will necessary to have more capacity available then needed under ideal conditions, raising the cost of the shuttle tanker option.
Cost per barrel of shuttle tanker vs. pipeline
Ultimately, the comparison of the two options has to be reduced down to a cost per barrel transported in net present value. This cost will depend on the specific circumstances of a field. In our study we have calculated the transport cost by shuttle tanker and pipeline from specific fields to the Citgo Refinery in Lake Charles using various scenarios. For example, from a field in the Garden Banks area we found that the cost of shuttle tanker transport would be $0.59 to $0.79 per barrel, depending on the scenario chosen for the routing option. From the same field, the cost of the pipeline option ranges from $0.64 to $0.90 per barrel, depending on the discounts negotiated on connecting pipeline charges and the likelihood that the new pipeline to connecting infrastructure will have a residual value at the end of the life of the field. These costs are expressed in net present value where future cost flows have been discounted back to the present at an assumed interest rate.
Shuttle Tanker Study
In a just completed study, IMA has analyzed the future requirements for shuttle tankers in the Gulf of Mexico. Included in the study is a forecast of the number of shuttle tankers required over the next 10 years, an assessment of the capacity to deliver the ships and an evaluation of financing options. It is an in-depth, totally objective analysis of this important new market. For further information, please visit our website at www.imastudies.com.