How can you get oil out from the ground when it lies beneath not just hundreds of feet of bedrock, but an entire ocean as well? During the Obama administration, it was a trick question: you didn’t, instead the previous administration focused on far less efficient energy in the fear of the great bogeyman: global warming.
Today, the answer is difficult not because of the depth but because of the dollar. As we shuck the failed policies of so-called green energy (it takes the energy equivalent of a full barrel of crude to produce a single solar panel cell), a different green factor is influencing the American energy market.
As more competition squeezes out more gas and oil, fossil fuel prices have plummeted, prompting the energy industry to come up with fresh new solutions to make offshore drilling an impact player again.
The company at the center of the offshore Renaissance is Royal Dutch Shell, the second-largest publicly-traded oil producer on the planet behind only ExxonMobil. Oil trading for as low as $15 a barrel may sound like heaven to consumers (imagine gasoline prices dropping below $1 per gallon for the first time since the early 1990s) but it’s a nightmare for energy conglomerates — unless they can quickly adapt to the change.
Shell has taken a look at their offshore platforms and seen opportunity where many other companies see little but ruin. Their 2016 purchase of BG Group, a British energy outfit, cost them no less than fifty billion dollars, but gave Shell access to oilfields off the coast of Brazil. Cheaper and faster, the company says, will be the path to exploiting these fields.
Deepwater projects need to get cheaper, and they need to get cheaper faster. While the break-even point for crude wells on land runs about $30 to $40 per barrel and the break-even point for petroleum fracking stands at about $50 per barrel, the costs of offshore development are much higher, typically floating around $70 per barrel just to cover expenses — a figure not reached since 2014.
The problem isn’t just cheap oil in competition, but the ongoing trend for electric vehicles (compare the price of Tesla stock and the price of oil over the past three months for further emphasis). That’s changed the company’s long-term strategy of increasing production while seeking out new reserves to squeezing each dime and each barrel.
Shell executives are quick to point out the numbers that indicate their successful reinvention, for Shell offshore platforms now drill oil 30% faster and 50% cheaper. The secret to their success should bring a smile to any red-blooded American’s lips, for Shell has instituted what they call “chief irritants” whose only role in the company is to shake up the business model by throwing out old ideas and incorporating new ones.
The parallels to political change write themselves — we can only wonder if Shell has done what Trump did and require two old regulations to be erased for every new one added to the books — and offer a tantalizing suggestion of the rewards to come for the election of our own Irritant-in-Chief.
Imagine if the United States government could cut 40% of its necessary equipment, as Shell has done for their offshore wells, and eliminate two out of every five pork-barrel projects. Better still, imagine if the feds could match Shell’s initiative to slash 25% of the workforce, leaving a trim workforce instead of an ever-bloated bureaucracy.
Shell’s success story raises the question of whether other oil companies can match their slash and burn approach to organization and logistics. The oil fields of Texas have come under the microscope of a number of petroleum producers since geologists believe that the underlying Permian Basin rock formation houses not just one big oil pocket but a number of smaller reserves, layered like crackers.
While some oil fields have been tapped during the fracking boom, operational managers believe there’s plenty more black gold hidden in deeper pockets. What’s more, some think that they can produce oil for as little as $20 per barrel, effectively making it profit-proof even during the worst of commodity bear markets.
Oil has always represented a volatile investment. As private corporations look for new ways to offset production while prices fall, their stock prices will follow suit. Bold investors should look for a long-term solution, but those without much taste for risk in their portfolio may prefer to put their money in more predictable returns.
Regards,
Ethan Warrick
Editor
Wealth Authority
