Royal Dutch Shell PLC has announced that it is experimenting with more cost-effective deep-water drilling as oil prices fall under $50 per barrel. The world’s second largest petroleum company hopes to bring efficient technologies and processes that worked to make onshore drilling more commercially viable in current market conditions to its more expensive deepwater operations. On its test rig off of Lousiana, Shell’s engineers and technicians are experimenting with ways to keep oil profitable even if prices fall to $15 per barrel.
Exploring cheaper drilling is becoming essential for oil producers as prices appear more likely to remain low. The Organization of the Petroleum Exporting Countries (OPEC) has thus far been unable to restrict supply enough to force higher prices due to U.S. inventory. Lower margins have also forced companies to take on more debt, of which Shell has almost $100 billion. With debt levels high and prices staying low, oil companies will need to find ways to make projects with large capital requirements like offshore drilling cheaper.
Shell itself has an added reason to bring efficiency as quickly as possible: its recent acquisition of BG Group PLC. Through the deal, Shell obtained several offshore drilling platforms and untapped fields off the coast of Brazil. Its operations there will serve as a test to see whether its experiments in the Gulf of Mexico and elsewhere can make new projects profitable in low price conditions.
As the energy sector faces the duality of low prices and the gradual switch to more environmentally friendly sources of power, oil companies face pressure to maintain current supply levels despite cheaper prices. Their ability to innovate will ensure that they can survive in low price conditions and that there is enough supply to keep prices low.
For more, visit the Wall Street Journal.