Five Regions Where Big Oil Is Foolishly Chasing Profits

This article was written by Oilprice.com -- the leading provider of energy news in the world. 

Big Oil has been very successful at developing sophisticated technology to access oil in some pretty remote areas.

Consider the technological skill necessary to drill several miles below the seabed at staggering depths, or the processing equipment needed to transform viscous bitumen into usable fuel – these are impressive feats of engineering and science.

But after years of spending billions of dollars on these challenges, the world's largest oil companies are running into a serious problem: Many of their projects are not profitable and won't be anytime soon.

The Carbon Tracker Initiative (CTI) has put together an impressive report that outlines the biggest and riskiest oil projects around the world being pursued by the oil majors. Many of them will not even break even unless oil prices rise by $30 to $40 dollars per barrel above the current price, which is around $100.

So, why then, are they putting shareholders' money at risk by chasing such costly projects?

CTI's research identified a list of the costliest projects being pursued by the oil majors, which can be loosely grouped into five regions around the world. These projects are unprofitable, yet oil companies continue to pour money into them.

1.    Canadian Oil Sands. Canada holds 173.6 billion barrels of oil, the third largest total in the world. But 98 percent of those reserves (170 billion barrels) are in the form of heavy bitumen, or oil sands. Oil sands are a semi-solid mixture of sand and viscous petroleum, and working with them is more similar to open-pit mining than traditional oil drilling. Once the oil sands are extracted, they need to be upgraded and refined in order for the oil to be able to flow through a pipeline. The effort means that Canada's oil sands are some of the most expensive projects – not to mention dirtiest -- in the world. The CTI report says that the world's six most expensive projects being pursued by Big Oil are all located in Alberta's oil sands. ConocoPhillips' Foster Creek project tops the list, with a whopping breakeven price of $159 per barrel.

2.    Offshore West Africa. After the oil sands, a slew of projects under consideration off the coast of Nigeria and the Ivory Coast are next in line as the world's most expensive. They are in deep water (up to 5,000 feet) and ultra-deepwater (deeper than 5,000 feet). As such, they are expensive. But it's more than just technical challenges that put a high price on West African drilling. Security threats, from piracy to sabotage, add additional layers of expense. French oil giant Total is considering drilling a well near the Ivory Coast, but it has a breakeven price of $127 per barrel. ExxonMobil and Shell are contemplating spending billions in Nigerian waters, with similar cost figures.

3.    Offshore Brazil. Brazil offers a much safer environment to work in, with little threat from gangs or pirates. But Brazil's pre-salt is one of the most technically challenging areas in which to operate. The oil is located beneath a thick layer of salt, which itself is located thousands of feet below the surface of the sea. Brazilian state-owned oil company Petrobras is doing much of the heavy lifting, but BP and Shell are also looking at pouring money into Brazilian ultra-deepwater projects, with breakeven prices above $120 per barrel.

4.    The Arctic. The far north offers oil companies a different set of challenges than most other places. A lack of infrastructure, severe cold, sea ice, and harsh storms can hinder development and inflate costs. Royal Dutch Shell found this out the hard way after spending several years and nearly $6 billion to drill in the Arctic, with little success. CTI assessed other Arctic projects, such as BP's Liberty prospect, and Chevron and ConocoPhillips' Amauligak project, each in the Beaufort Sea. Both projects have breakeven prices between $109 and $113 per barrel.

5.    Gulf of Mexico. In much more hospitable climes, like the Gulf of Mexico, companies can drill for oil profitably. The Gulf of Mexico accounts for 16 percent of total oil production in the United States. But costs are rising there, and not all projects are profitable, given current price levels. Shell made a 2013 discovery of oil near the Yucatan, but it was located in the "lower tertiary" reservoirs buried extra deep. As other wells mature, the lower tertiary offers one of the last frontiers for oil exploration. But drilling that deep is expensive, and Shell's project has a breakeven price hovering around $99 per barrel.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2014, at 10:31 PM, Freddyfreebe1 wrote:

    The people is suppose to believe this line. They don't need a profit for the next 50 years with all the money they screwed over people at the pumps the last 10 years. Goldmann Sach took oil from under 39 dollars a barrel with there scam. Now big oil got greedy and can't live without scam money. Oil was the greatest store ever told, till insurance and healthcare got into the scams.

  • Report this Comment On August 21, 2014, at 10:14 AM, Easttexas9 wrote:

    A recent report by research house Wood Mackenzie shows break-even costs for building new steam-driven [in-situ] projects is in the $65 – $70 a barrel range.

    Mining developments – the truck and shovel method accounts for a fifth of all projects – need at least $90 – $100 oil.

    Existing projects in Alberta can still make money at $45 a barrel.

    Existing projects are not threatened, but new projects are. And here's a Globe & Mail report from June 4, 2012.

  • Report this Comment On August 21, 2014, at 10:45 AM, fpl1954 wrote:

    These areas represent the most profitable areas in any oil company's portfolio. They are established areas with stable and favorable tax regimes, incredibly favorable in the US Gulf of Mexico. No oil company worth its salt would NOT operate in these areas. That is, except the Arctic. Given the nature of oil, all oil companies maintain activities in several frontier areas that have great promise. It doesn't always work out. Oil exploration is extremely expensive in terms of how much capital must be committed for decades before there is a return. This is why large profits are needed to keep the oil flowing. If you look at how much is reinvested into the economy by oil companies, it quickly becomes plain that a huge set of cajones is required to operate.

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