Five Regions Where Big Oil Is Foolishly Chasing Profits

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.

Aug 20, 2014 at 11:40AM

This article was written by -- 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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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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