Shell defends deep-water oil drilling, as profits soar

Chief emphasises 'important role' for offshore production despite BP disaster

Royal Dutch Shell mounted a spirited defence of deep-water drilling yesterday as it unveiled a 94 per cent surge in profits in its second quarter.

The oil giant's chief executive Peter Voser stressed the oil industry's "shock" at the explosion at BP's Macondo well in the Gulf of Mexico that killed 11 people, unleashed the worst oil spill in US history and claimed the scalp of BP chief executive Tony Hayward this week. "The Macondo blow-out and the related oil spill is a tragedy for everyone affected," Mr Voser said yesterday. "We were all shocked by the loss of life there, and the on-going and widespread impacts from the spill."

But he also emphasised the need for continued deep-water oil production. "World-wide deep-water production has an important role to play in the global energy supply equation, with potential for production growth with supply diversity, and sustained investment in technology, jobs and services," he said.

Shell's expectation-beating $4.53bn (£2.9bn) profits for the three months to June were helped by the company's $3.5bn underlying annualised savings and a 5 per cent rise in oil and gas production, said Mr Voser. Other key performance improvements included a 34 per cent rise in liquefied natural gas (LNG) sales volumes and an 18 per cent rise in sales of chemicals. Revenues rose 42 per cent to £91bn.

But the company has not been insulated from the shockwaves of the spill. Following the Gulf of Mexico disaster in April, President Barack Obama slapped a six-month moratorium on all deep-water drilling in US coastal waters. And when the move was overturned in the Louisiana courts, the US government simply issued another one. The ban has seen seven of Shell's drilling rigs left idling in the Gulf of Mexico and cost the group $56m. Its plans to start drilling off the Alaskan coast this summer season have also been put on hold.

But the biggest impact has been on Perdido, Shell's vast Gulf of Mexico platform that is both the furthest offshore and in the deepest water of any in the world. The field was shut down in April, just a month after coming on stream, because the company was unable to drill the necessary production wells. Progress towards the 100,000 barrel-per-day production target has been materially slowed, the company said.

Despite expectations of heavier regulations after the Gulf disaster, oil companies are continuing to pursue deep-water oil. Shell joined forces with three other oil majors – ExxonMobil, Chevron and ConocoPhillips – last week to form a $1bn Gulf of Mexico spill response and containment unit. And BP itself will start drilling in the 1,700m Gulf of Sirte off Libya within weeks.

Industry commentators agree that there is little option but to press ahead with deepwater drilling to meet global demand for hydrocarbons and shake off a reliance on the Middle East.

Thanks to booming oil prices and technical advances, deep-water oil and gas production has rocketed in recent years, up nearly two-thirds since 2000. And as once-unconventional technologies become familiar, new areas for exploration are being opened up all over the world. So far the majority of finds are in the so-called "golden triangle" comprising the coastal waters of Western Africa, South America and the Gulf of Mexico, believed to be parts of a similar formations separated by the continental drift that formed the Atlantic Ocean.

"Offshore oil production has increased at a very high rate in the last decade, as deep-water drilling becomes more of a conventional realm of production," said Manouchehr Takin, a senior analyst at the Centre for Global Energy Studies (CGES).

By mid-2010, deep-water oil production was about 6.4 million barrels per day, according to the CGES. Around a quarter came from Brazil, where sub-salt finds in recent years have between 15 and 20 billion barrels of oil proved, and anything from 50 to 150 billion of estimated reserves – equivalent to another Kuwait. Another fifth of current production is from the Gulf of Mexico, some 15 per cent from Angola and 10 per cent from Nigeria.

So far deep-water oil represents only a fraction of total global production, which runs at more than 84 million barrels per day. But the potential is vast as recent discoveries become producing wells. "Looking at the next 10 or 15 years, the expectation is that offshore and especially deep offshore will make more and more of a contribution in terms of both the oil reserves being discovered and the oil being produced," said Mr Takin.

BP's legal battle begins in Boise

In a packed courtroom, some 2,000 miles from the Gulf of Mexico, BP yesterday faced the first hearing in what is likely to be a lengthy and expensive legal battle over its liabilities following the Deepwater Horizon accident.

The Judicial Panel on Multidistrict Litigation, which revolves its hearings around the US and yesterday happened to be sitting in Boise, Idaho, heard arguments from more than 20 lawyers over where 300 lawsuits filed against BP and other companies over the Gulf of Mexico spill should be heard.

The lawsuits, brought by groups including rig workers, fishermen and property owners on the Gulf coast, are likely to be consolidated into a single set of hearings. However, while BP is hoping the cases will be heard in Houston, where its US headquarters are located and a city associated with big oil, many of the plaintiffs are pressing for trials to take place in New Orleans, the Gulf coast city closest to the accident site. Other possible venues include courtrooms in Alabama, Mississippi or Florida.

The panel is expected to give its verdict next month, though whichever venue it chooses is likely to be targeted by protesters, with BP even facing a demonstration in Boise yesterday.