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The global petroleum industry lives and dies by the price of oil.
This number—a gauge of the average amount paid for a barrel, 42 gallons, or 159 liters—is
responsible for enormous shifts in the field.
Shifts that lead to the rise of some nations, and the fall of others.
Shifts that change where and how people get their energy.
That’s because, just because there’s more or less one global price, there are innumerable
different production costs depending on where and how the oil is extracted.
One country’s barrel of oil can cost dozens of times more than another’s, but then even
within the same country the costs are not the same.
It’s more of a curve.
A given country’s cost looks more or less like this.
At a lower level of production, the average overall cost to produce a barrel of oil would
be a certain amount but then, as total production increases, that average per-barrel cost also
increases up until a point where the curve turns into a nearly vertical line, because
a country’s production capacity has been reached.
This is because oil is found in plenty of different places.
Sometimes it’s found under a big empty field near a major road, but sometimes its found
under thousands of feet of ocean nowhere near the coast.
Between these two, it’s pretty easy to understand where it would be more expensive to extract.
On that national cost curve, though, one must also put a horizontal line.
That’s the oil price.
If the price is here, then it makes sense to produce up to that amount of oil.
Any more and a barrel of oil would cost more to produce than what it sells for.
If the oil price moves up, though, then it makes sense to increase production even when
it raises the cost per barrel, and that’s what happened for most of the last fifty years.
The oil price rose, with some up and down, from $20 in 1973 to a peak of over $140 in
2008.
Throughout that time, as long as an oil company could find a way to produce a barrel of oil
for less than the current price, they were guaranteed a profit.
That’s what brought them from the field to the ocean.
Offshore oil rigs are inherently a higher-cost, higher-risk method of oil extraction, but
the oceans are, of course, home to a huge proportion of the world’s oil reserves so,
if there are no more low-cost oilfields on land, that’s where the companies go.
Before starting operations, though, these companies need to decide exactly where to
go.
Now, usually, oil platforms are installed where there are already plenty of other platforms
such as in the Persian Gulf, the Gulf of Mexico, or the North Sea.
They cluster together.
Within these areas, though, they need to determine which exact spot has the greatest potential
for oil extraction, so geologists conduct surveys using ships and satellite imagery.
Once that spot is selected, a rig will be towed to its location and installed.
Once they’re put in location, offshore oil platforms often don’t move for years—they’re
intended for long-term operation in a single spot.
Despite this, though, they operate quite differently from ships.
Usually, those working onboard have a shift of 12 hours a day, every day, for a period
of two or three weeks, followed by two or three weeks off onshore.
Keeping those work hours dense means that fewer people onboard are not working at a
given time, which means that less space is needed for accommodations.
But of course, this pattern means that there’s quite a lot of back and forth between shore
and rig.
For that, they use helicopters.
This is actually one of the largest commercial applications of helicopters and huge companies
have emerged, especially in the past few decades, to serve offshore oil rigs.
For example, Bristow Aviation, one of the largest, has a fleet of almost 500, mostly
used to make these offshore flights.
The North Sea oil field is primarily linked with Aberdeen, Scotland, onshore, at least
for its UK-owned or operated platforms.
Aberdeen airport—a primarily regional airport that only has commercial passenger flights
to a couple dozen European destinations—happens to be the world’s busiest heliport.
About 100 large helicopters take off from here each day, mostly flying out to the North
Sea.
But Aberdeen is also linked to the oil fields another way.
It serves as a hub for the ships that service the rigs.
Now, especially in the North Sea, oil makes its way from the rigs to shore by undersea
pipeline, so there isn’t a need to bring much back, but they do need to be frequently
replenished with supplies—both for the humans, and the rig’s operations.
That’s the job of platform supply vessels, which are essentially mini, short-range, flexible
cargo ships.
Aberdeen Harbor is always abuzz with activity, filing up these vessels, to keep the hundreds
of offshore platforms themselves supplied.
Onboard, there are essentially three types of jobs: production, those directly involved
with the extraction and processing of oil, maintenance, those who keep the facilities
and equipment in working order, and service, those who cook or clean or care for the rest
of the crew.
There’s always a focus, within the companies operating these platforms, to minimize the
numbers of people working actually onboard as much as possible.
It’s expensive first to transport and supply these workers, and then their salaries are
also considerably higher than typical onshore salaries in the petroleum industry.
An average offshore salary in the UK is around 60 or 70 thousand dollars—nearly double
the national average wage.
Therefore, most management and high-level decisions are made by workers back onshore
who video conference in to the platforms to coordinate.
Workers onboard are, for the most part, strictly operational.
On the inside, these platforms look a lot like ships.
The rooms are small and the recreation areas are sparse.
There isn’t, after all, much down-time given the long hours while onboard.
The platforms are more or less self-sufficient.
Even though they’re usually within a couple hundred miles of shore, ships only resupply
sporadically and helicopter flights are expensive, so water and electricity are produced onboard.
As you would image, the rigs themselves are also hugely expensive to build.
That’s because, what you see, the platform, is only a small component of the overall structure.
With all designs, there’s hundreds or thousands of feet of undersea drilling equipment, but
with some, there’s far more.
Certain platforms are floating, anchored to the ocean floor, but others are rather massive
undersea towers.
The tallest in existence is the Petronius platform which has almost 2,000 feet or 600
meters of undersea towering to support the platform itself.
This made it, until the opening of the Burj Khalifa in 2010, the tallest free-standing
structure in the world.
The development, construction, and installation costs of this platform were therefore about
$500 million.
And, in fact, those costs are completely typical, if not low.
Plenty of platforms cost far closer to a billion dollars.
So, the question that oil companies are now beginning to pose would be: is it worth it?
Well, there’s the short-term answer to that question and there’s the long-term answer.
In the short-term, the answer is definitively no.
At the time of writing, in April 2020, oil prices are hovering in the 20s of dollars
per barrel—artificially lowered by a price war between Russia and Saudi Arabia, and naturally
lowered by a drop in demand due to the COVID-19 pandemic.
There likely is not a single offshore oil platform in the world turning a profit at
those prices.
Places like the North Sea, which have particularly high costs due to their workforce coming from
relatively high-wage countries like Scotland, England, and Norway, have seen their output
reduced since oil reached a peak price up until 2014.
It’s just far cheaper to buy oil from onshore production facilities.
So, in the year of 2020, oil platforms just don’t make sense.
In the longer term, though, oil platforms could turn a profit, and that’s why they’re
kept around.
In a high-price oil environment, there likely isn’t enough onshore capacity to fulfill
demand and so these offshore platforms are how oil companies fulfill demand to increase
profits.
There’s much less short-term flexibility with offshore platforms than on-shore installations,
so typically the oil platforms are kept running, in the medium-term, and then in the short-term
onshore production is scaled more to demand.
But there are long-term costs that oil companies might not have fully previously considered
when offshore production first began at a large scale decades ago.
This was all realized with the BP Deepwater Horizon platform’s explosion and subsequent
oil spill in 2010.
Almost 5 million barrels spilled out into the Gulf of Mexico.
The full economic and environmental costs are still not fully realized, a decade later,
and they certainly far eclipse the costs borne by BP itself, but the company spent about
$65 billion cleaning up and settling claims related to the incident, and their market
value dropped by about $60 billion.
That’s equivalent to about two to three years of their profit.
And it’s not like the Deepwater Horizon will be the last oil spill.
There might have been reforms, and there might be more attention, but oil spills are just
a byproduct of the business.
The immense cost they impose on both the companies responsible, and the areas they alter will
not go away.
Even without considering their immense environmental cost, to the company, oil platforms have emerged
as high-risk, low-reward alternatives to onshore extraction methods.
That’s not a desirable combination by itself, and its coupled with widespread public sentiment
against offshore drilling.
That’s a losing combination, for everyone, and for that reason, there really hasn’t
been any expansion in the industry in the past decade and a half.
The world has been producing about 20 million barrels of oil from offshore sources per day
since about 2005, despite oil demand increasing, and yet there’s little evidence that this
will ramp up in the future in a free-market environment.
The only reason it might is if governments artificially prop up this production method
in order to ensure their oil needs are fulfilled domestically.
That’s possible in a place like the UK, with vast offshore production but very limited
onshore, but with the recent decline in North Sea oil, it’s not a future that oil companies
themselves are likely interested in pursuing.
This isn’t some great win for the environment, though—onshore extraction is hardly better
than offshore—but it does mean that, in the current oil environment, the makeup of
who, how, and where the world gets its energy is changing ever faster.
The story of the Deepwater Horizon explosion and spill is a fascinating one, and there’s
a great book that goes into immense detail of the saga the workers on the platform went
through to save lives and escape in its first hours.
It’s called Fire on the Horizon, and it gives a fantastic glimpse into the perils
of such a job.
Like many great stories, it is available as an audiobook on Audible, so that means that,
by signing up for a trial at audible.com/Wendover, or by texting “wendover” to 500-500, you
can get it for free.
If that doesn’t sound like your thing, though, and you’re a sci-fi fan like me, I would
wholeheartedly recommend Recursion by Blake Crouch.
It’s a terrifically unique story, and its performance on Audible is fantastic.
So, once again, by signing up at audible.com/Wendover, you can get Recursion, Fire on the Horizon,
or any audiobook for free, plus two free Audible originals, and you’ll be supporting Wendover
Productions while you’re at it.