HOUSTON -- Escalating offshore drilling costs, particular in extreme deepwater environments, may be causing some energy companies to rethink plans to aggressively pursue oil and gas in deeper and more remote areas.

Crude oil prices averaging more than $100 a barrel in 2011 and new bounties of offshore oil led to an expanding interest in tapping offshore fields around the world. Today, ocean drilling rig owners and operators are reporting strong demand for all categories of rigs, from jack-ups to ultra-advanced drillships, and are telling their investors to anticipate rosy earnings scenarios as day rates for rigs continue to go up (EnergyWire, May 29, 2012).

But with rising costs comes the added risk of drilling failure, whereby companies today can easily spend more than $100 million on an offshore exploration project, only to come up empty-handed. Analysts and sources in the industry say cost run-ups in the offshore environment and a risk of producing nothing in unexplored areas could steer even some of the largest oil and gas companies away from frontier zones.

"We call it dry hole tolerance: How many dry holes will their senior management take?" explained Rebecca Fitz, director of the upstream practice at the research firm PFC Energy.

While the new oil or gas play could mean huge returns, Fitz agreed that firms probably do not have the "dry hole tolerance" that some might expect in the ultra-deepwater frontier environments, defined by PFC as areas with water depths of 5,000 feet or more.

Smaller, less capitalized firms and national oil companies are probably the most reluctant to venture into new offshore frontiers. But the ultra-deepwater zones also pose challenges for large integrated oil companies that have to scramble each year to find new reserves, she added.

"That varies enormously by company and by strategy, and it's one of biggest hurdles a new entrant to [exploration and production] or a national oil company, in particular, has when considering venturing out into deepwater areas," Fitz said.

Last month at an annual shareholders' convention, Exxon Mobil Corp. CEO Rex Tillerson was asked by reporters why his firm was not more active in the deeper ends of the U.S. Gulf of Mexico, where peer companies are drilling.

Exxon Mobil is still a major player in the Gulf of Mexico today, and Tillerson predicted that his company would become more active in the offshore U.S. outer continental shelf in the years to come. But he also expressed concern about the rising costs of deepwater exploration, saying he would like to see technology cut drilling costs and exploration risks, a process that has been happening onshore in North America's booming unconventional fields.

Day rates for advanced offshore drilling equipment are creeping toward and, in some cases, past $500,000. There is broad agreement among drilling rig contractors that prices for rigs will continue to rise as demand outstrips supply, perhaps by as early as the end of this year.

Repsol to abandon Cuba waters

At a recent meeting held in Houston for financial analysts, executives with Noble Corp. said they expected to spend around $1.9 billion building new rigs this year. CEO David Williams explained that "attractive shipyard pricing with good, favorable payment terms in an industry environment with solid fundamentals like we see today is hard to ignore."

But rig day rates can account for only about half the cost of drilling in remote deepwater environments. During a rig tour around the annual IHS CERA Week energy conference, executives at Norway's Statoil ASA estimated that it was costing the company roughly $1 million a day to commission a large rig called the Maersk Developer to explore the Gulf of Mexico.

It costs at least $100 million to develop an deepwater offshore well, said Statoil North America executive Bill Maloney. Other experts say the average cost runs closer to $150 million. But Maloney also said the expense can often be justified if it means production that could generate billions of dollars in revenue for decades.

But those costs remain high, and Exxon Mobil joins the ranks of companies choosing to tread more lightly into ultra-deepwater environments, including in the Gulf of Mexico. Spain's Repsol appears to be abandoning exploration in Gulf waters off Cuba, for example, despite the potential that it could tap a big potential basin of fossil fuels.

Fitz is in the camp of analysts who believe Repsol, after spending around $100 million on a drilling program that began in January this year only to find nothing, has no plans to return to Cuba. It is much better for that company to focus its investments in Brazil, she said, than to continue exploring in uncharted Cuban exploration blocks where dry hole risk is higher.

"When you're opening up a play, your success rates are lower but your discovery size is larger, and as the play matures, the success rate improves but the discovery sizes are smaller," Fitz said. For ultra-deepwater drillers, "a 20 percent success rate sounds high to me."

And the recent moves in energy markets have reminded oil and gas executives that they cannot take for granted that crude oil will always sell for $100 a barrel or more.

Fears of economic woes in Europe have already pushed West Texas Intermediate crude prices down from around $106 per barrel at the beginning of May to less than $85 a barrel. That is a 20 percent decline in less than two months.

Still, many offshore explorers appear determined to soldier on despite rising costs of exploration, higher dry hole risk and recently softening crude oil prices.

Last week, Cobalt International Energy Inc. informed investors that it had encountered a dry hole at a Gulf of Mexico tract. But the company said it will hold onto the rig it has hired for that job and move it to another portion of the Gulf where it will try again, this time in a different geologic formation.

Fitz said such determination may be more difficult for others to fathom.

"Up to $150 million for an ultra-deepwater well is par for the course," she said. "To drill a dry hole and get nothing? That's hard for a new entrant to stomach."