With oil prices potentially set to stay low for years to come, the future of deepwater drilling is very much up in the air.
The world’s top oil executives have gathered in London this week for the Oil & Money Conference, put on by Energy Intelligence and the New York Times. There is an atmosphere of both optimism and pessimism at the conference, depending on who you ask. But there is also a general sense that U.S. shale has weathered the worst of the downturn and could be poised for a comeback if oil prices rise just a few dollars more.
“The phenomenon of shale oil is real and when prices rise to $60 a barrel you will see the level of active rigs rise. This is inevitable,” Ali Moshiri, president of African and Latin American Exploration and Production for Chevron, said during a panel event in London.
But while U.S. shale could come back with a vengeance at $60 per barrel, those prices are unlikely to be high enough to justify massive investments in long-cycle deepwater projects. Even though shale projects tend to be relatively expensive, they can be much less risky because of their short-cycle nature, requiring small upfront investments and very short lead times. Large-scale projects, on the other hand, are no longer a priority in a world of low (and volatile) oil prices. Deepwater and expensive heavy oil projects will be “very difficult” unless oil prices move up to between $60 and $80 per barrel, Chevron’s Moshiri said at the London O&M conference. That was echoed by the CEO of ConocoPhillips, who said that prices are “still pretty low to justify significant investments,” referring to large-scale, multiyear projects.
BP’s CEO Bob Dudley struck a slightly more optimistic tone, saying that his company could begin investing in new projects once again. “Investments are back,” Dudley said in London. “But it’s only going to be the very best.” BP has several projects on the drawing board for which it will soon make final investment decisions, including its Mad Dog II project in the Gulf of Mexico, which could run mover $10 billion. Dudley expects oil prices to average between $50 and $60 per barrel in 2017. Related: Low Oil Prices, Security Issues Deal Death Blow To Kuwaiti Parliament
To the extent that oil companies move forward on deepwater drilling in the future, it will be increasingly confined to a few choice parts of the world, according to Andrew Gould, a board member for Saudi Aramco. "Not all deepwater is equal," Gould said in London. "There are really only three areas that have the critical mass to allow economies of scale. These are the U.S. Gulf of Mexico, the North Sea, particularly the Norwegian area, and Brazil.”
There are reasons that these three regions – the Gulf of Mexico, the North Sea and Brazil – offer better returns than most other parts of the globe. The oil fields are large and well-known, and the infrastructure is in place. "These areas have the engineering and supply supporting proximity that can mobilize resources in a way that is impossible in remote areas," Gould added. Drilling in undeveloped frontiers could be off the table. BP’s recent decision to cancel drilling plans off of Australia’s southern coast is but one example. Related: Oil Gains After EIA Reports Strong Draw To Crude Inventories
Shale may be the preferred option in today’s market, but without deepwater, the industry could struggle to meet global demand several years from now. The IEA’s executive director cautioned that global investment could fall once again in 2017, which would mark an unprecedented third consecutive year of declining investment. A scarcity of new projects could lead to a supply shortfall. “We’re not investing enough today...to ensure that oil supply keeps up with demand, 2018, 2019, 2020,” John B. Hess, CEO of Hess Corp., said at the conference.
Nevertheless, Hess also said that deepwater doesn’t really make sense with today’s prices. "You will need prices in excess of $60-$80 a barrel to get the long-cycle projects running," Hess said.
Those two comments from Hess highlight the conundrum the industry faces: few companies are willing to risk investment in deepwater projects that cost billions of dollars, but many recognize that they will be needed to meet future demand.
By Nick Cunningham of Oilprice.com
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