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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Offshore Oil Is Poised For Significant Growth

Offshore

Following three painful years of portfolio repositioning, cost cuts, and deferred projects, the offshore oil and gas industry is now more prepared to deliver projects and profits at lower costs and simpler designs.   

Currently, U.S. shale is taking center stage in analyses about oil growth stories, and rightfully so — it’s growing at a much faster pace than previously expected. But cost inflation and investor pressure to prefer profits over production may slow down the pace of that growth going forward.

Meanwhile, offshore oil — which suffered from slashed investments during the downturn — is now coming back with projects that have improved economics, in some cases challenging those of U.S. shale. That’s due to the costs that major oil companies slashed after 2014, to simpler designs, and to the supermajors reshaping portfolios and projects to make as much money at $60 Brent as they were making at $100 Brent four years ago.

According to analysts at Bernstein, some 40 new offshore projects could be approved this year, a significant rise compared with 29 projects approved last year and with just 14 projects in 2016, which, according to Reuters data, was the lowest number since at least 1990. Most of the new offshore projects are also expected to be leaner and smaller and average 42,000 bpd of oil equivalents, compared to 69,000 bpd for last year’s projects, according to Bernstein.

Oil majors have already announced some impressive cost reductions in offshore projects.

Shell said last month that it would redevelop the Penguins oil and gas field in the UK North Sea, with a go-forward break-even price below $40 per barrel and peak production at around 45,000 bpd.

Then Statoil said earlier this month that it had reduced the breakeven for the first phase of its Johan Sverdrup offshore project to below $15 per barrel.

Related: Oil Rig Count Rises As Prices Recover

“Their focus on simplification, design enhancements and execution efficiencies have made their offshore prospects competitive with North American shale projects,” Matthew Fitzsimmons, VP Cost Analysis at Rystad Energy, said, commenting on the Johan Sverdrup cost reduction.

“Much is made of the Permian, its flexibility and the returns there. But actually infill drilling for a decade creates enormous sources of money,” Bernard Looney, head of BP’s upstream division, told Reuters.  

“You will see more deepwater over time, for sure,” Looney noted.  

Offshore development is needed if the industry is to offset the natural decline of currently producing oil fields, because even with the production boom, shale accounts for just 7 percent of the global oil supply of 98 million bpd, whereas offshore oil makes up more than one-quarter of supply.

There are signs that optimism is returning to the upstream, and companies will continue to prefer low-cost high-value oil developments this year, according to energy consultancy Wood Mackenzie.

Oil majors and national oil companies (NOCs) are expected to compete fiercely for discovered resource opportunities offshore Brazil, “bolstered by world-class deepwater economics,” WoodMac says, expecting Mexico’s licensing rounds to draw strong bidding this year as well.  

Deepwater Gulf of Mexico, which was badly bruised during the downturn, is also expected to stage a comeback this year, Wood Mackenzie reckons. The U.S. tax overhaul “drastically increased the fiscal competitiveness of deepwater Gulf of Mexico, relative to other offshore basins,” WoodMac said.

Still, current production in the Gulf of Mexico can’t be sustained with conventional deepwater fields, William Turner, Wood Mackenzie’s senior research analyst and lead author of the “Deepwater GoM: 5 Things to Look for in 2018” insight, said.

Related: Is This The Future For OPEC?

“Increased investments in exploration and development, especially in ultra high-pressure high-temperature technologies and projects, are crucial not only to maintaining the current pace of production but also in unlocking the next phase of significant volumes in the region,” Turner noted.

As a result of the oil price crash, global offshore investments have plunged from the 2014 highs of $335 billion, as companies had to reassess how to make higher-cost projects profitable in the lower oil price world, Rystad Energy says. The sentiment turned positive in 2017 and this year will be the bottom of the global offshore investments at $155 billion, before investments start to grow steadily year by year going forward.

“This growth comes from high offshore activity, driven mainly by an increasing oil price and companies’ ability to cut costs to improve the profitability of their projects,” Emil Varre Sandøy at Rystad Energy said.

By 2022, offshore investments will manage to recover to $230 billion, which will still be 25 percent lower than the 2014 high, but which will show that the industry will stick to strict cost management, Rystad says.  

By Tsvetana Paraskova for Oilprice.com

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