‘Depressed’ Offshore Sector Seems Pretty Upbeat

Offshore Drilling Depressed?

If offshore drilling is depressed right now, why is so much of it going on?

The offshore sector took a serious hit during the industry downturn as spending cuts limited project sanctions. But international research and consulting firm Wood Mackenzie expects 30 major offshore projects to win approval in 2018, and that’s only part of the story.

Altogether, 100 new offshore proposals could be headed for approval this year, according to business-intelligence data company Rystad Energy.

When Wood Mackenzie put together a list of conventional wells to watch in 2018, most of them were located offshore and a number of them in deepwater.

“The role of exploration is changing within companies. Many of the larger companies are looking to these deepwater opportunities to give them future legacy resources,” said Julie Wilson, global exploration research director for Wood Mackenzie in Houston.

“People have not abandoned high-impact exploration, because they need those needle-movers within their portfolios,” she noted.

Managing Expectations, and Efficiency

With industry spending still constrained, today’s approved offshore projects are considerably smaller than in the past, the company said.

Last year the average capital expenditure committed to major offshore projects – those targeting at least 50 million barrels of oil equivalent in commercial reserves – fell to $2.7 billion, Wood Mackenzie calculated.

That compares to an average project capital expenditure of $5.5 billion for major projects sanctioned over the last decade, it said.

Image Caption

Statoil's operation in the Barents Sea.

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If offshore drilling is depressed right now, why is so much of it going on?

The offshore sector took a serious hit during the industry downturn as spending cuts limited project sanctions. But international research and consulting firm Wood Mackenzie expects 30 major offshore projects to win approval in 2018, and that’s only part of the story.

Altogether, 100 new offshore proposals could be headed for approval this year, according to business-intelligence data company Rystad Energy.

When Wood Mackenzie put together a list of conventional wells to watch in 2018, most of them were located offshore and a number of them in deepwater.

“The role of exploration is changing within companies. Many of the larger companies are looking to these deepwater opportunities to give them future legacy resources,” said Julie Wilson, global exploration research director for Wood Mackenzie in Houston.

“People have not abandoned high-impact exploration, because they need those needle-movers within their portfolios,” she noted.

Managing Expectations, and Efficiency

With industry spending still constrained, today’s approved offshore projects are considerably smaller than in the past, the company said.

Last year the average capital expenditure committed to major offshore projects – those targeting at least 50 million barrels of oil equivalent in commercial reserves – fell to $2.7 billion, Wood Mackenzie calculated.

That compares to an average project capital expenditure of $5.5 billion for major projects sanctioned over the last decade, it said.

“The projects moving forward to final investment decision are much smaller than we’ve seen traditionally – a lot of brownfields instead of greenfields,” Wilson observed.

Rystad Energy said the 100 offshore projects of all types that could be approved this year represent about $100 billion worth of total capital investment, or an average of about $1 billion per project. Five years ago, the average capex for offshore projects was $1.8 billion, they noted.

But in a positive development, more offshore projects are being funded through the industry’s improved cash situation. Rystad estimated that 60 percent of companies looking to finance project development costs can now do so through their cash flow.

Wilson said Wood Mackenzie’s wells-to-watch list isn’t necessarily a collection of efforts likely to have the biggest production results.

“It’s more about a selection of wells we think are interesting because they are possible play openers, or high-impact wells,” she explained

They include Tullow Oil’s Cormorant-1 offshore Namibia, Kosmos Energy’s Anapai-1 off Suriname, ENI’s deepwater wildcat Santola-1 offshore Portugal and Statoil’s Gjokasen well in the Barents Sea.

In the longer term, the offshore sector of the industry knows it needs to become more efficient and competitive. It has to generate economic production to get projects sanctioned and budgets approved.

Wilson, whose background includes eight years working for BP, said offshore has some catching up to do in making use of data.

“Efficiency is a big deal. Digitalization is really going to help efficiency,” she noted. “We’re a very high-tech industry and have been for a long time. Having worked at an oil company myself, I’m amazed by all the data sources around, for essentially the same information.”

While offshore has thrived on advanced seismic, companies operating offshore generally have lagged behind in connectivity, data capture and data management.

“One of the things we talk about is that the industry very quickly needs to improve its data management,” Wilson said. “You have to make sure that all your data is accurate and verified, and that people are using the same sources.”

Automation also is helping companies reduce costs offshore, with remotely controlled platforms and robotic inspection and maintenance becoming realities.

“I think we’ve made a fantastic start, but the current focus for digitalization tends to be more on the production and integrity side rather than in exploration,” Wilson said.

“Those places where innovation can be captured more quickly will be the sweet spots. In terms of reducing the cost of supply it definitely will have an effect. It’s likely to be the onshore players who benefit first,” she observed.

Longer lead times for offshore projects give onshore operators an edge in more quickly introducing innovations for efficiency. Offshore operations and facilities also tend to be more complex than their onshore counterparts.

But offshore might offer the biggest potential dollar savings from efficiency improvements because of the large capital commitment required, especially for deepwater projects.

“The impact could be greater offshore because you are investing billions of dollars. If you are building efficiencies into that whole project, there are potential savings that could even surpass onshore,” Wilson said.

Some offshore operators today are talking about reducing per project capital expenditures by 30 percent through increased efficiency, she noted.

Here’s another reason offshore drilling hasn’t gone away: The oil and gas industry has stuck with it and gotten pretty darn good at it.

Offshore operations in the Gulf of Mexico date back to the 1940s. The Offshore Technology Conference in Houston, one of the world’s major industry events, celebrated its 50th anniversary in May.

“You think about the Gulf of Mexico, which is a very open playing field. Companies that dominate, like BP and Shell, have continued to explore and to replenish their portfolios through three decades,” Wilson said.

In the near term, cautious spending is mandating smaller offshore projects and in-field or infill development. For offshore exploration, highly prolific reservoirs are the focus today, according to Wilson.

Operators want to go after prospects that can result in large reserves, attractive post-exploration development opportunities and big production numbers, so investment dollars get spread out over more barrels or million cubic feet.

“Once you start developing, that’s really going to help your development costs,” Wilson explained.

Deepwater Potential

Major hydrocarbon discoveries over the past decade have mostly come offshore for the industry, and currently, almost all the frontier plays with the biggest exploration potential are in deepwater.

That’s a big reason the industry looks at deepwater drilling and says, “I can’t quit you.”

“The scale of the discoveries you can make is why people explore deepwater,” Wilson said. “Deepwater will usually give you the biggest bang for the buck in terms of discovery size.”

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