Add the offshore sector to the much-improved outlook for oil and gas. If current projections are correct, offshore activity should be getting a major boost, starting later this year. This expected rebound has more to do with sharply lower drilling and production costs than with higher oil prices.
The future for offshore exploration, especially in ultra-deepwater, remains more clouded. While the near-term outlook for offshore activity appears favorable and positive, the prospects for a return to active offshore exploration can best be described as “hopeful.”
Increasing Activity
Consultants and analysts now expect healthy growth in the offshore sector for the next five years, including bullish projections from global research and consulting firms Rystad Energy and Wood Mackenzie.
In March, Rystad Energy forecast a two-thirds increase in offshore oil and gas activity for the period 2021-25, with activity growth in all water depths.
The Norway-based consulting and business intelligence firm noted that the increase would be coming off a period of reduced drilling by the industry. Offshore commitments dropped to 355 projects during the past five years, down from 478 in the period 2011-15, it reported.
Rystad forecast a total of 592 offshore commitments from the beginning of 2021 until the end of 2025. It considers a project committed when more than 25 percent of its overall greenfield capital expenditure budget has been awarded through contracts.
For overall numbers, Rystad projected that shallow-water commitments will account for the largest share of the total increase, going to 356 from just 206 during the past five years.
But “the most impressive growth is that of deepwater commitments, with the number of projects rising to 181, from 106 in 2016-20,” Rystad noted.
In a startling observation, Rystad reported its latest Offshore Cost Benchmarking Report found that the cost of greenfield shelf reserves compared to deepwater has fallen dramatically since a high in 2014 – from more than $5 per barrel of oil equivalent to only around $1 per boe in 2020.
Andrew Latham, vice president of global exploration for Wood Mackenzie, said worldwide exploration and appraisal well numbers fell by more than 30 percent last year, from a little over 1,000 in 2019 to about 700 in 2020.
“Of these, just under half are offshore. We expect global E&A well counts to be again around 700 in 2021, with numbers increasing through the year,” Latham said.
“Thereafter, the fundamentals look good. Exploration economics have been reset through a combination of lower costs and sharper focus on prospects with a straightforward route to commercialization in the success case,” he noted.
For 2022 and beyond, “we expect E&A drilling to recover to around 1,000 wells per year, including 500 offshore wells. We expect that this drilling will add around 20 billion boe per year, of which at least 50 percent will be gas. The sector will be profitable at long-term oil prices of $50 (per barrel) Brent,” he said.
Industry Upturn
In offshore, a rising economic tide can lift all industry segments. The projected growth in project commitments “will stimulate rising demand for floating production, storage and offloading vessels, as well as subsea tiebacks,” said Rajiv Chandrasekhar, energy service analyst for Rystad Energy.
“The search for large new fields in deep and remote waters became much more economically viable after dayrates for drilling rigs and offshore supply vessels fell in the wake of the oil price crash in 2014 and 2015. This offers significant support for companies interested in deepwater,” he said.
Based on its oil price predictions, Rystad expects service company revenues from offshore involvement to recover and steadily increase to 2024. Chandrasekhar said EPCI (engineering, procurement, construction and installation) is likely to be the service segment with the highest market share, in terms of revenue.
Rystad predicted subsea tieback and floater commitments will rise considerably over the next five years, with a 50-percent increase in the number of company-owned FPSOs used on upcoming projects, “though fixed platforms will still remain the dominant solution for shelf developments.”
Rig operators also have an improved outlook, but the market for offshore drilling rigs will remain oversupplied “for the next five years. We can expect to continue hearing about contractors downsizing their fleet and scrapping rigs to deal with the oversupply,” Chandrasekhar said.
Availability of other equipment and supplies, and of offshore vessels, should be sufficient to meet offshore demand in all but the most specialized areas, according to Rystad.
“While there is an abundance of available OSVs, burgeoning sectors like offshore wind that need very specialized vessels – for example, wind turbine installation vessels – are likely to face supply shortages,” Chandrasekhar noted.
“With an aging workforce, the industry is likely to see a lot of retirements moving forward, and hence the pressure of shortage of experienced personnel. Hiring will also face competition from industries like renewables that have overlapping skill sets,” he said.
The bottom line is that the industry appears to be headed for a significant upturn in offshore activity, although not a return to the boom days of more-than-$100-per-barrel oil prices. In greenfield expenditures, Rystad Energy foresees offshore project commitments in 2021-25 of more than $480 billion.
“However, this is still well off the pace set in the 2011-15 period, when around $673 billion worth of commitments were made,” the company noted.
Future Exploration
Offshore exploration today has a promising but still uncertain future, largely because of the questionable long-term outlook for oil and gas demand and prices.
Chandrasekhar said Rystad’s projected increase in offshore commitments includes only projects that are already in company portfolios, reflecting the industry’s significant backlog of projects-to-be-drilled.
“Offshore exploration activity, led by China, is expected to increase towards 2022. However, we do not expect annual spending on offshore exploration to reach 2019 levels in the next five years,” he said.
Also, offshore exploration could be negatively affected by an industry de-emphasis on future oil production because of climate concerns.
“Some long-established companies are setting reduced exploration budgets as they plan a smaller role for upstream oil and gas in future. BP is an obvious example.” Latham noted. “Since we believe that exploration still offers value creation, we expect that others will pick up the opportunity.”
A shift to a greater activity share by national oil companies is already under way, and “NOCs (national oil companies) now account for 50 percent of the resources discovered by conventional exploration,” he observed.
The past half-dozen difficult years for the industry hit small operators and niche explorers especially hard, leaving them with reduced funding and potentially a reduced role in future exploration.
“Smaller explorers that are unable to fully fund development of discoveries have faced acute financing challenges. These companies often depend on a healthy asset market to monetize their finds, but deal flow has been quiet and prices low,” Latham noted.
“Specialist explorers have traditionally been among the sector’s top innovators. Who knows what opportunities would be missed if some of these companies were to disappear?” he said.
On a more positive note, Latham said climate concerns could actually increase exploration efforts, as the industry tries to restructure its portfolio mix.
“Decarbonization of upstream portfolios will be a growing motivation for investment in exploration,” he said. “Companies will look to displace older, high-carbon assets with new fields with lower emissions intensity, because of both higher facilities throughput and new carbon mitigation technologies.”
The biggest takeaway from projections of increased offshore activity might be this: While the recent upturn in oil prices has gotten more attention, lower costs are affecting the oil industry and the offshore sector like magic.
“The industry achieved full-cycle returns of at least 12-16 percent in 2020, its best result in a decade and the continuation of an upward economic trend since a low point in 2014. Exploration added 25 billion boe of new conventional resources during 2020, similar volumes to 2019 despite the reduced well count,” Latham observed.
“The discipline and focus on advantaged resources – low-cost, low-carbon barrels that can displace existing opportunities – that have driven this turnaround in exploration economics shows no sign of ending,” he said.