Is there a place for deepwater exploration in today’s lower-oil-price environment?
The oil and gas industry had better hope so.
Most of the recent success in global exploration has been driven by deepwater finds, said AAPG member Bob Fryklund, chief upstream strategist for IHS in Houston.
“For the bulk of them up to last year, for the past five years or so, 80 percent of the major discoveries were in deep water,” Fryklund said.
If you look at new basins opened for production, that number rises to 90 percent, he observed.
Fryklund will discuss the future of offshore as the speaker for the topical luncheon “Deepwater Exploration: A View Forward” on Monday, May 4 at the 2015 Offshore Technology Conference in Houston.
He’ll talk about where deepwater exploration is headed, not only in terms of operations and technology, but also in terms of geography.
A dozen significant new offshore plays have appeared in areas that include east Africa, Brazil, the Barents Sea, East Coast Canada and Angola, Fryklund said. The future deepwater hunt could extend into the Mediterranean, the Atlantic, the Arctic and other places, he noted.
“Deep water is definitely not dead,” he said. “It’s definitely part of the future. And it’s going to grow.”
While Fryklund emphasized the ongoing importance of deep water to the world’s exploration picture, he cited some uncertainties raised by recent trends.
“There are a couple of big questions about deep water, and about exploration” in general, he said.
One trend affecting the industry offshore over the past two years has been a shift toward smaller per-well or per-play resource numbers.
“Even though we’re making a large number of these new play discoveries, they’re smaller,” Fryklund noted. “There’s a bit of a disconnect between the number of new plays and the size of the resources.”
Offshore discoveries come in cycles, and for deep water “the cycle of those from peak to trough is in the neighborhood of seven years,” he noted. “We are definitely in that trough.”
From a longer-term exploration perspective looking at all years since 1980, the past two-year slump in deep water has been significant, with reduced resource numbers in both liquids and natural gas, Fryklund noted.
“It’s noticeably lower on the graph. One of the questions is, ‘Is that the new norm?’ That ties back more to the geology,” he said. “Many of these offshore plays are not the mega-deltas.”
A Lot of Cents
Fryklund said new geological thinking will be needed to improve the reserves-to-discoveries ratio, and that might mean considering a different type of reservoir target.
“Instead of hunting clastics all the time, maybe we should switch back to targeting carbonates,” he suggested.
He mentioned Zagros carbonates in the Middle East and also carbonate play potential “in the Arctic, when you think about the Universitetskaya-1 discovery by Rosneft. And there’s a lot up there in the Kara Sea.”
Another question for deep water is the future effect of a nosedive in offshore seismic, Fryklund said.
“While the drilling of wells is down, the shooting of seismic has just fallen off the map, down somewhere between 50 percent and a third,” he said. “The bright spot is, even before the price drop, in deep water we were overbuilt on rigs and overbuilt on seismic.”
That has brought a decline in day rates for offshore rigs and portends lower deepwater exploration costs for the industry. A company’s nickel should buy more as expenses come down.
Make that about six billion nickels, per well.
“You can’t drill too many dry holes at $300 million, no matter how big you are,” he said. “Getting better than that requires a lot of imaging, a lot of processing.”
Technology also is bringing down the cost of deepwater exploration, combined with geophysical advances like wide-azimuth and full-bandwidth seismic and a climb up the learning curve that’s cut some offshore drilling times by 25-30 percent.
“Another area that’s helped to reduce costs,” he commented, “is the automation side of things.”
Much work remains to be done in offshore technology, however.
“One of the frontiers,” he said, “is, ‘How do we get enough power on the seafloor to do the pumping and to do the separation down there?’”
‘Less Room for Error’
Fryklund noted that some of the smaller companies working the Gulf of Mexico are reducing the size of the window from discovery to first oil.
Part of the improvement comes from experience, part from bringing in vendors and others earlier in the process, he said.
“In some cases, they’ve done (deepwater projects) three or four times now,” he said. “They’ve built a model that’s sustainable, that’s repeatable.”
Deepwater’s success story might have been overlooked somewhat as everybody seemed to be talking about unconventional resources, and everybody seemed to focus on North America.
“Everybody had shale fever,” Fryklund said.
That obscured the importance of deepwater efforts in the world’s exploration picture, where challenges loom in the future.
“The discoveries are in deeper and deeper water. They’re in remote areas. They’re in harsher conditions,” Fryklund noted.
And the industry is struggling with the after effect of a major decline in oil prices, a challenge to essential but expensive deepwater exploration programs.
In March, the U.S. Bureau of Ocean Energy Management’s lease sale for the central Gulf of Mexico demonstrated the effect of significantly lower product prices on the offshore industry.
The total number of bids declined to 195, compared with 380 in the 2014 central Gulf round. The total amount of all bids was $583.2 million, compared to $1.1 billion a year earlier.
Bids were made on 169 tracts, compared to 326 in the 2014 lease sale, when 277 fever tracts were offered, the high bid total showed less of a decline but still dropped to $538.8 million from $850.8 million a year earlier.
Deepwater exploration might have an exciting long-term outlook, but its immediate future is still clouded by uncertainty over the direction of the price of oil.
“At today’s prices, things are challenged,” Fryklund acknowledged.
“It’s getting tougher with mistakes, with cost overruns,” he said. “You have less room for error.”