Increasing Costs in Deepwater Development May Impede Projects

The United States accounts for more than one out of every 10 barrels of crude oil produced around the globe each day, according to the U.S. Energy Information Administration. This is due in part to rising production of tight oil found in shale rock formations, but overall produced crude oil in the United States mainly comes from a handful of states and the Gulf of Mexico.

Five states and the GOM supplied more than 80 percent, or 6 million barrels per day, of the crude oil (including lease condensate) produced in the United States in 2013, the agency reported. Texas alone provided almost 35 percent, according to preliminary 2013 data released in the EIA’s March Petroleum Supply Monthly. The second-largest state producer was North Dakota with 12 percent of U.S. crude oil production, followed by California and Alaska at close to 7 percent each and Oklahoma at 4 percent. In addition, the federal offshore Gulf of Mexico produced 17 percent.

Productivity of oil and natural gas wells is steadily increasing in many basins across the United States because of the increasing precision and efficiency of horizontal drilling and hydraulic fracturing in oil and natural gas extraction, the EIA noted. Many resource-producing basins are experiencing a yield over time in either oil (Bakken, Eagle Ford and Niobrara) or natural gas (Marcellus and Haynesville) formations.

With shale oil/tight oil development in the United States accelerating at a rapid pace, crude oil production could approach 5 million barrels per day in 2017, compared to around 1.5 million barrels per day in December 2012 and practically zero in 2006, according to a study by the Harvard Belfer Center. Meanwhile, Wood MacKenzie projects North American tight oil production to exceed 5 million barrels per day by 2019.

Some might say the focus of major operators has shifted from deepwater to onshore exploration and production (E&P) with a few companies divesting Gulf of Mexico acreage to fund shale drilling. Furthermore, the March 2014 Baker Hughes Inc. rig count report showed land-based rigs at 1,719 with only 55 rigs drilling offshore, revealing a big spread which may not have been as wide a decade ago when oil and gas shale drilling was not done as extensively as it is now.

“Several deepwater projects recently were deferred or in one case canceled,” Jim McCaul, president of International Maritime Associates, Inc., explained to Rigzone. “I think this had to do with the opportunities available elsewhere as well as the increasing costs of the deepwater developments, so I think shale and tight oil are definitely having an impact on the deepwater sector. There’s only so much money available in each company’s budgets … companies have limited resources and it’s a matter of where you use it.”

The floating production sector looks healthy and growth remains strong, but the sudden expansion of shale oil/tight oil production could disrupt the growth trajectory in the deepwater sector, he added. Currently, there are more than 200 deepwater projects in the planning stage that will likely require a floating production system for development, with 320 oil and gas floating production units now in service, on order or available for reuse on another field as of March 2014,
according to International Maritime Associates.

“Deepwater drilling is at a high level of utilization, and the number of new deepwater projects coming into the planning stage is set to accelerate over the next few years, as around 90 new drillships/semisubs are delivered,” McCaul stated. “So I wouldn’t count this sector of the industry out; it just seems as if operators are wanting a financial return that can be obtained from each project, and in turn are cutting costs.”

Impacts On Deepwater Projects

This sudden expansion of shale oil/tight oil has two potential repercussions, McCaul noted. First, the supply of oil from these new resources will reduce U.S. oil imports, allowing more crude to be available for other markets and ultimately driving down the price of crude. Second, oil companies will invest in shale oil/ tight oil projects using capex that otherwise might be earmarked for deepwater project starts.

“Both spell potential trouble for future deepwater investment,” he stated. “Deepwater spending has had growth at a 12 percent+ compounded rate over the past five years and has been the best and most secular growth sector in oilfield
services,” said James Wicklund, managing director of Energy Research at Credit Suisse LLC, to Rigzone.

“But while spending has increased, production hasn’t, and today, we think that deepwater is now the second highest marginal cost per barrel of oil produced behind Canadian oil sands. So the oil companies have decided what to do: they are going to focus on growing returns rather than production.”

Majors like Exxon Mobil Corp. reducing its capex are an example, Wicklund said.

“In pledging to cut its spending, Exxon will join its peers, including Chevron Corp., Shell Oil Co., and Total S.A., in an attempt to deliver higher returns on their investments. Exxon has the highest return on capital in that group, but like its peers, it has suffered from a fall in profitability in recent years as costs have risen while commodity prices have been broadly leveled,” according to ExxonMobil management at its March 6 Analyst Day.

“Shell’s chief executive officer is out with the same message,” added Wicklund. “The company’s chief executive told analysts in New York that the company aimed to remain disciplined and selective with their capital, ensuring that any new investment contributes to robust cash flow growth.”

“Deepwater is providing lower returns and has shown no production growth while U.S. unconventionals have much higher returns (at least on paper), [and] enough scale of reserves to be of interest to the majors … so according to them, they will shift spending,” Wicklund noted.

“Have we seen it yet? Not really … they are not likely to abruptly change course any time soon either. Spending growth in the deepwater is continuing up, but at a compounded rate of closer to 3 percent over the next five years, down from 12 percent over the previous five years. Still up, but in a market that has geared up, with the spending rate continuing.”

What Is The Deepwater Status?

“Presumably, there is a lot of activity onshore, but if you look at the overall economics and the quality of plays and where you’re going to see the best returns, it’s still the deepwater Gulf,” stated Jason Nye, head of Statoil’s Gulf of Mexico operations, at a recent press tour.

“I don’t think we will ever witness an end to deepwater specifically for those reasons. If you look at the rig counts and the activity levels, we have more rigs in the Gulf of Mexico, than pre-Macondo, working right now. There is a lot of activity and it’s higher than it has ever been. I think both, onshore and off, can co-exist.”

“Opening up additional areas for exploration and development is critical to the future of the industry overall, even if near-term emphasis is waning,” remarked Wicklund. “The technology involved is still stunning beyond comprehension by most. As what happens in this and other industries, the costs will be driven down and the efficiency will move up, and the industry will work to push deepwater into a more attractive economic segment. Many or most of all current projects are still economic, but the majors haven’t been able to grow production over the past few years so a shift away from that metric was inevitable.”

That shift has consequences; and one of the consequences right now is the industry having an economic alternative, of scale, to deepwater development.

– See more at: http://www.rigzone.com/news/oil_gas/a/132845/Increasing_Costs_in_Deepwater_Development_May_Impede_Projects/?all=HG2#sthash.PNXijskb.dpuf

18 Comments on "Increasing Costs in Deepwater Development May Impede Projects"

rockman on Thu, 1st May 2014 7:03 pm 



“First, the supply of oil from these new resources will reduce U.S. oil imports, allowing more crude to be available for other markets and ultimately driving down the price of crude. Second, oil companies will invest in shale oil/ tight oil projects using capex that otherwise might be earmarked for deepwater project starts.”

Double BS IMHO. First, as we’ve discussed many times, shale development requires high oil prices…as the Deep Water also does. Second, there’s very little overlap between Deep Water and hale players. As highlighted recently by Shell Oil (a serious DW player around the globe) completely withdrawing from all US shale activity.

DW activity will decline and it won’t require higher prices to bring it about. It will follow the same path followed by every oil play ever developed: the big fields tend to be found early with future fields becoming progressively smaller. So even with flat cost more future projects will fall below the economic threshold. The DW GOM is not a new play: the first field began producing over 35 years ago with over 140 DW GOM discovered to date.

Plantagenet on Thu, 1st May 2014 7:08 pm 



The fantasy that the price of oil will go down is belied by the steep rise that is actually occurring in oil prices.
The trend is our friend.

As oil prices continue to increase, Deepwater drilling will become ever more attractive.

Makati1 on Thu, 1st May 2014 7:40 pm 



RIGZONE = Petroporn, pimping for a dying industry.

Perk Earl on Thu, 1st May 2014 8:19 pm 



“As oil prices continue to increase, Deepwater drilling will become ever more attractive.”

That’s presuming the economy can handle a higher oil price. Right now fuel at CA pumps in our area is 439.9 a gallon for regular unleaded. At the height of the oil price spike (before the Big Recession) in 08 the price at the pumps only reached a little higher, around 4.90 a gallon.

Makati1 on Thu, 1st May 2014 11:00 pm 



Perk Earl, gas here in Makati is around $5 per gallon and has been for at least 6 years. But, here it is mostly used to transport things and people in public transit and business. It is not wasted on trips to Walmart. BTW: There are no Walmarts in the Philippines. Too much low price competition.

Perk Earl on Fri, 2nd May 2014 12:44 am 



Well, I understand fuel prices around the world vary for different reasons, but it seems like a price point gets reached here in the US in which discretionary purchases suddenly drop off quickly. Then it follows many of the small mom & pop stores begin having close out sales and unemployment starts edging up. I wonder if we are close to that happening here and if so will oil price drop?

rockman on Fri, 2nd May 2014 5:19 am 



Earl – “…in the US in which discretionary purchases suddenly drop off quickly…and if so will oil price drop?” Not sure how old you are but search back to mid-80’s oil prices and that’s exactly what you’ll find. The late 70’s oil price spike drove the world into a Deep recession. The demand destruction caused oil prices to drop more than 60% by 1986.

There’s no reason to expect the same couldn’t happen again in the future and we could see $40/bbl oil. Not predicting it will happen but just that it could with sufficient demand destruction. Of course, in time such a low price would stimulate economic growth, increase demand for oil and eventually higher prices again. But that recovery would take years just as it did in the 80’s.

Davy, Hermann, MO on Fri, 2nd May 2014 6:46 am 



Rock, if there is a recovery. The 80’s had a bounty of the final mother lode of cheap oil coming on line. That oil is gone. The other issue is a system with a huge debt load to service but without cheap energy to service it.

rockman on Fri, 2nd May 2014 7:54 am 



Davey – The recovery I was referring to would be a return to the piss poor state we’re in now. LOL.

Davey on Fri, 2nd May 2014 8:50 am 



I hope so but you seem to have a brighter more optimistic character than my dark serious tone. At party folks would tire of me and gravitate to you. Lol

Boat on Fri, 2nd May 2014 9:35 am 



The biggest change in the US that needs to happen in a world of increasing energy costs is no immigration. Legal or illegal. Technology is the driver of job loss and of course is much more efficient. If we embrace that fact and plan for it our transition to a smaller population would come much easier. Some examples.
Online schools don’t need as much infrastructure. Same with banking, insurance. A flat/consumption tax would eliminate many thousands of jobs doing taxes that are not needed. A shrinking population would not need near as much housing, water etc. materials and all the infrastructure that goes with it.
Health care where blood tests determine prescriptions without doctors, nurses where a computer tell you what you need in many circumstances. All with much less infrastructure to maintain. There are 10’s of millions of jobs that can be eliminated easily because they are inefficient. The winner in high paying jobs is the countries that go down this road 1st and quickest. But it will happen.
With population drop companies that create the most value will get the best workers if they train, and compensate them the most. Inefficient and convenience stores may not make it like many restaurants and jiffy lubes lol
Anyhow, there does not need to be this big crash, just a faster transition to the future.

Kenz300 on Fri, 2nd May 2014 9:48 am 



As the price of oil become more and more expensive the alternatives all look better……….

The price of oil, coal and nuclear keeps rising and causing environmental damage.

The price of alternative energy sources keeps dropping and they are safe and clean.

How Big Oil Clings to Billions in Government Giveaways

http://peakoil.com/publicpolicy/how-big-oil-clings-to-billions-in-government-giveaways

Davy, Hermann, MO on Fri, 2nd May 2014 10:02 am 



Boat what you are describing is managed de-growth. Anytime you have a population decline you will have economic activity decline. Systems theory says managed de-growth is not possible. What occurs when an economy is at the limits of growth facing diminishing returns with a population in overshoot to carrying capacity contracts is break to a lower level of economic activity. This break or decent is not rational or smooth because of the interjection of chaos and dysfunction in the system. So we see the classic bifurcation that leads eventually to a new equilibrium or IOW a reboot. If, we could have started this process years ago when we were not at the limits of growth then it is possible with enough money, cheap energy, political will, and luck we could have steered society towards a more sustainable outcome. Yet, it is the nature of species and their ecosystems that they will opt for overshoot if the energy and environment allows it. This is precisely what has happened in our case. A system that is basically self-organizing by millions of individual decisions gravitated to economic/population growth, higher consumption, and environmental expansion or IOW overshoot. The system is now brittle and unable to allow innovation and change. This phenomenon is present in important segments of the global economy like the financial system, wealth inequality, and development. Out environmental system is facing energy, water, and food stress. This system must crash per systems theory. The big question is “WHEN” also theory is theory so how will real life play out?

Boat on Fri, 2nd May 2014 11:03 am 



Davy
Obviously I don’t believe in your Systems Theory crash for the world. As many developed countries drop populations due to economic hardships show that man can adjust populations without collapse. At the moment Japan is a good example with their energy efficiency improvement.
I do think there will be obvious winners and losers like there is today with 18% of the worlds population not even having electricity and of course are the most vulnerable. As fuels from food become more prevalent we might see areas of the world collapse from starvation but the countries that manage the best will win the survival competition with the least amount of disruption.
Some people cheer the pain of collapse to save the world. Through starvation, war or climate change. I tend to think it might be messy but winners will always be there regardless of what happens. My example of degrowth and efficiency is just a common sense approach with just 2 arrows in the quiver.
A couple more examples. How much electricity is wasted lighting up buildings and store fronts when no one is there. How much Nat Gas is wasted by flaring. When regulations catch up with common sense we could cut energy use by a huge %.
A cash for clunker for semis plan would help. New engines and beds can get 12 mph instead of the industry avg. of 5.5-6.5. We can go a long way without any crash. Just trim some excess.
I enjoy the doomer comments and believe there is partial truth in much of it. As there is partial truth that think we can manage our way out of problems. Degrowth or crash I do believe over time a few billion people have to go. Degrowth is less painful.

GregT on Fri, 2nd May 2014 12:07 pm 



Boat,

Just because you don’t believe in something, doesn’t make it any less real. Re-read what Davy wrote and think about it. He is absolutely correct in his summation. What you have written doesn’t make any sense.

Davey on Fri, 2nd May 2014 12:08 pm 



Boat, the contraction has alread begun. A camouflaged decent is already well underway. You are wishful thinking about survival of some countries especially the more advanced and complexed. These counties will fall the hardest. If you do not buy into systematic risk then you are failing to see the whole picture. It would be nice to think us North Americans will be exceptional and survive the coming decent through managed de-growth like you say. Yet the developed economies are facing the biggest changes. The flip side of this is the developed economies have the most low hanging fruit to pick that is if they can manage to hold the economy together. That is a big if. We have never seen a global contraction so it will be a new phenomenon that will unfold. I will agree with you and would not want to be the parts of third world in food and water overshoot in this coming decent. China and India in particuliar will be ugly. Yet, Boat the US is in for a rude awakening. Forget the electric cars fantasy that is a dead end. Ok, that is my doomer response. I hope we can avoid all this doom but reality is telling me different.

Boat on Fri, 2nd May 2014 1:00 pm 



Davy
I think I upset a couple of people without meaning to. As the earth has 7 billion people there has to be a difference in views. I was a fun conversation and you for one didn’t call me a troll or just plain wrong. I appreciate that. I guess I am just more optimistic.

Davey on Fri, 2nd May 2014 1:57 pm 



Boat, no problems here and enjoyed the chat. We need the optimism. As a doomer i can be dark, serious, and fatalistic. This is a reality of life but so is hope and optimism. Mixing the two along with Lady Luck you get a range of outcomes.