Offshore Development Slump Likely To Cause Long-Lasting Pain

Topics: Offshore
Graphic courtesy of Wood Mackenzie.
Capital spending is expected to continue falling in the near term.

Those waiting for the offshore exploration sector to come back should expect delays. “We are at the bottom of the cycle,” Julie Wilson, research director for global exploration at Wood Mackenzie, said during a presentation at the 2016 Offshore Technology Conference (OTC) that showed deepwater spend declining through 2020, with no upturn in sight.

The problem is that an oil price of USD 50/bbl is still short of the price needed to profitably develop deepwater fields. An oil price of USD 60/bbl is the break-even cost for 70% of the proposed deepwater projects, she said.

The energy information company predicted a growing backlog of postponed projects in the coming years, totaling USD 150 billion by 2020, in a sector where future investment will be affected by whether it can break from its reputation for high costs.

Deepwater producers have made progress in cost cutting. Despite the drop in hydrocarbon prices since 2013, the gap between the value of what has been discovered and the cost of finding and appraising those fields has narrowed. But the deficit remains significant.

“Hammering the service sector will not make projects viable again,” Wilson said. While service companies and suppliers cannot afford further discounts, savings are possible because, she said, “there is huge waste across the industry.”

For example, projects to build the trains used to liquefy natural gas have had huge cost overruns. Those high-development prices combined with depressed prices for natural gas worldwide led to the deferral of USD 43 billion in deepwater projects in Australia, and USD 37 billion in Mozambique.

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Offshore Development Slump Likely To Cause Long-Lasting Pain

Stephen Rassenfoss, JPT Emerging Technology Senior Editor

01 July 2016

Volume: 68 | Issue: 7