Thursday 30 March 2017

The deep-water sector is on the cusp of a recovery as costs come down to make field developments competitive with the US tight oil play, which is now suffering from accelerating cost inflation, according to Wood Mackenzie.

The UK-based consultancy estimates that 5 billion barrels of oil equivalent in deep-water resources awaiting final investment sanction now have a break-even oil price level of $50 per barrel, based on a 15% internal rate of return, as average global deep-water costs have dropped 20% since 2014.

A further 20% cut in costs could make a total of 15 billion boe of deep-water resources commercially viable for development, putting these volumes on a par with US shale where 15 billion boe of tight oil sitting in undrilled wells could be exploited at $50 per barrel, based on the same return rate.

The firm said “the playing field between tight oil and deep water is about to get more level” due to the fact “tight oil cost inflation is back with a vengeance”, while there is scope for further cost-cutting in the deep-water sphere through measures such as leaner development principles and improved well designs.

“The deep-water value proposition will strengthen as tight oil cost inflation returns,” it stated, adding a 20% rise in tight oil costs would mean the two resource themes effectively have the same opportunity set at $60 per boe.

As a result, WoodMac expects to see a pick-up in deep-water field project sanctions this year, with BP’s Mad Dog Phase 2 and Shell’s Kaikias, both in the US Gulf of Mexico, and Noble Energy’s Leviathan off Israel already given the green light.

Asia Pacific research director Angus Rodger highlighted the deep-water US Gulf as a region where operators have made “significant strides” in making structural cost reductions, with many reducing break-even levels from $70 to $50 per boe.

“This is not just a result of cheaper rig dayrates. Of far greater impact are the steps the industry in the Gulf of Mexico and elsewhere have taken to re-evaluate project designs and improve well performance,” he explained.

“We are now seeing scaled-down projects emerge with less wells, more subsea tiebacks, and reduced facilities and capacities – and this all translates into lower break-evens.”

Portfolio high-grading has also played a part in making more projects viable while there are also fewer players in the deep-water arena as many independents have exited the traditionally high-cost sector due to costs pressure or a re-allocation of capital to tight oil plays.

More than 70% of 45 deep-water projects awaiting final sanction over the next few years are operated by only eight companies - Brazil’s Petrobras, and the seven majors ExxonMobil, Shell, BP, Eni, Statoil, Total and Chevron, according to the firm.

“In a capital-constrained world, fewer operators inevitably means less deep-water projects flowing through to sanction. Only the most cost-competitive projects and regions will attract new investment,” Rodger said.