Deepwater statistical report

Alan Murray, Wood Mackenzie

With international oil companies facing stiff competition for resource capture opportunities, Wood Mackenzie looked at discovery trends in deepwater basins to examine whether deepwater continues as the most exciting opportunity in global exploration.

Explorers continue to find volumes in excess of a billion barrels in deepwater basins; however, the biggest finds no longer deliver top-level returns. Since 2002, full-cycle Internal Rate of Return (IRR) on new billion-barrel resources in deepwater have fallen to near 15% from around 25%.

Cost inflation is the most directly identifiable reason. Higher day rates for specialist rigs increase both finding and development costs. This has been evident since 2004. On top of this, a mixture of higher prices for input materials has pushed costs up further. Development costs have also been affected by shortages in floating equipment and subsea installation markets.

The increasingly uncertain environment around deepwater costs and returns means that projects are taking longer to sanction, and this is adding to the drag on returns as lead times are extended.

We expect future returns to be kept low by increasingly gassy discoveries, and by discoveries in deeper water and in deeper reservoirs.

Oil still predominates in deepwater. Nigeria, Brazil and the GOM are delivering large volumes of oil, but many of the shallow buried plays are now well explored and the largest prospects are in deeper plays, which are more technically challenging and expensive. This includes the presalt play in the Santos Basin, the GOM Paleogene and the Nile Delta’s Miocene play.

What does this mean for deepwater explorers? Achieving scale in deep water can no longer be done without accepting lower returns. Deepwater exploration will fall into two distinct camps:

1. Those focused on adding resource will explore the more technically challenging new deepwater plays.

2. Those seeking superior returns on investment will focus on smaller prospects close to existing facilities.

This should manifest itself in a number of new entrants into the best explored areas of the deepwater basins-as is already happening in the GOM-many of whom will use acquisitions to build a position from which they can add incremental volumes.