Deepwater: A robust market in an uncertain climate

Despite the global economic crises, another run-up in oil prices due to fears of a global oil shortage will increase the economic viability of deepwater E&P.  

Steve Robertson and Thom Payne, Douglas-Westwood Ltd. 

A future peak in world oil supply is inevitable; the only question remaining is the date that this will happen. In recent years the world has witnessed oil price shocks driven by oil supplies having become very tight, as spare capacity was absorbed by growing demand for energy worldwide. Future projections of oil supply and demand suggest that this situation is likely to repeat.

The implication of this supply scenario is that we expect to see a sustained increase in oil prices as supplies tighten in the run-up to the peak year. This will affect deepwater developments to the extent that they will become more economically viable as the oil price rises. Developments that were marginal at $20/bbl will undoubtedly be more vigorously pursued in an environment where the long-term expectations of oil price are $60/bbl and upward.

THE MARKET FORECAST

Douglas-Westwood’s World Deepwater Market Report 2009−2013 forecasts that the deepwater oil and gas sector will spend $162 billion over the period 2009−2013, 36% more than the amount spent in the preceding five-year period, Fig. 1. The bulk of deepwater developments are being led by major oil companies and well-placed NOCs that we believe will not be hit by the economic downturn and turmoil in the debt markets to the same extent as smaller players. However, some impact on the sector may be felt through those deepwater operators that are reliant on external project finance. The result is that some delays to projects are inevitable until the financial markets become more settled.

Overall, we forecast the deepwater sector to continue its growth trend from 2010 onward, reaching an annual total of over $35 billion by 2013. From 2009 to 2013, expenditure in the deepwater sector is projected to expand at a compound annual growth rate of 3.6%. The “Golden Triangle” of deep water, namely, Africa, the Gulf of Mexico and Brazil, will still account for nearly 75% of global deepwater expenditure over the forecast period, but the emergence of Asia as a significant deepwater region should not be overlooked, Fig. 1.

Fig. 1. Global deepwater expenditure by region 2004−2013.

Asian deepwater expenditure over the 2009−2013 period will increase by 90% compared to 2004−2008 spend. Much of this growth will be driven by the development of the Kebabangan cluster in Malaysia as well as the MA-6 development offshore India. Looking beyond 2013, we expect developments in the pre-salt Santos Basin to drive Latin American expenditure well into the remainder of the decade.

Three main elements dominate the deepwater spend over this period, namely, pipelines, the drilling and completion of development wells and platforms. Pipelines and control lines will continue to play a vital role in infrastructure needed for deepwater developments. Opening up reserves further from the coast and the incorporation of satellite fields into deepwater hubs will drive expenditure with a total forecast spend of $57.7 billion, which is marginally more than the expenditure on drilling and completion of subsea development wells ($53.8 billion). These two components of deepwater activity will account for nearly 70% of all expenditure.

Platforms make up a further 24% of expenditure, with major growth in the numbers and cost of deepwater floating production systems, resulting in a total of 86 units forecast for installation at a cost of $38.2 billion, compared to 18% over the previous five-year period ($21.2 billion). Advances in technology are allowing production from greater water depths on both a technical and an economic basis.

DEEPWATER SURVEY

As part of our report, we carried out a series of interviews with senior individuals chosen to represent the industry. Our survey showed that operators in the deepwater business currently perceive issues such as capital costs, technology challenges, oil price volatility and lack of experienced personnel as some of the key factors restraining deepwater development.

Operators’ expectations of future oil prices are largely in the $50−69/bbl range, which shows that, despite the current economic downturn and its associated effect on oil prices, operators believe that the long-term oil price will rise.

Subsea processing was highlighted as a key enabler for the viability of many future deepwater projects; however, there was also an acceptance of the difficulties involved in applying this technology. There is also a perception that the industry needs to address the relatively low levels of R&D spending in some areas.

CONCLUSIONS

Renewed pressure on oil prices is expected over the long-term period. The economic downturn may affect some deepwater projects due to their relative complexity and the associated costs; however, many operators have long been using conservative hurdle rates based on oil prices of $20−60/bbl to determine investment levels.

Delays and project timeframe slippage have always been an inherent part of the deepwater business and a key consideration for our modeling process. In light of the current climate, additional delays to some projects due to difficulty in securing project finance and operator re-evaluation of projects is inevitable. Of the operators we surveyed, 27% replied that they were delaying drilling plans. We note, however, the positive news flow in recent weeks from many operators following a review of spending plans, including Petrobras, which announced a 55% increase in spending in its strategic review published in January 2009.

The expansion of the deepwater sector has undoubtedly been constrained in recent years by the lack of yard availability, equipment, engineering contractor capacity and experienced personnel. Operators are now expecting the supply of these products and services to come into line with demand. We expect operators’ buying power to return and downward pressure on pricing to be exerted throughout the supply chain.

Political difficulties remain a challenge. Survey participants have expressed concerns that new and emerging NOCs may be difficult to deal with due to their links to “less than ethical” governments.

Overcoming technical challenges is also an ongoing issue, particularly the considerable difficulty in persuading risk-averse field-asset managers to try new technology. A new approach is needed. Overall, the outlook for the business is one of significant long-term opportunity but also many challenges—there is undoubtedly major potential for the players with the resources and capability to tackle both.  

THE AUTHORS
	Steve Robertson heads Douglas-Westwood Ltd.’s oil and gas team. His experience with DWL since 2002 includes managing many commercial due-diligence studies for investment banks and private equity firms. He is lead author and joint author of several of DWL’s published market studies and participated in DWL’s research in various regions and technology areas including onshore services, drilling markets, field development, floating production and subsea processing. He is a graduate in economics and computing. Contact via publications@dw-1.com.
	Thom Payne is a law graduate, gaining an MA in political sociology having focused specifically on EU foreign/security and energy policy. Since joining DWL as an Analyst he has contributed to studies for several investment banks, oilfield service groups and government organizations, both in the UK and abroad. Thom has given various presentations and interviews on the offshore and onshore energy markets for such organizations as INTSOK and the BBC World Service.