Offshore in Depth

Here are seven decisive business trends that will influence the fortunes of the offshore oil and gas industry in 2018. 

Capacity overhang. Historically, the largest single driver of upstream capital investment has been the amount of excess productive capacity compared to the global demand for crude oil. In the mid-1970s, capacity exceeded demand by less than 1 MMbopd, prompting a 150% increase in capital spending to $145 billion/year from 1975 to 1980. In 1985, global productive oil capacity was 75 MMbopd, compared to demand of 60 MMbopd, a 25% capacity overhang. This gap depressed upstream capital spending, which averaged just $87 billion for the next 10 years. In the mid-1990s, demand finally caught up with supply, and the gap between the two has fluctuated between 2 and 3 MMbopd. 

As demand has trended upward to current levels of 96 MMbopd, increased upstream investment (averaging over $400 billion/year from 2005–2015) has built global productive capacity to around 100 MMbopd. The addition of unconventional resources over the last decade has provided an easily adjusted capacity surplus and an increase in oil inventories, which have caught OPEC’s attention and discouraged offshore investment. Expected stronger oil demand should encourage investment in capacity, including some offshore.

Oil prices. Current and projected oil prices are important considerations in offshore investment decisions. In the three years since oil prices collapsed, offshore operators have trimmed costs and streamlined development to reduce break-even prices for new offshore fields. While offshore fields can compete with unconventional plays that break even at $40/bbl, most offshore prospects require $60/bbl to make money. Year-end 2017 benchmark prices around $60/bbl are encouraging signs, but some operators will be reluctant to invest in long-term offshore projects instead of unconventional wells that make a return more quickly.

Regulation. The current U.S. administration took two steps in December to make good on its promise to cut back on regulations governing offshore drilling. First, BSEE “paused” funding for at least 90 days for work on a study meant to improve enforcement of offshore drilling safety. In 2016, BSEE had engaged the National Academies of Sciences, Engineering and Medicine to conduct the study, based on lessons learned from the Deepwater Horizon incident. A BSEE spokesman said the study was being held up to evaluate whether it duplicated the agency’s other efforts to improve inspections. 

On Dec. 28, BSEE Director Scott Angelle announced that the agency had published revised safety regulations that would roll back rules imposed after Macondo. The proposed new regulations would remove requirements for government regulators to review real-time production data and for third-party inspections of critical drilling equipment.

Angelle estimated that the changes would save the industry at least $228 million over the next 10 years. A likely downside of these moves, however, is a further erosion of the public’s trust in the administration’s and the industry’s commitment to protecting HSE.

Lease sales. The U.S. administration also plans to open up more coastal areas for offshore drilling. In April, the White House issued an executive order declaring its intent to expand offshore drilling in the Arctic and Atlantic oceans. After the order was released, Interior Secretary Ryan Zinke said it would take at least two years to decide which areas could be auctioned. Zinke added, “America leads the world in environmental protection, and I assure you we will continue that mission.”

In October, the Department of the Interior proposed its “largest oil and gas lease sale ever” to be held in March 2018 to auction 77 million acres in federal waters from Texas to a small sliver of Florida. Lease Sale 250 will offer 14,475 unleased blocks in the region-wide sale. The proposed sale overlaps Lease Sale 249, which offered 76 million acres in 14,220 unleased blocks and attracted just $121 million in winning bids on 90 tracts. In contrast, Lease Sale 247 for the Central Gulf attracted $275 million in high bids on 163 blocks.

Meanwhile, on Jan. 4, 2018, Interior announced its new 5-year plan (2019–2024) that would open up to 90% of U.S. offshore territory to leasing.

Strategies of offshore majors. Offshore operators, particularly in deep water, must have the financial resources and technical capabilities to plan and execute major long-term projects. Given these requirements, decisions made by Royal Dutch Shell, ExxonMobil, Total, Chevron, Eni, BP and Statoil will set the direction for the offshore industry’s future. They are likely to approve fewer projects and have increasing economic influence over suppliers.  

Service sector strategies. Contractors and service companies will continue to consolidate and evolve to serve the dominant offshore operators. More combinations like Schlumberger and Cameron, Technip FMC Technologies, Baker Hughes and GE Oil & Gas, and McDermott and CB&I will continue to offer more integrated technology solutions as they restructure the industry. 

Offshore wind power. The first offshore wind farm began generating electricity offshore Rhode Island in 2016. While a novelty for the U.S., offshore wind power provides 15,000 MW globally, 88% in European waters. The cost of offshore wind installations has been declining rapidly, due to technology improvements and gigantic 9-MW turbines with rotor diameters up to 538 ft. In the U.S., 28 offshore wind farms, with potential capacity of nearly 24,000 MW, are in various stages of development. New U.S. projects won’t be built in 2018, but now is the time for offshore oil and gas suppliers to evaluate a potential new market.  

About the Authors

Ron Bitto

Contributing Editor

Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM