Commentary: Offshore sector not dead yet – FuelFix (blog)

By Julie Wilson

News of the demise of the offshore industry may be premature. Production from offshore continues to rise: its 12 percent higher than it was six years ago, and will be 10 percent higher again in another six years, reaching over 503 million barrels of oil equivalent per day of oil and gas in 2023.

The offshore sector had been subject to high cost escalation as the market heated up from the mid-2000s. Offshore costs were driven by increasing complexity, greater use of customized designs components, local content requirements and rising labor costs. North American shale plays responded much more quickly to lower prices, and in a capital-constrained world, offshore has mostly been losing the battle for capital allocation at least in those companies with a foot in each camp.

But there are companies that rely on the offshore for at least some of their growth, and they have been re-working their best projects to optimize for lower oil prices. Projects are smaller, complexity is eschewed and enabling technologies are being applied to reduce inefficiencies, shorten cycle time and bring down cost.

Cost reduction and project redesign are resulting in a small recovery in new projects in deepwater, where the biggest prizes still lie. We expect eight new deepwater projects to receive final investment decisions this year equaling 2015 and 2016 combined. Project costs are about 20 percent lower than in mid-2014.The progress in reducing costs means that 14 billion barrels of oil equivalent from undeveloped deepwater resources could be profitably developed at $60 a barrel.

Deepwater major projects are becoming competitive (in break-even price) with new tight oil drilling, and we are not yet at the bottom of the cost cycle offshore. In contrast, shale plays are experiencing cost inflation as the rig count and activity increase, creating competition among operators for pared-down equipment and crews.

Deflation took some time to gather pace offshore, but is now most apparent in the rig sector where many rigs have been retired or idles 40 percent of modern 6th and 7th generation deepwater rigs are not contracted. Rig companies have reduced their own costs by around 20 percent, but have been forced to offer steeply discounted rig rates that have slashed margins. We expect further deflation in the rig market in over the next two years, when more rigs will roll off high-priced long-term contracts.

New ways of working have brought structural changes which should serve to keep costs lower. New technologies and new practices are both playing a role.

Offshore exploration well drill times have fallen from an average of 78 days in 2013 to just 56 days in 2016. Similar improvements are happening in development wells. New deepwater drilling technologies include dual derricks, dual blow-out preventers and sophisticated downhole sensors, which all speed rig operations.

Revised practices such as streamlined logistics, proactive maintenance and improved well planning all increase efficiency. Operators, contractors and suppliers are collaborating more and earlier to design a better well and trouble-shoot issues before they occur.

Operators are once again building long-term supplier relationships through vehicles such as global framework contracts, to streamline and standardize processes and equipment. The supply chain itself has been collaborating and consolidating to provide innovative solutions to the operators by creating efficiencies. The upper echelon of the subsea supply chain has seen the major original equipment manufacturers (OEMs) pair off with the leaders in the marine construction market and work together to increase efficiencies throughout the entire life cycle of the project.

Innovation continues in the offshore sector but now its directed at efficiency and cost reduction rather than pushing the technical limits.

Julie Wilson is research director for Global Exploration at Wood MacKenzie.

Continue reading here:

Commentary: Offshore sector not dead yet - FuelFix (blog)