OTC: Panel seeks to energize deepwater projects

This story was corrected on May 9 to specify that Yanosek said more than 80 deepwater projects have been deferred since this year’s first quarter; not 400 as originally indicated.

“Nothing draws people together like a common enemy,” said Maersk Oil Houston’s President Bruce Laws, “and the common enemy right now is low commodity prices.” Laws, who addressed an audience at the Offshore Technology Conference in Houston on May 4, was part of a panel discussing worldwide oil and gas deepwater development. The session revolved around deepwater projects not keeping pace with the current downturn. The price of oil, meanwhile, has declined nearly 60% from mid-2014.

Panelist Kassia Yanosek, associate partner at McKinsey & Co. Inc., cited breakeven prices as one of the most important factors the offshore industry needs to observe. In 2014, average deepwater greenfield projects carried a breakeven price of $70/bbl in 2030, according to her estimates. The breakeven price, she said, has already declined 20% and is now $50-60/bbl.

“Capital projects escalated two to three times on a like-for-like basis from 2000 to 2013,” Yanosek said. Nearly 70% of industry-wide capital expenditures escalation was driven by factors other than commodity prices, Yanosek said. Looking ahead to future pricing often makes deepwater projects uneconomic in the face of lower commodity prices. Since this year’s first quarter, nearly more than 80 deepwater projects have been deferred.

Cost compression is a way to maintain investments in offshore development in a down climate. Rig rates have decreased by 40% compared with first-quarter 2014. Technology and engineering has also been discounted with the current price climate. Overall, the panelists outlined a plan for identifying redundancies, building alliances, and working to lower outlays on capital projects rather than “throw money” at the problems faced in deepwater developments, as one panelist said.

Climbing demand

Jason Olsen, manager at Hess Corp., pointed out that demand continues to climb even as the supply side has dropped off. “By 2030, new offshore production needs to increase by about 17 million bo/d to meet demand,” he said. The US Energy Information Administration reports global demand increased 1.8 million b/d in 2015, and it is expected to increase 1.2 million b/d in 2016.

Aside from offshore development, the industry as a whole is finding itself in a rut with the current lull in oil price. “Onshore production is down by 400,000 b/d in the US,” Laws said. This is coupled with an announcement in January that 120,000 workers had lost jobs in the oil and gas sector—a number that has increased through early May.

Laws cited the famous Yogi Berra quote, “The future ain’t what it used to be,” to exemplify some of the more interesting outcomes of the current global downturn in the oil and gas industry.

Many host countries are feeling pressure due to the down market. “Natural decline of existing fields is 6-8% on average,” Laws said. Many of the recent projects are displaying poor exploration results, and with lower commodity prices, there are fewer projects being carried out.

In periods where commodity prices are high, foreign governments have often held the upper hand in negotiating exploration contracts, however, this has changed within the last year. Severe deficits in some regional governments, inflation, and currency devaluation have created a scenario where many governments and national oil companies are competing for scarce independent oil company capital.

For many independents, their role has become reversed. They are viewed as a source of income rather than a contractor. While the extent and duration of this relationship is unknown, it is fueling capital projects in many deepwater regions. “It is a new and uncomfortable concept,” Law said.

Contact Tayvis Dunnohoe at tayvisd@ogjonline.com.

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