Rumors about death of the offshore oil and gas producing industry prove—to borrow a quip attributed with embellishment to Mark Twain—to have been greatly exaggerated. This happy observation applies even where the future, not long ago, looked especially grim.
A more than doubling of the price of crude oil since the start of 2016 is resuscitative, to be sure. More important for the future, however, are impressive improvements in operating efficiency.
Breakeven prices drop
A recent OGJ article observes that breakeven oil prices for future conventional projects, including some in deep water, have fallen in many cases to parity with onshore tight oil ventures in the US Lower 48 (L48). Deepwater discoveries in Brazil and Guyana now compete favorably with L48 plays, notes the author, Harry Paton of Wood Mackenzie Ltd. (OGJ, May 7, 2018, p. 45). In an assessment of projects awaiting final investment decision (FID) and expected to account for more than 13 million b/d of oil in 2027, Paton notes an important distinction between L48 onshore and conventional pre-FID projects, most offshore.
“Conventional projects are handled at a total project level by companies incorporating several wells, requiring large initial spending,” he writes. “Those projects can last for decades, while L48 unconventional fields typically involve drilling one well at a time.” Paton also points out that the production outlook for pre-FID conventional projects has shrunk since before crude prices dived in mid-2014. The reason goes beyond project cancellations and delays. “Operators reworked concepts for many projects, changing their scope to prioritize value over volume,” Paton says. “This strategy cuts costs but shrinks production plans for many assets.”
At the recent Offshore Technology Conference in Houston, another analyst noted that operators are not only lowering costs of offshore projects but also shortening project cycles. Susan Farrell, vice-president of energy-wide perspectives at IHS Markit, said a model for 54 projects from third-quarter 2014 to third-quarter 2017 found breakeven costs have fallen by 45-50% to below $40/bbl of oil. But not all the improvement will continue. “Half of the costs savings are from service-sector price reductions,” Farrell said. “First-quarter 2018 cost levels appear to have flattened out.”
Still, the lowering of breakeven prices and strengthening of crude prices allow projects suspended in 2014-15 to advance, however cautiously. In his OGJ article, Paton says the industry sanctioned more than twice as many conventional projects in 2017 as it did the year before. Many of the 2017 FIDs came late in the year and involved deep water. He expects the increase to continue in 2018 to 30 FIDs.
Cost reduction contributes to a joint effort by the British government and producing industry to improve oil and gas economics on the mature, historically high-cost, and formerly flagging UK Continental Shelf. A strategic focus on “maximizing economic recovery” in effect since 2016 has helped stabilize a slide in oil production from a peak of slightly below 3 million b/d in 1999 to 900,000 b/d in 2014. Since then, output has been steady at just more than 1 million b/d. Compared with pessimistic outlooks that preceded development of the MER strategy, stabilization represents noteworthy success.
Efficiency gains
Much of the improvement comes from efficiency gains documented in a new report from the UK Oil & Gas Authority (OGA). Production efficiency—the total of hydrocarbons produced as a share of economic maximum production potential—climbed for the fifth straight year in 2017 to 74%. The improvement, OGA estimates, added 11.8 million boe of oil and gas to ultimate recovery during the year. The MER strategy targets production efficiency of 80% this year. The metric had fallen to 60% in 2012.
For a global offshore industry crushed by the crude-price slump of 2014-15, these are welcome signs—not of return to past grandeur, but of cautious renewal based greatly on skill and ingenuity. The hope now is for profitability at diminished scale. Given the recent past, that should be enough.
