Forecast: Offshore spending to reach $275 billion by 2011

Steady increases in offshore oil and gas production will drive up industry's annual spending to more than $275 billion by 2011 from $219 billion in 2006, according to a forecast published by Douglas-Westwood and Energyfiles.

By OGJ editors
HOUSTON, Apr. 18 -- Steady increases in offshore oil and gas production will drive up industry's annual spending to more than $275 billion by 2011 from $219 billion in 2006, according to a forecast published by Douglas-Westwood and Energyfiles.

The report, World Offshore Oil & Gas Production and Spend Forecast 2007-11, said offshore oil production has risen by more than a third since 1991 and is forecast to continue to rise at about the same rate, reaching 35 million b/d in 2011. Offshore gas production, meanwhile, has more than doubled in the same period—to 867 billion cu m in 2006, or 14.9 million boe/d. It will almost double again by 2011, forecast the report.

While offshore oil and gas fields are distributed across the world, only three regions—the North Sea, the Gulf of Mexico, and the South China Sea—attract more than half of this spending, said report author Michael R. Smith. "Yet relative shares are changing, with growth forecast everywhere except Western Europe," he said.

"Expensive deepwater projects in West Africa and the Gulf of Mexico as well as projects in the Caspian Sea and Sakhalin and new activity in the Persian Gulf are disproportionately increasing spending shares in these regions," Smith said. Offshore oil output is expected to peak within 10 years at less than 40 million b/d, but the global peak for gas is not predicted until at least 2030, he said.

Price effects
The recent spending surge, said Smith, was driven by a shortage of spare oil and gas production capacity. "From 2002, prices significantly increased for equipment, consumables, and services, and this was especially so in 2005 and 2006 as demand rose and fuel costs escalated," he said. "The magnitude of growth, especially in rig rates, was attributable to intense competition within the service sector over the previous years of relatively low oil prices, which led to underinvestment in higher-specification rigs, new production systems and associated hardware, and in personnel."

Over the next 5 years, oil prices will be "erratic," the report said, but "generally lower in 2007 as oil demand growth is forced down by higher oil prices, as new non-OPEC production enters the market, and as LNG and coal continue to replace oil use in Asia along with modest amounts of other alternative energy sources everywhere."

Oil prices are expected to escalate from 2009, however, eventually leading to more cost inflation. "But not all cost escalation can be ascribed to inflation," Smith said, adding, "Costs are also going up as more advanced rigs, production systems, and services are used for deeper and more complex reservoirs and more extreme conditions."

Operational sector
Although high oil and gas prices over the period to 2011 will result in continued strong growth in all parts of the offshore oil and gas business over the next 5 years, the report continued, "the prime mover will be the less-alluring operational sector."

Smith said capital spending (capex) has nearly doubled since 2002, with most of the growth occurring in the last 2 years. This spending has been dominated by drilling and platforms. "But hardly any capex growth is forecast for the 5 years to 2011, although floating and subsea production solutions, especially in deep waters, are likely to continue to expand their shares," Smith said.

Conversely, he said, operational expenditures (opex) "will likely increase by more than 50% to 2011 as a result of increasing output and a higher share of more expensive oil." Last year, Smith said, opex accounted for 40% of global offshore spending, "but its share is forecast to begin rising again in 2007, and by 2011 spending on capex and opex could be approximately equal."

Smith said this report is "unique" in that it determines capex levels based on "production additions." He said, "Every year new production comes on stream, which both adds capacity and replaces lost capacity as older fields deplete. The expected volume of new production is modeled using these two increments of output—'growth' and 'replacement'—the sum of which corresponds to the amount and cost of new capacity that is added each year."

He said, "Shallow-water production additions are only forecast to increase in the Middle East and will continue to increase until at least 2010 as the region strives to meet global oil and gas demand. They are also increasing in the Caspian Sea and Sakhalin."

Deepwater production additions meanwhile are increasing in all regions where deepwater prospects exist, Smith said. "In particular, additions in West Africa are expected to show considerable growth, [while] deepwater oil additions in Brazil and the Gulf of Mexico will modestly decline towards the end of the period" but will be supported by new marketed gas production.

Constraints
Many sectors of the offshore industry up to 2011 will continue to be constrained by shortages of equipment and people resources, the report said. "Consequently, day rates will remain high, especially for capital assets such as high-specification drilling rigs and other vessels," the report said. "The experienced personnel needed to design, build, and operate drilling and production equipment will also command a growing premium."

Starting to enter the market, however, are new, high-specification rigs and vessels, which are serving to moderate day rate growth. Smith said, "These restraints are reinforced by limits on exploration opportunities in offshore regions available to private oil and gas companies. Moreover, only the most demanding environments in ultradeep waters and arctic regions are expected to offer new large scale opportunities by the end of the period."

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