Low oil prices have challenged the economic viability of many deepwater projects, resulting in project delays and cancellations. Some companies such as ConocoPhillips and Marathon Oil Corp. have made significant strategic shifts away from deepwater in favor of shorter-cycle US unconventional plays.
Things will likely get worse for deepwater drillers before they improve. A wide consensus is that, beyond a rebound in oil prices, recovery in the expensive deepwater industry could take years.
Analysts from Simmons & Co., an energy investment banking firm, are apparently more optimistic. "We believe early-stage recovery in deepwater investment is nearing," they said in a recent research note. Particularly, their latest review of leading deepwater operators' capital plans and project lists yields an encouraging opportunity set.
"Although the industry is by no means positioned for a frenetic V-shaped recovery, even a measured recovery as we envision for 2017-18 would mark a significant improvement for the woefully underutilized service and equipment sector, as well as for investor sentiment, which has grown excessively jaundiced about the marginalization of deepwater," they said.
Majors' capital plans
Simmons & Co. reviewed the most up-to-date capital plans of the top eight deepwater operators: Petrobras, BP, Shell, Chevron, ExxonMobil, Total, Eni, and Statoil. Total production from this peer group is heavily weighted to offshore, predominately in deep water. These companies compose a robust study sample as they represent 65-70% of the deepwater market, as measured by rig counts and tree orders.
The spending outlook of these major deepwater operators remains muted due to the cash flow and balance sheet constraints that restrains capex flexibility in the event of higher-than expected oil prices.
However, the ongoing movement to radically reform deepwater economics, such as cost reduction and efficiency gains, is resulting in a material reduction in threshold oil prices that is required to sanction projects. Accordingly, a critical mass of major and mid-sized final investment decision (FID) candidates for the near-to-intermediate horizon is emerging, according to Simmons & Co.
At the recent analyst presentation in Baku, BP identifies 8-10 projects that could be sanctioned by 2017, including Mad Dog Phase 2, Atoll, Angola Block 18 Platina, and Snadd. On June 20, BP sanctioned a fast-track development of the Atoll Phase 1 gas project offshore Egypt. Also, BP's Mad Dog project, which originally had a cost of $20 billion, has now been brought down to $9 billion.
Kaikias, a 40,000-b/d tieback to the Mars-Ursa development, is on top of the Shell's "select" pre-FID option list.
Liza Phase-1, ExxonMobil's deepwater Guyana discovery, will likely see an early production floating production, storage, and offloading vessel fast-tracked in 2017, followed by another one or two FPSOs in 2018-19 and beyond.
According to Simmons & Co., these potential high-profile FIDs, combined with a select few highlights from other operators, yield a plausible bucket of 20-25 significant deepwater projects that screen well against a $60-70/bbl price deck for 2017-18.
By contrast, only one major deepwater oil project-Shell's Appomttox-and a small handful of smaller offshore FIDs have been sanctioned over the preceding 2 years.
Strategic commitment
Although offshore and deepwater investments have paused, most major deepwater operators remain very much strategically committed to the resource base.
"The inexorable importance of deepwater to the supermajors is an important reality that seems too easily dismissed by the deepwater bear camp," said Simmons & Co.
Chevron is somewhat unique among the supermajors with its significant strategy shift in favor of shorter cycle US unconventional plays.
About this shift, Simmons & Co. said, "One could argue that Chevron has too much capital-physical, technological, and intellectual-invested in deepwater to transition fully and permanently away from the resource play. As the cost curve continues to decline, and as the major project vacuum invariably presents growth challenges, we would not be surprised to see the pendulum swing back toward deepwater for Chevron late this decade, particularly given their strong free cash flow by that point in time."
Conglin Xu | Managing Editor-Economics
Conglin Xu, Managing Editor-Economics, covers worldwide oil and gas market developments and macroeconomic factors, conducts analytical economic and financial research, generates estimates and forecasts, and compiles production and reserves statistics for Oil & Gas Journal. She joined OGJ in 2012 as Senior Economics Editor.
Xu holds a PhD in International Economics from the University of California at Santa Cruz. She was a Short-term Consultant at the World Bank and Summer Intern at the International Monetary Fund.
