Five signs that the offshore oil and gas industry is recovering are starting to become clearer, with 2019 seen as a transition year and with offshore embarking on a multiyear trajectory starting in 2020. These were among the findings in a recent research report from Barclays.
The first sign of recovery is that offshore exploration activity and spending is on the rise. Examples abound of major oil companies increasing their exploration activity and spending.
Chevron Corp. raised its 2019 global exploration budget by 18% year-over-year to $1.3 billon. ExxonMobil Corp.’s Mar. 6 Analyst Day slide showed a step up in offshore exploration wells drilled each year during 2017-21 (driven by deepwater activity and LNG) in nearly every offshore region (15 locations specifically called out) with average exploration spending of $2.5 billion/year in 2019-21. BP PLC said it would be doubling its exploration program this year—albeit vs. a “relatively modest program in 2018.” Eni SPA expects to drill 140 exploration wells the next 4 years (or an average of 35 wells/year).
“But it’s not just the majors—it’s the independents, too,” Barclays said.
Hess Corp. raised its 2019 exploration budget by 17% year-over-year to $440 million, most of which is planned for Guyana. Aker BP plans to drill 15 exploration wells this year vs. 10 wells last year with exploration spending up 40% year-over-year to $500 million. Cairn Energy PLC plans to drill at least 7 exploration wells this year, with 3 in shallow water offshore Mexico. Lundin Petroleum Co. plans to drill 15 exploration wells and 2 appraisal wells this year with a $300-million budget. Kosmas plans to drill 6 exploration wells this year.
Secondly, subsea contract awards are surging. Over the last 6 months, 14 subsea awards have been announced by the Big 3 subsea contractors—TechnipFMC, Schlumberger, and Baker Hughes.
Thirdly, the floater rig count is now moving comfortably off the bottom. The contracted floating rig count now stands at 124 rigs vs. 116 at yearend 2018 in a move off the bottom, and this right after the oil price collapse to end the year. Fourthly, the recent US Gulf of Mexico lease sale drew sufficient interest from both majors and smaller independents.
Gulf Lease Sale 252, held on Mar. 20, drew the highest total bids out of the past four lease sales over the past 2 years. A total of 30 operators submitted bids with the Top 5 being Shell ($94 million), Anadarko ($30 million), Equinor ($29 million), Hess ($25 million) and BP ($19 million). Notably, total bids submitted by all other operators aside from the majors and Equinor totaled $114 million in this most recent lease sale, a notable increase vs. the $28 million and $38 million in Lease 249 and Lease 250, respectively.
Lastly, Hess has highlighted the attractiveness of offshore development vs. US shale.
In Hess’ analyst day in March, the company highlighted how attractive offshore economics can be in a side-by-side comparison of Liza Phase 1 and an illustrative development in the Permian basin with the same peak production of 120,000 boe/d.
As shown, not only is total development spending of Liza Phase 1 far lower at just $3.7 billion (vs. $12.8 billion, or 1,500 Permian wells times $8.5 million cost per well), the time to peak production is also shorter at just 3 year (vs. 10+ years) and the service cost environment currently “deflating/flat” (vs. inflating for shale), all resulting in a lower required WTI price to meet the same returns threshold.
“Granted, Guyana is a world-class resource and perhaps the biggest exploration discovery this downturn…so we have to take Hess’ chart with a grain of salt. Nonetheless, the side-by-side comparison does show just how attractive the economics of a successful offshore development can be,” Barclays said.
