Steve Robertson, Thom Payne - Douglas-Westwood
Deepwater E&P activity is driven by a variety of supply-side and demand-side factors: the need to offset decline from existing reservoirs, the lack of new opportunities onshore or in shallow waters, and new technological advances that improve technical and economic feasibility of deepwater developments.
In recent years, the world has witnessed oil price shocks driven by situations where oil supplies have become very tight as spare capacity is absorbed by growing worldwide demand for energy. Future projections of oil supply and demand suggest that this situation is likely to repeat.
A future peak in world oil supply is inevitable; the only question remaining is the date it will happen. The implication of this supply scenario for the global energy markets is that we expect to see a sustained increase in oil prices as supplies tighten in the run-up to the peak year. This will impact deepwater developments to the extent that they become more economically viable as the oil price rises. Developments that were marginal at $20/bbl will undoubtedly be more vigorously pursued in an environment where the long-term expectations of oil price are $60/bbl and upwards.
The market forecast
Douglas-Westwood’sWorld Deepwater Market Report 2009-2013 forecasts that the deepwater oil and gas sector will spend $162 billion over the period 2009 to 2013, 36% more than the amount spent in the preceding five-year period. The bulk of deepwater developments are being led by major oil companies and well-placed NOCs that Douglas-Westwood believes will not be hit by the economic downturn and turmoil in the debt markets to the same extent as smaller players. However, some impact on the sector may be felt through those deepwater operators that rely on external project finance. The result is that some delays to projects are inevitable until the financial markets settle.
Overall, the deepwater sector is forecast to continue its growth trend from 2010 onwards, reaching an annual total of over $35 billion by 2013. Between 2009 and 2013, expenditure in the deepwater sector is projected to expand at a compound annual growth rate (CAGR) of 3.6%. The “Golden Triangle” of deepwater, namely Africa, the Gulf of Mexico, and Brazilian areas, still will account for nearly 75% of global deepwater expenditure over the forecast period, but the emergence of Asia as a significant deepwater region should not be overlooked. Asian deepwater expenditure over the 2009-2013 period will increase by 90% compared to 2004-2008 spend. Much of this growth will be driven by the development of the Kebabangan cluster in Malaysia as well as the MA-6 development offshore India. Looking beyond 2013, we expect developments in the presalt Santos basin to drive Latin American expenditure well into the remainder of the decade.
Three main elements dominate the deepwater spend over this period, namely pipelines, the drilling and completion of development wells, and platforms. Pipelines and control lines will continue to play a vital role in providing the necessary infrastructure for deepwater developments. The opening of reserves further from the coast and the incorporation of satellite fields into deepwater hubs will drive expenditure (total forecast spend of $57.7 billion), which is marginally more than the expenditure on drilling and completion of subsea development wells ($53.8 billion). These two components of deepwater activity will account for nearly 70% of all expenditure.
Platforms make up a further 24% of expenditure, with major growth in the numbers and cost of deepwater floating production systems, resulting in a total of 86 units forecast for installation at a cost of $38.2 billion, compared to 18% over the previous five-year period ($21.2 billion). As the industry moves into deeper water, advances in technology are allowing production from greater water depths to be viable on both a technical and economic basis.
Deepwater survey
Douglas-Westwood, as part of the report, carried out a series of interviews with a panel of senior individuals chosen to represent the industry. Our survey showed that operators in the deepwater business currently perceive issues such as capital costs, technology issues, oil price volatility, and the lack of experienced personnel as some of the key factors restraining the development of deepwater activity.
Operators’ expectations of future oil prices are largely in the $50-59/bbl and $60-69/bbl ranges, which show that, despite the current economic downturn and its associated affect on oil prices, operators believe that the long-term oil price will rise due to the long-term supply/demand imbalance.
Subsea processing was highlighted as a key enabler for the viability of many future deepwater projects, however, there was also an acceptance of the difficulties involved in the application of new technology and how the operators manage the risk effectively. There is also a perception that the industry needs to address the relatively low levels of R&D spending in some areas.
Conclusions
The outlook for energy demand and global oil supply suggests that the former is likely to exceed the latter and renewed pressure on oil prices is expected over the long term. The economic downturn may impact some deepwater projects due to their relative complexity and the associated costs. However, many operators have long been using conservative hurdle rates based on oil prices of $20-60/bbl to determine levels of investment.
Delays and project slippage have long been an inherent part of the deepwater business and a key consideration for our modeling process. In the current climate, additional delays to some projects through difficulty in securing project finance and operator re-evaluation of projects is inevitable. Of the operators we surveyed, 27% replied that they were currently delaying drilling plans. We note, however, the positive news-flow in recent weeks from many operators following a review of spending plans, including Petrobras which announced a 55% increase in spending in its strategic review published January 2009.
The expansion of the deepwater sector undoubtedly has been constrained in recent years by the lack of yard availability, equipment, engineering contractor capacity, and experienced personnel. Operators now are expecting the supply of these products and services to come into line with demand. We expect operators’ buying power to return and downward pressure on pricing exerted throughout the supply chain.
Political difficulties remain a challenge. Survey participants have expressed concerns that new and emerging NOCs may be difficult to deal with due to their links to “less than ethical” governments.
Overcoming technical challenges is also an ongoing issue, particularly the considerable difficulty in persuading risk-averse field asset managers to try new technology. A new approach is needed. Overall, the outlook for the business is one of significant long-term opportunity but also many challenges – there is major potential for players with the resources and capability to tackle both.
The World Deepwater Market Report 2009-2013 forms part of a series of reports that are used by companies in more than 50 countries. These include leading corporations, investment banks, and agencies of governments. The report considers the prospects for this growing market and values future expenditure through to 2013. The report also reviews technologies and drivers and details prospects.
Further information is available atwww.dw-1.com. The authors can be contacted via [email protected] or +44 1227 780999.
About the authors
Steve Robertson heads Douglas-Westwood’s oil and gas team and his experience with Douglas-Westwood since 2002 includes managing many commercial due-diligence studies for investment banks and private equity firms. He is lead author and joint author of several of the firm’s published market studies and participates in DWL’s industry research in regions such as Russia and the Middle East and technology areas including onshore oilfield services, drilling markets, field development, floating production, and subsea processing. Authorship and joint-authorship of published studies include: The World FLNG Market Report, The Subsea Processing Gamechanger Market Report, The World LNG Market Report and The World Floating Production Market Report. Steve is a graduate in Economics & Computing and is a regular speaker on the subject of oilfield services markets at industry events and conferences.
Thom Payne is a Law graduate, gaining an MA in Political Sociology having focused specifically on EU, foreign/security, and energy policy. Since joining DWL as an analyst, he has contributed to studies for several investment banks, oilfield service groups, and government organizations, both in the UK and abroad. Thom has given various presentations and interviews on the offshore and onshore energy markets for such organizations as INTSOK and the BBC World Service.
