Escalating offshore expenditure, production expected

Therefore, numbers may differ from other sector analyses, which often only account for direct costs in purchasing specific equipment rather than full operating company budgets (AFEs). The forecasts do not necessarily correspond to target spends announced by companies and governments; instead, they represent most likely values based on expected activity and inflationary pressures, including potential projects determined from likely yet-to-find (YTF) and yet-to-develop (YTD) oil and gas volumes.

Causes of growth

There are fundamental reasons for the recent and projected exceptional levels of growth in spending. Inevitably a large part is due to simple inflation, especially in the rig market, where rates have doubled and even trebled for high-specification rigs in short supply. In fact, the drilling market, which alone accounts for over 25% of offshore spending, has seen leaps of well over 20% in each of the last three years. These are, of course, especially marked in the deepwater environment, where exploratory wells are now costing on average around $40 million, with some reaching as high as $100 million in the most demanding regions.

Higher spending is in part directly due to the increase in the price of energy. High oil prices not only inflate the cost of equipment and materials but also influence the profit and salary expectations of the service sector who anticipate, not always correctly, that the spectacular profits made by oil companies will filter down the market chain. Furthermore, excess liquidity competing for inadequate opportunity, allows oil companies to spend on the best equipment, services, and technologies available, and also – inescapably – leads to profligacy and higher taxes.

Inadequate opportunity works in another way to drive spending higher. Operators, outside of a few privileged NOCs, need to exploit remote, deeper, more demanding, and less profitable oil and gas accumulations that call for costly technologies. These are especially the technologies required to drill horizontal and extended reach well paths, through distant and perhaps thin reservoirs containing lower quality oils.

Allied to this, the rapid increase in the use of subsea hardware in drilling, production, and separation to exploit accumulations underlying deepwater regions, as well as installation of ever more expensive offshore fixed and floating platforms, is in response to a lack of alternatives.

In some cases, modern technology reduces costs, such as in the advent of re-usable floating production systems, but far more often it is an added expense driven by the geology and geography of the only substantial oil and gas fields left to exploit.

Of course it cannot go on forever; there is a limit to the extremes that can be pursued. Not a technological limit – almost anything seems possible today – but a geological limit as sedimentary basins peter out the further you get from shore and as the number of drilling prospects decline as they have done in most of the world’s shallow waters already.

Future spending surge

The only part of the USA where production is still persistently climbing is the Gulf of Mexico as a result of new deepwater developments. TheIndependence Hub is an example of a pioneering project that has set records in the use of demanding and costly technologies. The hub, in a water depth of 2,414 m (7,920 ft), 110 mi (175 km) from the Mississippi River Delta, is a coordinated development of multiple deepwater gas discoveries. First gas production began in mid-2007 from the first of several discoveries including Spiderman, San Jacinto, Atlas Northwest, Atlas, Mondo Northwest, Cheyenne, Jubilee, Vortex, and Merganser.

The platform is the world’s deepest and links with the deepest subsea production tree at the Cheyenne field. It has the deepest steel catenary riser installation and the deepest export pipeline. Called Independence Trail, this carries gas and condensate 135 mi (215 km) to a junction platform before being brought ashore by tie-in to the Tennessee Gas pipeline for processing. Designed for an operating life of 20 years, the hub has excess capacity to eventually tie-back to at least 10 additional fields. The presence of many small fields, requiring a costly but innovative development option, indicates a mature area where simpler options are exhausted.

Of course, many further fields will eventually produce in the deep waters of the Gulf of Mexico, both in the US and perhaps in Mexico. Some will be giants, such as Jack and St. Malo, discovered in the last couple of years within a subsalt play on the Walker Ridge and scheduled to start production by 2014. Indeed, another discovery on this ridge, called Julia, was announced as recently as January 2008. Spending on these and other fields is ensuring that the USA continues to create opportunities for all types of service companies that offer the most sophisticated and expensive technologies available.

It has long been known that large resources of oil and gas are located beneath the salt basins of the world. The most reported discoveries last year were in Brazil where Tupi and other associated fields are located in a subsalt play within the hitherto poorly productive Santos basin to the south of the Campos basin where most of Brazil’s production originates. Along with the great water depth, the salt layer has presented a dual challenge of imaging (since salt is relatively impervious to seismic energy) and drilling (since salt tends to wash out while drilling, creating zones of lost circulation). Modern technology and high oil prices are progressively overcoming these challenges, albeit at great cost.

Drilling in Brazil may have identified well over 10 Bbbl of oil and gas that could be recovered from beneath water depths of over 2,000 m (6,562 ft). In fact, they could be the largest discoveries since Kashagan in the Caspian Sea (in the year 2000) and the largest ever deepwater discoveries. However, as always, there are question marks. Firstly, the press reports do not reveal how much of the volumes are gas, especially since the Santos basin, has, up to now, been a gas-prone region. Also, with just a few wells it is impossible to be sure of such large volumes and the complex geology and difficult surface conditions will mean many years before each can be put into production.

In North Africa, Egypt’s oil production peaked in 1993 at 750,000 b/d. Output is declining despite increasing liquids production from newly developed shallow and deepwater gas fields in the Nile Delta. Gas production, however, has grown very rapidly in recent years, almost all as a result of these Nile Delta discoveries and new finds are regularly announced. In January 2008, BP announced the Satis gas discovery, which it described as “significant.” Satis was said to “demonstrate the potential of the deeper reservoirs within the Nile Delta…” It is probably “significant” in that it has located a new deep gas play, which could itself be large, although this is not surprising in such a geological basin.

Satis appears to lie nearby to other developed and developing gas fields on the east of the delta but it will still be a challenge to develop with a reservoir reported at a depth of over 6,000 m (19,685 ft) below sea level. It is high pressure/high temperature and will require expensive and specialized equipment to exploit.

Of course, there remain many costly areas to exploit that are hardly touched. The US government held an oil and gas lease sale for 5,355 blocks in the Chukchi Sea off northwestern Alaska in February 2008 with acreage available in 30 to 80 m (98 to 262 ft) of water, 200 mi (322 km) west of Prudhoe Bay. The Chukchi Sea is located on the edge of the Arctic Ocean between Alaska and Siberia and is one of the last frontier areas in North America. The lease sale includes blocks near the International Date Line – the border with Russia – and is the first tract offered in the area since 1991. On the other side of the border, the area on and off Sakhalin Island in Russia is highly productive where ExxonMobil recently drilled the world’s longest extended reach well.

Activity, spending

This is just a varied mix of examples but they all point in the same direction – increased spending in deep waters and deep complex reservoirs. The oil industry is putting capital into expensive technologically demanding deepwater projects, high temperature and high pressure projects, and remote projects since traditional shallow water projects cannot offer the same profitability. Shallow water prospects are either too small or are simply unavailable outside NOC-operated regions. And this is not necessarily a government-driven shortage – there are simply fewer and smaller undiscovered or undeveloped oil and gas fields in all regions. Very small accumulations can now be exploited at higher prevailing prices and with subsea technology. But small fields require fewer wells and more costly technology.

In particular, many deepwater wells have been and will be required. It is estimated that around 4,500 deepwater wells have been drilled globally in the 18 years since 1990, when production first began to rise. It is expected that almost as many will be drilled over the next five years.

The number of deepwater exploratory wells is still increasing in regions where potential exists, and the number of deep development wells will continue to increase everywhere that fields have been discovered, although outside of West Africa the other key regions could see a plateau in drilling numbers within a few years.

Meanwhile, while the overall number of shallow water wells is projected to decline, total spending is projected to rise everywhere, rising by nearly 50% over the next five years compared to the last. In view of the much smaller rise forecast for drilling numbers, the bulk of this can be ascribed to increased costs through inflation and higher specification wells. There thus will be an increasing disconnect between well numbers and well spends as shown in Figure 2. All this drilling has, of course, led to growing deepwater output and Figures 3 and 4 show how deepwater oil production and overall production have expanded since 1990. By 2015, deep waters will perhaps be delivering nearly 10 MMboe/d to refineries, representing around 10% of our global output.

At the moment cost reductions from better technology are outweighed by cost increases created from more difficult fields, shortages of equipment and personnel, and inflationary pressures from higher energy prices. The profitability of the oil industry at high oil prices has ensured that even the most expensive of offshore projects go ahead. Except where geological or other risk is unacceptable, high well costs are rarely a deterrent, and drilling in ever deeper waters is testament to that. Barring some extreme locations within the arctic and Antarctic, every offshore basin is now accessible and the service industry, over the next five years, will reap the rewards.

null

null

The World Offshore Drilling Spend Forecast 2008-2012 and The World Offshore Oil and Gas Production and Spend Forecast 2008-2012 published by Douglas-Westwood provide overviews of future prospects for offshore drilling, production and spends, quantitatively forecasting the world market by region and type of activity. The reports include essential information for decision-makers in oil companies, the contracting and supply industries, and government departments. For more information visit www.dw-1.com or www.energyfiles.com, email [email protected] or call +44 1227 780999.