Deepwater vs tight oil: levelling the playing field

With US$380 billion in potential investment going into an increasingly narrow funnel, we are beginning to see evidence that the playing field is levelling for two of the most important upstream asset classes — US tight oil and deepwater. 

All eyes have been on US tight oil breakevens and the Permian boom during the past few years, leaving deepwater investment in the dust. But as it has become leaner, the deepwater industry has been quietly recovering and improving its own economics.

After nearly three years of struggling to attract new investment,  we expect to see a notable ramp-up in deepwater project sanctions this year to eight — a number which equals 2016 and 2015 combined. Portfolio high-grading has been a major contributor to deepwater’s transformation, including re-worked project designs, fewer and cheaper wells, and smaller facilities.

By focusing on smarter developments, deepwater project breakevens are over 20% lower than mid-2014, with 5 billion barrels of oil equivalent (boe) breaking even at US$50/boe and 15 billion at US$60/boe (NPV15). This compares to 15 billion boe and 26 billion boe, respectively, for US tight oil under the same metrics. A further 20% deepwater project cost cut would bring deepwater economics in-line with tight oil, with approximately 15 billion boe in the money at US$50/boe and 18 billion boe at US$60/boe (NPV15).

Given we remain in a capital-constrained world and many players have exited the deepwater sector to focus on the onshore US, the outlook for new FIDs remains challenging. But we believe more deepwater projects will achieve sub-US$50/boe breakevens, as evidenced already in the Gulf of Mexico. The first quarter of 2017 saw three projects sanctioned — two in the Gulf of Mexico, one offshore Israel — and all have breakevens below US$50/boe.

We believe deepwater can provide viable competition with tight oil for investment within the portfolios of the industry’s major players. ‘Permania’ broke out of the gate early, and has a strong lead, but deepwater is the dark horse.

The Majors will be relying on conventional development to fuel portfolio growth, but they also need to sanction projects. So what’s next? Only the most competitive deepwater projects will move forward, but those that thrive may give investors pause, even in an industry rapt by unconventional noise.