Revival of deepwater industry: best projects closing gap

EDINBURGH/HOUSTON/SINGAPORE, 30 March 2017 — According to a recent Wood Mackenzie report, a leaner and more cost-competitive deepwater industry is emerging from the downturn, with the most attractive projects now competing with US tight oil plays.

2017 will see a noticeable pick-up in deepwater project sanctions, with three projects — Mad Dog Phase 2, Kaikias and Leviathan — already fully approved.

Wood Mackenzie estimates that on average global deepwater project costs have fallen just over 20% since 2014. Assuming a 15% internal rate of return hurdle (NPV15), 5 billion barrels of pre-sanction deepwater reserves now breakeven at US$50/boe or lower.

By comparison, there are 15 billion barrels of tight oil resource in undrilled wells with breakevens of US$50/boe or lower at a 15% hurdle rate in Wood Mackenzie's dataset. However, the playing field between tight oil and deepwater is about to get a lot more level. There is still considerable scope to drive deepwater breakevens lower through leaner development principles and improved well designs, but in tight oil cost inflation is back with a vengeance.

Wood Mackenzie estimates that a further 20% cut in current deepwater costs would bring 15 billion barrels of pre-FID reserves into contention, on par with tight oil. The deepwater value proposition will strengthen as tight oil cost inflation returns. A 20% rise in tight oil costs would mean that the two resource themes effectively have the same opportunity set measured by volume in the money at US$60/boe.

Angus Rodger, Asia-Pacific upstream research director at Wood Mackenzie, said: "We are at last beginning to see the first signs of recovery in deepwater, driven primarily by cost reduction and portfolio high-grading. Projects in the US Gulf of Mexico in particular have made significant strides, with many reducing NPV15 breakevens from above US$70/boe to below US$50/boe.

“This is not just a result of cheaper rig day rates. Of far greater impact are the steps the industry in the Gulf of Mexico and elsewhere have taken to re-evaluate project designs and improve well performance. We are now seeing scaled-down projects emerge with less wells, more subsea tie-backs, and reduced facilities and capacities — and this all translates into lower breakevens.”

The slowdown has also changed the structure of the deepwater industry. While it is slowly getting leaner, it is also getting smaller. Over 70% of the 45 pre-FID projects targeting sanction over the next few years are operated by just eight companies — Brazil's Petrobras and the seven majors (ExxonMobil, Chevron, Shell, BP, Total, Eni and Statoil). This is due to the exit of many independents from the sector because of either cost pressure or a re-allocation of capital to tight oil plays.

In a capital-constrained world, fewer operators inevitably means less deepwater projects flowing through to sanction. Only the most cost-competitive projects and regions will attract new investment.