Deepwater could match up against tight oil breakevens
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A further 20 percent of cost cuts, through leaner development principles and improved well designs, could put deepwater head-to-head in project economics against tight oil. But more work is needed for deepwater to be truly competitive globally.
While US tight oil faces a minimum of 10 to 20% rapid cost inflation as oil companies drill in earnest and service sector demand booms, deepwater project breakevens will continue to come down the cost curve.
Drivers include re-worked project designs, fewer and cheaper wells, smaller facilities, and portfolio high-grading. By focusing on smaller but 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).
After nearly three years of struggling to attract new investment, we are beginning to see evidence that the playing field is starting to level for two of the most important upstream asset classes — tight oil and deepwater.
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 see around eight projects making FID in 2017 — a number which equals 2016 and 2015 combined.
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Deepwater will continue to be the primary source for world-class conventional discoveries — of our top 15 wildcat 'wells to watch' in 2017, almost all are in more than 400 metres of water, based on our Global Project Tracker analysis. If the Majors want to grow, they 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.