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Deepwater Spending Forecast to Decline to 2020 as FIDs Delayed, Projects Canceled

Global deepwater spending is forecast to total $137 billion between 2016 and 2020, down 35% from a year-ago forecast for 2015-2019, Douglas-Westwood Ltd. (DW) analysts said.

“The prolonged low oil price has impacted the deepwater market, with operators considering alternative development options and delaying the sanctioning of new projects,” author Mark Adeosun said. “Compared to the same point last year -- where we saw 210 potential projects visible for installation in the coming five-year period -- we now expect 118 projects to be installed 2016-2020.”

Capital spending predominantly is going to be driven through 2020 by the Americas and Africa, which combined are expected to account for 87% of total outlay.

“Though all regions will be adversely affected by low oil prices, in the near-term, projects that were sanctioned before the oil price downturn and the development of East African gas basins will ensure these regions remain key deepwater hubs,” Adeosun said.

Deepwater projects being financed in the Gulf of Mexico (GOM) include

  • Royal Dutch Shell plc’s Appomattox field, its eighth and largest floating platform in the U.S. offshore (see Daily GPIJuly 1, 2015).
  • Williams Partners LP’s natural gas system from its existing Transcontinental Gas Pipe Line lateral to the Mobile Bay facility (see Daily GPI, March 11).
  • Anadarko Petroleum Corp.’s subsea tiebacks at Lucius, Caesar/Tonga and K2 (see Shale Daily, March 1).
  • Chevron Corp.'s Jack/St. Malo floating production system (FPS) (see Daily GPI, Dec. 3, 2014; and
  • BP plc's Mad Dog Phase 2, also an FPS (see Daily GPIFeb. 4, 2014).

The Energy Information Administration in February said eight oil and gas fields came online in the GOM last year, four are slated to start up this year and two more ramp up in 2017, all signs that offshore output should hit record highs in 2017 (see Daily GPI,Feb. 18).

GOM output is expected to average 1.79 million b/d in 2017 and hit 1.91 million b/d by the end of next year, when it would account for 21% of domestic production, according to federal officials.

According to DW, Latin America is expected to retain the largest share of capital expenditures to 2020, despite the corruption scandal and “huge” financial difficulties rocking Brazil’s Petroleo Brasileiro SA, or Petrobras, which is developing pre-salt basins in the country’s offshore.

Meanwhile, the downturn has further delayed sanctioning for some significant projects, which in turn will impact manufacturers.

“To date, subsea hardware manufacturers have been somewhat insulated” by the price decline because of the record backlog established between 2011 and 2014, DW Research Director Steve Robertson said.

“However, we expect a further decline in subsea hardware installations in 2017 and 2018, with backlog falling rapidly and new orders trickling in at very low levels.”

As a result, subsea original equipment manufacturers “will feel the full impact of the downturn in 2016 and will have a very difficult year.”

Through 2020, an estimated $38 billion is expected to be spent to install deepwater FPS units.

“However, 82% of FPS units forecast to be installed over 2016-2020 have already been sanctioned,” DW researchers said. That spending underscores how much is weighing on projects that have passed the FID stage. Last year saw the lowest number of deepwater FPS units ordered since 1996.

“Ultimately, 2016 will be a challenging year for the oilfield service and equipment market, with many firms focused simply on positioning and survival through the downturn,” DW researchers said. “There are, however, opportunities at this point in the cycle to bring through new approaches and technology for deepwater development to improve efficiency and lower cost. In the long run, we remain of the view that deepwater will be a cost competitive source of world-class hydrocarbon reserves.”

The U.S. Department of Interior’s Bureau of Ocean Energy Management shares that optimism for offshore development -- once prices strengthen. Only 30 exploration and production companies bid in last week’s Central Planning Area Lease Sale 241 in the GOM, and there were no bids for Lease Sale 225 for the Eastern Planning Area, but officials expect a turnaround in the future (see Daily GPI, March 23).

Interior’s Janice Schneider, assistant secretary for land and minerals management, said investment may be down, “but the Gulf of Mexico is still one of the most active deepwater areas. Investment is continuing in developing projects, and work continues from work begun years earlier. We expect exploration will bounce back when the market eventually does…”

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