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Offshore Natural Gas Discoveries, Production Overtaking Oil

In a world were unconventional production has become the market mover, natural gas production is making strides in the offshore, growing by almost 30% in the past decade to more than 1,000 bcm/year (35,314 Bcf), according to the International Energy Agency (IEA).

The global energy watchdog’s offshore forecast, part of its World Energy Outlook series, was issued last Friday as the Offshore Technology Conference (OTC) was concluding in Houston.

Offshore oil production has remained steady at around 26-27 million b/d over the last 10 years,” meaning its share of a growing oil market has shrunk, IEA researchers said. However, offshore gas resources have increased by nearly one-third over the period.

Notably, the areas seeing the biggest gains are in order: the Middle East, North Sea, Brazil, Gulf of Mexico (GOM) and Caspian sea.

IEA in its New Policies Scenario is forecasting an increase of 700 bcm in offshore gas production to 2040, “split equally between shallow and deepwater developments, bringing the share of offshore production in total gas output above 30% by 2040.”

The projections to 2040, which also included gains in offshore wind, show the “fortunes of oil, gas and wind power vary depending on the policies in place,” said Executive Director Fatih Birol.

“In the New Policies Scenario, in which we explore the evolution of the global energy system in line with existing policy frameworks and announced intentions, offshore oil production edges higher while gas surges ahead to become, in energy equivalent terms, the largest
component of offshore output.”

Many countries and regions are expected to contribute to the boost in offshore gas output, from Brazil to Australia to the Eastern Mediterranean, but the most growth is seen in the Middle East, with continued development of the world’s largest gas field -- called South Pars for Iran, the North Field for Qatar -- and from Africa, notably because of huge gas discoveries off Tanzania and Mozambique.
In IEA’s second forecast, the Sustainable Development Scenario, the prospects for offshore gas “remain relatively robust...but a decline in oil demand in this scenario weighs against new capital-intensive offshore oil projects,” said researchers. The sustainable scenario outlines an integrated approach to achieving internationally agreed objectives on climate change, air quality and universal access to modern energy.

What’s helping with the slow return to offshore development are falling costs, “as companies try to ensure their viability in a shale-inspired lower price environment,” IEA researchers said. “In the aftermath of the oil price fall in 2014, proposed new deepwater projects were generally among the first to be delayed or cancelled as the industry moved toward shorter cycle investments, including shale.”
Offshore projects today typically are “much leaner and fitter.” Only the best projects are moving ahead, as, for example, capital investments in the Norwegian offshore and in the GOM that once required a breakeven oil price of $60-80/bbl “now claiming to be robust at $25-40/bbl.”

As gas demand worldwide rises by almost 50% to 2040 and oil consumption continues to grow, “the interest in offshore hydrocarbon resources remains strong.”

The deepwater has accounted for around half of discovered oil and gas resources over the last 10 years, IEA noted, with Brazil the global leader. “Mexico also sees rapid growth as a result of successful bidding rounds since 2016, alongside the United States, African producers and some new players including Guyana and Suriname,” said researchers.

The largest recent oil and gas finds all have been in deepwater, which IEA defines as water depths of more than 400 meters. Deepwater discoveries on average have accounted for about 50% of the discovered conventional oil and gas volumes for the past decade.

“Some of these have been oil, notably the prolific pre-salt finds in Brazil, but more than half of all the new hydrocarbon resources discovered over the last decade have been gas, such as the Zohr and Leviathan fields in the Mediterranean, the Rovuma basin finds off Mozambique and Tanzania, and recent discoveries off Mauritania and Senegal.”

The stock of existing offshore reserves is huge, accounting for about 15% of global oil resources “and close to 45% of gas reserves,” with nearly 30% of the world’s remaining conventional oil resources and almost two-thirds of the gas.

“The question, in a world where shale dominates short-term market dynamics and where there are longer-term uncertainties over demand, is the extent to which these offshore resources fit into the global supply outlook,” IEA researchers said.

100 FIDs Offshore Forecast in 2018

According to Rystad Energy, 100 offshore projects are likely to be sanctioned this year, compared with only 60 in 2017 and 40 in 2016.

The projects expected to receive a final investment decision “represent a collective $100 billion worth of capital investment, giving an average of about $1 billion per project,” according to Rystad. In contrast, the average projected capital expenditures for offshore projects approved in 2013 was $1.8 billion.

“The offshore suppliers have created their own comeback,” said Rystad Vice President Audun Martinsen, who handles oilfield service research. “Their constant search for cost reductions and streamlining of operations has enabled them to cut offshore project costs by almost 50% compared to the heights of the last cycle.”
Prices charged by offshore suppliers have fallen more than in the onshore, according to Rystad, with an average reduction of close to 30% in 2018 from 2014.

The main driver in falling costs is declining dayrates by offshore drilling contractors, which is down 50-70%. Engineering, procurement, construction and installation costs for surface platforms and subsea infrastructure are down by 20-30%.
“Not only are the suppliers charging less for their services, they have also improved the efficiencies of their operations, thus shortening lead times from project sanctioning to first oil,” Martinsen said. “As an example, the time required to drill and complete a well has fallen by 30% in the North Sea, the GOM and Brazil over the past four years.”
At least two projects in the Americas are “maturing,” including Royal Dutch Shell plc’s Vito deepwater project in the GOM, which was FID’d last month. Shell estimated a forward-looking, breakeven price for Vito development of less than $35/bbl. Vito is expected to reach peak production of 100,000 boe/d; the development in Mississippi Canyon has an estimated, recoverable resource of 300 million boe.

Exploration and production (E&P) companies “have more free cash flow at hand in 2018 than they did during the recent peak years of 2008 and 2011,” Martinsen noted. “In fact, 60% of the companies looking to finance their project development costs can do so through their cash flow. Supported by strong oil prices, we see a very small risk of these projects not materializing.”
The average breakeven price for deepwater developments currently stands at about $45/bbl, and for shallow water it is close to $30/bbl, according to Rystad. Meanwhile, payback times have fallen by three years for deepwater projects and by 1.5 years for shallow water schemes since 2014.

“Offshore projects can now compete with some of the best acreages in the Permian Basin in terms of breakeven prices,” Martinsen said. “With rising inflation in the U.S. shale, offshore appears geared to out-compete shale this year and next.”

‘Invigorated Offshore E&Ps’

Raymond James & Associates Inc. analysts J. Marshall Adkins and Praveen Narra, who attended the OTC last week, came away with a feeling a rising optimism about the offshore. An oil price above $70/bbl “has finally invigorated offshore E&Ps to at least begin planning and discussing more activity.”

The offshore industry “has now moved from intensive care to a regular hospital room,” the duo wrote in a note on Monday.

“We walked away from the OTC with a few overarching themes: offshore oilfield activity and sentiment appears to have bottomed, but a full blown recovery is still in the distance; evolutionary technologies continue to lower oil and gas extraction costs and increase safety; and the U.S. land recovery is hitting full stride and is poised for a multi-year upcycle.”

Costs and economics are improving in the offshore “but it will take time and sustained higher oil prices to drive a meaningfully recovery in offshore oil projects.”

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