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Global Deepwater Drilling Spend Escalating

Global deepwater drilling activity is going on a rampage, with spending set to more than double over the coming decade, according to Wood Mackenzie.

The energy industry consultant estimates that capital expenditures will hit $114 billion in 2022, up from $43 billion in 2012, offering a big challenge for the oil and gas industry to keep up with the unprecedented growth.

"Deepwater has accounted for most of the discovered volumes during this time, but this has not been without increasing technical and commercial challenges," said Wood Mackenzie's Malcolm Forbes-Cable, who authored the latest study.

"Considering the deepwater sector has eclipsed that of onshore and shallow water in the last decade with respect to both discovered volumes (41%) and value created ($351 billion), this increase is not as surprising as previously thought. In addition, Wood Mackenzie saw a 39% growth in deepwater and Arctic net acreage licensed by the 20 leading deepwater players in 2012."

Global drilling activity in the offshore has returned to the highs preceding BP plc's Macondo well blowout in April 2010, the consultant said. Bullish growth now is set to remain on a tear, with an overall compound annual growth rate of 9% over the next 10 years. Arctic drilling also is forecast to begin to pick up by the end of this decade, but it only represents about 3% of the wells drilled to 2022.

The number of exploration, appraisal and development wells is seen increasing by 150%, moving to 1,250 wells a year from 500.

"To meet the forecasted well demand the fleet will require 95 additional deepwater rigs to be constructed between 2016 and 2022, representing $65 billion of investment," Forbes-Cable said. "This will require the longest period of deepwater rig construction to date, representing a change for the deepwater sector from cyclical to sustained growth."

Existing rig orders and newbuilds required to meet demand "suggest that the rig contractors will need an additional 37,000 workers over the next decade to operate the fleet." By Wood Mackenzie's estimates, "this simply cannot be met with existing personnel and the historical rate of recruitment."

The tight deepwater rig market "has been driven by an accelerated shift to newbuild rigs by operators in the wake of Macondo, which has set in motion increased regulation and heightened the focus on risk mitigation by the operators."

The corporate landscape in deepwater and Arctic areas is becoming increasingly diverse, but it remains dominated by the incumbent international oil companies (IOC) and a few national oil companies (NOC), the report said. Growing deepwater positions underpin their growth strategies, but the pace of development has to be balanced by internal factors, such as exposure to technical risk, capital allocation and budget constraints, human resources and technological capabilities.

"It's evident that major external and internal constraints must be addressed in order to deliver deepwater and Arctic sector demand," said Forbes-Cable. The deepwater frontier is "increasingly viewed as the key driver for growth among international operators, oilfield service companies and rig contractors."

The energy industry has several areas to focus on, he said, including "increasingly strategic alliances between IOCs and NOCs, increased collaboration and partnering between the supply chain and operating companies, and closer integration in training of personnel, design and development of technologies, and project implementation."

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