Short-term uncertainties in the deep

Catarina Podevyn

May 1, 2015

Infield Systems’ Catarina Podevyn takes a look at recent oil price movements and market conditions on the deepwater (500m+) capex spending up to 2019.

Olympus platform in deepwater US Gulf of Mexico. Photo from Shell.

Infield System’s latest deepwater forecast continues to highlight the increasing uncertainty within this market segment.

Even before the oil price decline, the landscape of deepwater investment was showing initial signs of a shift as some operators looked to reassess investment decisions on economically challenging prospects; as seen on Chevron’s Rosebank development offshore West Shetland. Over 2H 2014, with a declining oil price, several capital intensive deepwater prospects were subject to reconsideration, while geopolitical conditions, particularly within the Middle East and Eastern Europe have also affected project timescales and brought additional cancellations.

Latin America

Over the 2015-2019 period Latin America, driven by Petrobras’ pre-salt developments offshore Brazil, is expected to retain its leading share of the deepwater market accounting for 35% of global deepwater capex demand. Key projects are expected to include Iara Horst, at a water depth of 2230m, and the multiphase Buzios development.

Despite remaining the key region for deepwater investment, expenditure growth is anticipated to be at a far slower rate than during the historical period; at a CAGR of 6.3% compared to 21.2% seen between 2010 and 2014, while with Petrobras’ present financial difficulties, the rate of expenditure growth over the forthcoming period may see a further revision.

Increasing industry attention is also being drawn towards Mexico’s deepwater prospects following energy reforms within the country. Infield Systems expects the Lakach project to be the key development taking place over the period, with October 2014 seeing Pemex award a US$290 million subsea production systems contract to OneSubsea. However, once again the full success of developing Mexico’s deepwater prospects will be subject to a more stable investment environment.

Source: Infield Systems OFFPEX 

Africa

The deepwater market is anticipated to remain strong offshore Africa over the medium-term as a result of a small number of giant projects already underway. Spend is expected to be driven by Angola; forming a 43% capex share of the region’s deepwater market. Infield Systems forecasts a drop-off in expenditure during 2019, primarily due to the anticipated completion of key projects such as Total’s Egina and the Kaombow 1 and 2 developments before the close of 2018.

Offshore Ghana, deepwater investment is expected to increase by 129% over the entire 2015-2019 timeframe compared to the previous five years, with Tullow’s Tweneboa (Deepwater Tano) anticipated to be the most capital intensive project. Within the East African sub-region Anadarko and the Eni-CNPC consortium are expected to lead expenditure on projects including Prosperidade and Coral (Rovuma Offshore Area 4). Infield Systems also expects deepwater development offshore Tanzania to increase from 2018 onwards, with operators Statoil and BG Group commencing capex spend.

Source: Infield Systems OFFPEX 

North America

North America is expected to hold an 18% share of offshore deepwater capex demand over the 2015-2019 period; a decrease from the 25% share seen over the previous five years. While this has in part been a result of the completion of capital intensive developments such as Chevron’s Jack and Anadarko’s Lucius, the US Gulf of Mexico has also been affected by the oil price decline, with further delays announced on projects such as BP’s Mad Dog II platform.

BP has also cited declining service costs as a factor influencing the decision to push the development further, while with a prevailing low oil price, further delays over the remainder of 2015 may also be announced across the region. Beyond 2016, however, Infield Systems expects deepwater expenditure within the Gulf of Mexico to pick up, with a forecast CAGR of some 12.6%, between 2015-2019. Key developments are expected to include Shell’s Appomattox and Stones, and the Anadarko-led Heidelberg project. Deepwater spend is expected to peak in 2019, with North America expected to become the second largest region for capex spend after Latin America.

Asia

Gumusut Kakap, which came on stream in October 2014, was Shell’s first deepwater project in Malaysia in 1200m water depth.Photo from Shell.

Asia is expected to undergo some of the most robust growth in offshore deepwater expenditure over the forthcoming five years. Infield Systems’ latest Asia Regional Market Report to 2019 highlights how this pivotal global market is expected to be driven by the Southeast Asian sub-region, in particular Malaysia, with key projects including Petronas PFLNG-2, to be installed on the Rotan field, and the Shell-operated Ubah gas field development. Deepwater development offshore India, driven by Reliance’s Dhirubhai 34 R-Series and the ONGC-operated Krishna-Godavari UD-1 projects, is also anticipated to be central to the growth of the region’s deepwater market going forwards.

Europe

Looking towards the North West European Continental Shelf (NWECS), Infield Systems expects capital expenditure within the deepwater sector to remain steady during 2015, predominantly as a result of ongoing development of Aasta Hansteen offshore Norway. However, 3Q 2014 also witnessed a farm-down of several of Statoil’s assets within the Norwegian North Sea area, including Aasta Hansteen and its accompanying Polarled pipeline, with the operator now looking to refocus strategy elsewhere.

Indeed, from 2016 onwards, Infield Systems expects deepwater development offshore Norway to decrease year-on-year through to 2018, with only the final year of forecast seeing an increase in investment. Within the UK sector, despite recent uncertainty and the forecast -63%, decrease in deepwater capex for 2015 compared with the previous year, Infield Systems expects an increase in expenditure in water depths of 500m and greater from 2016 onwards, with key projects anticipated to require investment during this time including the delayed Rosebank project. Investment is also expected to take place on other west of Shetland fields with expenditure having been pushed back during 2014.

Middle East

The Middle East region, although not traditionally seen as a deepwater area of development, is expected to see steady deepwater growth throughout the forecast timeframe, driven by projects such as Noble’s Leviathan development offshore Israel, which could form 44% of the region’s deepwater capital expenditure over the 2015-2019 timeframe. However, recent difficulties facing Noble and the size of the operator’s current holding in Leviathan may result in delays with the project. BP’s Shah Deniz two step-out wells are also anticipated to require significant investment during the period, with Infield Systems currently expecting capital expenditure on the second phase of the project to commence in 2016.

Australia

Offshore Australia, while mega-projects are expected to continue – particularly within the Greater Gorgon Area, the pace of new deepwater development is forecast to slow. The long-awaited Scarborough development has also increased in uncertainty over recent months, with operators of the JV, ExxonMobil and BHP Billiton, requesting an extension of the field’s retention lease while the project partners move towards a final investment decision. Altogether, Infield Systems expects deepwater capital expenditure offshore Australasia to increase over the forthcoming five years despite the less favorable market conditions, with capex spend expected to reach a forecast period peak in 2018.

Conclusion

Altogether, Infield Systems expects the deepwater market to face a challenging time over the 2015-2016 period, with further delays anticipated as a result of the prevailing low oil price. However, over the longer timeframe, with the first gloss having been taken off the US shale oil and gas boom, and unwavering growth in energy consumption from transitional economies, exploration and production activity within deep and ultra-deepwaters can only increase.

Indeed, beyond 2016, Infield Systems expects capital expenditure within water depths of 500m and greater to see a resurgence, with the global deepwater market expected to form a 51% share of total offshore capex over the entire 2015-2019 timeframe, fueled by the high productivity of many of the wells drilled at these depths.

Catarina Podevyn has been an analyst with Infield Systems since 2008, in which time she has worked across a variety of sectors and authored numerous articles and publications on a wide range of subject matter. Her core areas of expertise are within the lloating platform sector and the deep and ultra-deepwater market.