Quest Offshore assesses the drilling, subsea, and marine construction dynamics affecting of one of the world’s pre-eminent deepwater basins amid the downturn.
The Gulf of Mexico has long been a region of critical importance to the global deepwater industry, both from the perspective of activity levels as well as the complex nature of executed projects in deep water lending to industry technology advancement. As the Gulf deepwater development remains affected by the global commodity price downturn, Quest Offshore will attempt to analyze market dynamics impacting the region from three vantage points: drilling, subsea, and marine construction.
After three consecutive years of growth following the 2010 drilling moratorium, the deepwater US Gulf of Mexico is starting to show signs of weakness amid lingering low commodity prices. In 2015, new well spuds declined by nearly 30% compared to previous three years. From 2012-2014 an average of 80 new deepwater wells were spud annually, representing a nearly 50% increase over the previous two years. Operators, determined to get back to business, brought forth an arsenal of nearly 30 newbuild high-specification rigs designed to meet the most stringent safety standards and highest drilling efficiencies. By the end of 2015, only three new rigs were put into service and the number of units under contract had declined over 15%. Deferment of development projects and priority towards lower risk exploration will have further impact on 2016 drilling counts, and forecast well demand is expected to remain 20-30% below the peak period of 2012-2014 through this decade.
In contrast to the visible decline in activity, what’s happening behind the scenes would indicate that operators remain optimistic about their future endeavors in the deepwater Gulf of Mexico. Permit approvals for well in water depths ≥500ft have nearly reached pre-Macondo levels.
Currently five operators are responsible for 60% of the wells underway and 65% of the rigs contracted: Shell, Chevron, BP, Anadarko, and Hess. Operators expected to account for ongoing incremental activity include: LLOG, Cobalt, Noble Energy, Deep Gulf Energy, and ExxonMobil. Previous players of important significance who are expected to reduce activity or exit deepwater include: Stone Energy, Murphy, BHP Billiton, Eni, Statoil, Freeport-McMoRan, ConocoPhillips, and Marathon.
Well demand is forecast to drop again in 2016 and remain below peak 2012-2014 levels through the remainder of the decade. As the year progresses a stability, or lack thereof, in oil prices will dictate the outcome of 2017 exploration and production budgets. Cut backs to programs in the near-term will send more rigs ashore to wait out the downturn resulting in a tighter supply-demand scenario by the end of 2017. With day rates now near the bottom, operators will have an opportunity to resume drilling at a much lower cost than during the peak period once oil prices stabilize. These key factors will set the stage for a return to activity growth late in the decade.
The Gulf of Mexico continues to prove itself as a dynamic deepwater basin within the global subsea market. Not only does it have an extensive supply base along the Gulf coast, but the diversity of the demand is unique among other deepwater regions. The area has a strong mix of independent oil company and international oil companies that, for the most part, focus on different project profiles and as such provide the supply chain with high variety in award opportunities. Independent-led subsea tiebacks will continue to dominate the region’s preferred development scenario, which, during less trying times, leads to a larger pool of potential work for the supply chain.
International oil companies have established the majority of the floating production infrastructure in the Gulf of Mexico and continue to evolve that into deeper waters over time. This demand is cyclical depending on operator priorities and thus leads to high degrees of variability in floating production demand where subsea hardware and service demand is far more consistent. Chevron, Shell, and BP continue to be leaders in floating production potential demand as they focus on larger reserve potential in more frontier areas of the region.
We have observed a re-definition of the typical independent oil company in the Gulf of Mexico over the past 15+ years. Prior to the 2009 down cycle, the region saw a higher concentration of smaller independent oil companies (IOCs) taking advantage of the high natural gas prices via fast-track subsea tiebacks. Once the natural gas price plummeted and oil prices started recovery, we saw larger profile independent oil companies taking an apparent larger and longer investment stance in the Gulf. We saw the likes of Freeport-McMoRan and Stone Energy buying older IOC-owned floating production hubs with plans for infrastructure-led drilling to boost and maintain production. In general, the role of these independent oil companies in the region is to develop the marginal fields, which do not fit into the profile of the IOCs, and utilize the well-established network of third-party development infrastructure.
In terms of subsea tree demand, the Gulf of Mexico represents ~15% of total global subsea tree awards. Infill tree orders have been an increasingly more important component of the foundation of demand not just in the Gulf of Mexico, but globally. As IOCs floating infrastructure ages, adding more development wells and ordering additional subsea trees, is a cost effective solution to growing and maintaining production levels. The same is true of independents who have acquired older assets from IOCs. Infrastructure-led drilling around these assets as a means of increasing oil recovery is relatively inexpensive, realize a faster cycle time, and can require less ancillary hardware and equipment to reach first oil. This strategy has proved a successful addition to operators’ options for extending the life of field.
The Gulf of Mexico has seen depressed installation levels in 2015 and this is expected to continue through 2018 after elevated installation activity in 2013 and 2014. Lucius and Jack/St. Malo export lines were the main contributors to the spike in installation activity for 2013 and 2014 as well as other large projects such as the Keathley Canyon Connector, SECKO pipeline and exports serving Big Foot and Delta House. Quest Offshore expects installation activity to begin recovery in 2019 with the forecasted installation demand largely composed of pipeline infrastructure for developments such as BP’s revamped Mad Dog Phase 2 and Hopkins development, Shell’s Appomattox, Hess’ Stampede and Pemex’s Lakach deepwater Coatzacoalcos project. The region is expected to have approximately 3200km of pipeline and umbilical installation demand for the period of 2016-2021, accounting for only 11% of the global total. This is a function of both the depressed overall market as well as cyclicality in the region due to the installation of large exports for new hubs in remote areas.
As of March, there are currently 34 vessels being tracked by Quest in the Gulf of Mexico. By category, there are six multipurpose construction vessels, 10 field support vessels, three deepwater pipelay vessels, three derrick pipelay vessels, two Intervention vessels, four reel-lay vessels and one heavy-lift vessel in the Gulf of Mexico. Vessels expected to remain in the Gulf of Mexico throughout 2016 include the Deep Blue, Normand Clipper, Normand Pacific, Q4000, Q5000, Harvey Deep Sea, Olympic Boa, Siem Stingray, Ocean Alliance and the REM Installer. Several of the mentioned vessels are performing work scopes such as subsea maintenance, repair and hardware installation including jumpers, umbilicals, and production trees and flying leads under master charter agreements. It is expected that some of the vessels currently occupying the Gulf will mobilize to the Africa Mediterranean region as installation activity ramps up in the region.
Current market conditions both create opportunities for operators looking to execute projects at reduced cost as well as lead to hope that the retirement of older assets coupled with a future recovery will lead to a balanced market. Although installation activity is depressed relative to previous quarters due to the cyclical nature for the region, there is still opportunity for small tiebacks, IRM work and call-offs in a spot market.
Caitlin Shaw is the senior director of market research and the data division for Quest Offshore Resources. She graduated from Texas A&M University Galveston in 2003 with a BS in marine biology. During her tenure at Quest she has held various strategic positions of increased responsibility leading to senior director in 2013.