The deepwater industry is expected to emerge from the downturn leaner and more cost-competitive than it’s ever been, according to a recent report from Wood Mackenzie.
With the most attractive projects now competing with U.S. tight oil plays, 2017 will see a noticeable surge in deepwater project sanctions. Three have already been fully approved—Mad Dog Phase 2, Kaikias and Leviathan.
Wood Mackenzie estimates that, on average, global deepwater project costs have fallen more that 20 per cent since 2014. Assuming a 15 per cent internal rate of return hurdle (NPV15), five billion barrels of pre-sanction deepwater reserves now break even at US$50/boe or less.
By comparison, there are 15 billion barrels of tight oil in undrilled wells with break-evens of US$50/boe or less at NPV15. The playing field between tight oil and deepwater, however, could get even closer to level. In deepwater, it is possible to drive break-evens even lower through leaner development principles and improved well designs; in tight oil, on the other hand, cost inflation is wreaking havoc.
Wood Mackenzie estimates a further 20 per cent cut in current deepwater costs would bring 15 billion barrels of pre–final investment decision reserves into contention, making it even with tight oil. The deepwater value proposition will strengthen as tight oil cost inflation returns. A 20 per cent rise in tight oil costs would mean that the two resources effectively have the same opportunity at approximately US$60/boe.
“We are at last beginning to see the first signs of recovery in deepwater, driven primarily by cost reduction and portfolio high-grading. Projects in the U.S. Gulf of Mexico in particular have made significant strides, with many reducing NPV15 break-evens from above US$70/boe to below US$50/boe,” says Angus Rodger, the principal analyst for Asia-Pacific upstream research at Wood Mackenzie.
“This is not just the result of cheaper rig day rates,” he continues. “Of far greater impact are the steps the industry in the Gulf of Mexico and elsewhere have taken to re-evaluate project designs and improve well performance. We are now seeing scaled-down projects emerge with less wells, more subsea tie-backs, and reduced facilities and capacities—and this all translates into lower break-evens.”
Like this? You should be reading Oilweek.