Global annual capital expenditure by the deep-water oil and gas industry has been estimated to rise to $60 billion by 2022 from current $50 billion.
According to Wood Mackenzie, the rise is as a result of lower costs and improved returns for investors.
“This rise will be driven by big projects in Guyana, Brazil and Mozambique.But the increase in spend and activities will accelerate a return to cyclical cost inflation in the offshore sector. With total deep-water rig capacity expected to fall over the next few years — as older, less efficient units are scrapped – rig day rates could double by the early 2020s,” the report said.
It noted that the deep-water industry appears in good health, following a sustained cost reduction through the downturn but this hard work is in danger of being undone, as impending cyclical cost inflation could raise break-even costs once again.
The cost of developing new deep-water barrels has fallen over 50 per cent since 2013, according to WoodMac data data and analysis. The most important steps deep-water operators have taken to achieve lower costs, and therefore better returns, include downsizing projects, greater focus on subsea tiebacks and brownfield developments, reduced project lead times, reduced well counts, more phasing of larger developments, faster well completions, better project execution and lower rig and service sector costs.
The most competitive region is the Americas, and in particular Brazil, Guyana, and the Gulf of Mexico, where over 50 billion boe of pre-sanction and post-sanction deep-water developments are now profitable under an oil price of $60 per barrel (based on break-even costs).
“One of the key drivers in cost reduction in deep-water projects is lower rig costs, which is a cyclical factor,” said research director Angus Rodger. “But more importantly, there have also been big structural changes, such as the faster drilling of wells. For example, in the US Gulf of Mexico it now takes half the time to drill a deep-water well compared to 2014,” he said.
Better project execution has also reduced overspend and improved returns, the report said. The average deep-water project sanctioned between 2014 and 2016 has started-up around 5 per cent under budget, compared to projects from 2006 to 2013, when cost overruns between 10 and 15 per cent were the norm.