WoodMac: Deepwater projects may soon compete with US tight-oil plays

The deepwater oil and gas industry is emerging from the downturn with three projects sanctioned for this year—BP PLC’s Mad Dog Phase 2 and Shell US’s Kaikias, both in the US Gulf of Mexico, and Noble Energy Corp.’s Leviathan project offshore Israel in the Mediterranean Sea.

Wood Mackenzie estimates global deepwater project costs have fallen more than 20% since 2014. The research and consultancy firm also said 5 billion bbl of presanction deepwater reserves now breakeven at $50/boe assuming a hurdle of 15% internal rate of return (NPV15).

By comparison there are 15 billion bbl of tight-oil resources in undrilled wells with breakevens of $50/boe or lower at a 15% hurdle rate in WoodMac’s dataset.

Cost inflation is reentering the tight-oil market while deepwater operations costs continue to soften. WoodMac estimates that a further 20% cut in current deepwater costs would bring 15 billion bbl of pre-FID reserves into contention, which is in line with tight oil.

According to the firm’s report, a 20% rise in tight-oil costs would even out the cost curve providing equal opportunities in deepwater measured by volume at $60/boe.

Angus Rodger, WoodMac’s Asia-Pacific upstream research director, said, “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 US Gulf of Mexico have made reduced NPV15 breakevens from above $70/boe to below $50/boe in the last several years.

The cost reduction is not solely attributed to cheaper rig rates, but the industry has taken steps in the gulf and elsewhere to reevaluate project designs and improve well performance. Scaled-down projects have emerged deploying fewer wells, more subsea tie-backs, and smaller, fit-for-purpose facilities. “This all translates into lower breakevens,” Rodger said.

The report also points out that while the industry has become leaner, it has also reduced in number. More than 70% of 45 pre-FID projects targeting sanction by 2019 are operated by eight companies—Brazil’s Petrobras Energia SA, ExxonMobil Corp., Chevron Corp., Royal Dutch Shell PLC, BP PLC, Total SA, and Statoil ASA.

The report attributes cost pressure or reallocation of capital to tight-oil plays as the driver of many independents exiting deepwater projects. Fewer operators will translate to fewer projects flowing through to sanction, and only the most cost-competitive projects and regions will attract new investment.

Contact Tayvis Dunnahoe at [email protected].