OTC: Offshore industry’s turn to shorter-cycle, phased-development stirs PE interest

The offshore oil and gas industry is picking up on shorter-cycle, phased-development, making some projects more attractive to private equity, panelists told a May 2 session at the Offshore Technology Conference in Houston.

Private equity and private equity-backed companies have been involved in offshore projects, but the funding source isn’t traditionally known for playing the long-game. But as Susan Farrell, vice-president of energy-wide perspectives at IHS Markit, pointed out during an OTC panel discussion Apr. 30, the offshore industry is on a mission to turn high-cost, long-cycle oil production into lower-cost, shorter-cycle production to compete with Lower 48 unconventional onshore projects for financing (OGJ Online, Apr. 30, 2018).

For one, panelists of the May 2 session agreed, the cost of entry into shale is up markedly—think Permian basin. And as companies have done onshore, those focused offshore have increased efficiencies and found ways to standardize, panelists said. Completion times are down 40% and companies are extending reach for enabling tiebacks, attracting private equity attention. Also drawing attention are potential returns. While the number of offshore deals are dwarfed by Lower 48 unconventional, the plays are three, four, and five times larger, making for blockbuster-sized opportunities, they said.

What’s more, said Brian Reinsborough, chairman, founder, president, and chief executive officer of Venari Resources, is that break-evens have come down considerably. In late April, Shell made financial investment decision on the Vito development in the Gulf of Mexico, noting the decision was made with a forward-looking, break-even price estimated to be less than $35/bbl (OGJ Online, Apr. 24, 2018). If true, said Reinsborough, it “demonstrates that some projects will compare to shale.”

Capital requirements and the time to payback remain barriers to increased private equity investment in offshore and deepwater projects but look for funds to become more active in subsea tiebacks, on the Gulf of Mexico shelf, in deepwater infrastructure, and potentially in late-life assets that could provide “quick wins,” said panelists. Less private equity money is expected to go toward greenfield projects or areas with regulatory uncertainty. On the whole, said Reinsborough, private equity “will go wherever they can get good returns.”

Contact Mikaila Adams at [email protected].