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OE17: Deepwater deflation - for how long?

Written by  Caitlin Shaw, research director, Wood Mackenzie Wednesday, 06 September 2017 03:03

Global deepwater oil and gas development has been plagued for a decade by cost creep in equipment and services. Some of the inflation was warranted as we moved into deeper, harsher and frontier areas, requiring higher equipment specs, more specialized assets and a higher level of risk mitigation. But, operators and the supply chain were also not working as efficiently as they could with an eye to controlling project costs.

Wood Mackenzie’s subsea cost index illustrates movement of global subsea production system costs since 2006. Commodity price, project complexity, subsea tree backlog, among other factors, played a major role in the peaks and valleys of historical subsea costs. After a 32% reduction in subsea cost during the recent downturn, Wood Mackenzie's outlook forecasts muted cost movement through the end of the decade, driven in large part by the lower-for-longer commodity price outlook, which will limit the complexity of the executed projects in the near-term. 

Scaling back

The major E&Ps active in deep water have been the ones to spend big money developing production systems and infrastructure that create the framework for most other activity. Many of these companies are currently taking a moment and looking at where and how they can do things better. Whether it is reworking existing projects, phasing out larger scale projects or turning to subsea tiebacks, these companies are looking for and finding ways to keep deepwater moving forward.

The global deepwater supply chain was fast to react. Collaboration and consolidation efforts have created integrated solutions and opportunities to save money and increase recovery. We have seen most of the major players team up with complimentary companies to leverage their strengths and offer enhanced solutions – OneSubsea, TechnipFMC, GE-Baker Hughes. While each of these companies has its own value proposition, common themes exist around realizing cost savings via earlier engagement in the project life-cycle.

What will the future hold?

Where costs will go in the future is largely dependent on the ongoing efforts to optimize deepwater developments. We are currently working with a mix of cyclical and structural cost savings and will need to see a strong transition to rely more on those structural savings as we move out of the downturn. Some structural savings will need material cultural changes within the industry. These will need time to disseminate and take effect. 

According to WoodMac's Subsea Service, we are seeing positive movement in subsea tree orders year-on-year, with 83 subsea trees ordered in FY 2016 and 81 awards in H1 2017. This result is encouraging as only part the full potential of the E&P's and supply chain's efforts have been realized. As time goes on and these efforts mature and are more widely applied, the potential for the subsea and deepwater markets is exciting.

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