Deepwater cost challenges and opportunities

October 14, 2014

Deepwater exploration offers one of the few attractive places for today's international oil companies, but costs will need to be curbed to make it work, senior executives said in Aberdeen today (14 October).

Total's Angolan Clov FPSO during offshore installation operations. The deepwater development came on stream this year. Image from Total.
 

More than 9% of world hydrocarbon production will be from deepwater by 2020 and deep offshore (greater than 500m deep) represents 25% of global yet to find resources says Philippe Guys, CEO, Total UK.

"Deepwater is one of the few attractive places left where you can go and you might discover another elephant field," says John Westwood, chairman at analysts Douglas Westwood.

Both executives were speaking at a deepwater focused event in Aberdeen.

To an extent, the industry has little choice to go into deeper waters. Conventional resources are either declining or in the hands of national oil companies (NOCs) - 80% today compared to 22% held by NOCs when Westwood started in the industry - driving international oil companies into unconventional and deepwater areas, Westwood says. "The problem with this scenario is cost," he says. Oil and gas production has risen 15% and 49%, respectively, in the 10 years to 2013, but costs have risen 387% in the same period, he says. "These are big numbers when oil prices are flat. We are seeing projects being pulled back and some times resurrected with major cost reductions. But there are still some major opportunities out there for those who can find cost reductions to get at these resources."

For Total, deep offshore is a key area. Guys says 50% of Total's prospective resources are deep offshore. Deep offshore is also 10% of Total's current production, amounting to 25% of the group's profits.

But, costs need to be addressed, he says. "Costs of our operations deep offshore are extremely high. We need to look at what we can do to avoid a lot of these costs and streamline."

"Costs need to be reduced," said Craig May, managing director Chevron Upstream Europe.  

The Clov FPSO berthed at the Paenal yard.
Image from Total. 

 

"We have moved from bigger to smarter developments and we need to continue towards smarter. Technology needs to deliver cost reductions to create future field developments and improve competitiveness on existing assets. Producing assets will need less complex incremental technology, with immediate impact. We need to look at what other industries are doing and overcome resistance to (adopting) things "not invented here." In areas where intellectual property is less sensitive or the price is so large it is to everyone's advantage to work together."

Despite the costs, deepwater remains a huge opportunity, Westwood says. He said offshore spend would increase 7-8% per year and that deepwater will take an increasing share of offshore activities. "Deepwater production is expected to rise 70% between 2013 and 2020," he said.

Westwood says there were 156 deepwater wells drilled in 2013, a figure expected to rise to 350 in 2020.

CAPEX in deepwater over the next five years is expected to amount to $260 billion, with 83% of that in the Golden Triangle. But, new areas are also opening up, in the Arctic, South East Asia and East Africa, Westwood says.

In 2013, there were 200 deepwater trees installed deepwater. "We think there is going to be 400 a year needed by 2020," he says. The growth has seen contractor's order books bulge tom $8 billion in 2010 to $16 billion by 2013.

Subsea processing, particularly, offers great promise, Westwood says, led by subsea boosting with strong demand from Latin America.

"Subsea processing really does have something going for it," Westwood says. But there are barriers, including perceived high costs and immaturity of the technology sand associated resources, he adds.

Despite the talk about shale oil putting pressure on offshore economics, Westwood says that "shale will not greatly impact deep water. Shales are not cheap wells and they deplete quickly. Our view is that shale will not greatly impact deepwater."

Concluding, he says: "Technology is not the answer for all the issues. Some of the issues are people issues and project management issues."



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