By Mark Adeosun, Douglas-Westwood

OIL PRICES have fallen dramatically in recent months, resulting in concerns over the viability of some large and ultra-deepwater projects.

Capital expenditure (CAPEX) and operational expenditure have also been on the rise for several years, placing further pressure on budgets.

Recently, some operators have responded by announcing reduced budgets and delaying deepwater project sanctions.

Now is the time to refocus on standardisation on the oil and gas industry and reduce costs to ensure the viability of high CAPEX deepwater developments.

It is important to note that CAPEX reductions were already a minor focus of operators before the oil price collapse, although they are now of even greater importance.

As suppliers work through backlogs the reduction in component orders will increase competition and consequently, lower costs.

Global Market Summary

Douglas Westwood expects deepwater expenditure to grow by almost 69 per cent globally, compared to the preceding five-year period, totalling US$210 billion between 2015 and 2019.

However, in the short term, delays as a result of the low oil price, are causing significantly slower growth than was expected a year ago.

Deepwater CAPEX will rise post-2016, driven by the continued development of deepwater fields off Latin America and West Africa, as well as new developments off East Africa. North America remains a key deepwater region despite a reduction in CAPEX over the next five years.

Asia

Deepwater expenditure is forecast to total US$11 billion over the next five years, an 80% growth on spending during the previous five-year period, 5% of global expenditure.

Despite the fall in oil prices which is undermining the oil industry, deepwater basins remain an important focus area for development in this region and the market will experience significant growth over the forecast period.

Over 119 development wells are to be drilled and completed over the 2015-2019 period, which will require expenditure totalling US$3.6 billion.

Subsea equipment will total US$5.8 billion, subsea production will account for US$3 billion of forecast Capex, while subsea umbilicals, risers and flowlines will account for US$2.8 billion.

Two floating production and storage (FPS) units are expected to be installed at a CAPEX of US$0.7 billion. In 2015 just a single FPS unit is expected, the Rubicon Vantage floating production storage and offloading vessel at the Wassana oilfield while the second FPS unit is expected to be operational by 2019 at the Annapurna field.

Trunkline projects over 2015-2019 will require a total CAPEX of just over US$1 billion, which is driven by the 456 kilometre pipeline of Gendalo/Geham in Indonesia.

However, the insecurity in the oil and gas industry due to the recent declines in oil price has impacted deepwater growth in the region. The FPS sector remains a fragile part of the market over the forecast period as operators focus on cost cutting measures and review development plans. Furthermore, subsea tiebacks to existing infrastructure represent a cheaper alternative field development methods.

Widespread delays on projects such as the M-1 development and the D-3 Subsea Cluster in India have resulted in decreased expenditure for 2015, however, CAPEX for 2016 and 2017 has increased, meaning the total deepwater market in Asia remains an attractive area for development activity.

Important deepwater projects also include the Krishna Godvari basin (India) especially the ultra-deep Dhirubhai (R-Series) field which has helped to sustain deepwater CAPEX within the region.

Australasia

Australasia is expected to experience the fastest growth in CAPEX globally (36% compound annual growth rate). Despite this, Australasia will still remain the second smallest deepwater region with only 2.6% of global forecast expenditure.

Deepwater expenditure is expected to total US5.4 billion over the next five years. This is an increase of almost 123% on the previous five-year period.

Although largely thought of as a shallow water region, Australasia is seeing an increasing focus on deepwater basins, particularly off the coast of Western Australia.

Around 44 development wells are forecast to be drilled and completed over 2015-2019, which will require expenditure totalling almost US$1.3 billion.

Subsea equipment will total US$2.8 billion. Subsea Production will account for US$930 million of forecast Capex, while SURF will account for US$1.9 billion. One FPS unit is to be installed at the end of the forecast period, an LNG FPSO.

There is one trunkline in 2015 related to the Browse LNG project, whilst the Equus Pipeline accounts for trunkline CAPEX at the latter end of the period.

CAPEX for Australia is lower than previously anticipated due to project delays affecting the region. Debate had occurred over whether to make the Scarborough field an onshore LNG or a Floating LNG project; recently ExxonMobil secured environmental approval to develop using FLNG.

Another project experiencing delays is Greater Gorgon LNG, where Phase Three of the project is expected to occur at the end of the forecast period.

The Equus development originally expected to come onstream in 2017 has experienced many delays and is now expected to be onstream by the end of the forecast period.

Deepwater Market Conclusions

The current low oil price environment will increase pressure on deepwater projects; however, the viability of these developments is typically calculated over the long-term.

An oil price recovery is expected by industry in the mid-to-long term.

Whilst the economic feasibility of deepwater fields varies, typically long-term oil prices of US$80 per barrel ensure the viability of the majority of developments.

Author – Mark Adeosun, Author of The World Deepwater Market Forecast 2015-2019. Mark has conducted research into various oil & gas projects, with a focus on offshore drilling and deepwater activity. Mark has a BSc degree in geology and a Master’s degree from the University of South Wales in Geographic Information Systems.