By Balwinder Rangi, Douglas-Westwood
CAPITAL expenditure on deepwater projects is expected to total US$260 billion from 2014 to 2018, a 130 per cent increase on the preceding five-year period, according to new research released by Douglas-Westwood.
The research firm’s 12th edition of its World Deepwater Market Forecast 2014-2018 predicted US$213 billion of this money would be spent in the Americas and Africa as East African natural gas developments begin production.
Driven by new projects in Tanzania and Mozambique coming online in the latter half of the forecast period, the firm forecast that East Africa could become a deepwater natural gas hub, boosted by high Asian gas prices.
The report also found Latin America was continuing to lead investment in deepwater activity, despite Petrobras’ struggles and the bankruptcy of Brazilian operator OGX.
Western Europe’s Capex is expected to grow fastest at a capital growth rate of 56% to $15.5 billion. The Middle East will grow second fastest (38%) with Eastern Europe & FSU third (32%).
Despite a moderate growth rate of 8%, Asia will remain the largest deepwater market outside Africa and the Americas, despite a lack of available rigs causing delays to some projects.
However, the lack of available rigs is causing delays to some projects in Asia; Reliance Industries had to delay exploratory drilling on Block D3 until mid-to-late 2014 following issues with rig availability.
Australasia is the second smallest deepwater region by capital expenditure, at US$3.9 billion, Douglas-Westwood said.
However, it has a promising outlook, especially if the high gas prices in Asia can be exploited through continued development of Australia’s deepwater gas fields.
North America is expected to experience the least growth in Capex globally – at a rate of 2% – as high cost inflation relative to price inflation has resulted in some projects becoming unviable.
The greatest challenge these groups faced was rising cost inflation, with surging exploration and production costs and the imposition of local content requirements leading operators to cancel flagship projects.
Concerns exist within the industry that oil prices are not rising relative to the continued growth of exploration and production costs – with Barclay’s Capital Survey estimating global E&P costs would rise by 6% in 2014.
Consequently, operators have cut Capex by delaying/cancelling projects.
Globally, Douglas-Westwood predicted a continued trend towards exploration in ultra-deep waters in excess of 2,000 metres, with the market poised for a period of significant growth.
Relaxed Basel III requirements, lower costs of borrowing and an increased number of financial institutions willing to finance deepwater developments have improved finance conditions for both operators and contractors.
Challenges in project execution, cost and local content are not unique to deepwater. Ultimately, the maturity of onshore and shallow producing areas is driving increased and unprecedented levels of activity in deepwater.
Drilling and completion (D&C) represents the largest segment of the forecast US$260 billion to be spent over the next four years, with expenditure totalling over US$90 billion, the majority of which will be spent on subsea well completions.
Douglas-Westwood forecast Capex on D&C will grow at a rate of 17% between 2014 and 2018, with Africa and Latin America representing the largest markets.
Floating production systems (FPS) account for the second largest segment of deepwater Capex, with over a quarter to be spent on FPS units and installations and dominated by Latin America with almost half of forecast FPS Capex.
Deepwater expenditure on FPS units will primarily be on FPSOs, accounting for almost 80% of forecast FPS expenditure.
However, Douglas-Westwood forecast FPS Capex to grow the least of all segments due to high cost inflation causing operators to revaluate development plans for fields and ultimately leading to project delays/cancellations.
Subsea Equipment (Subsea Production hardware and subsea umbilicals, risers and flowlines) jointly account for almost a third of global expenditure over the forecast period.
Subsea production hardware is driven by the number of wells drilled, therefore Capex is related to D&C Capex and is expected to total in excess of US$35 billion between 2014 and 2018.
Africa is the largest market for subsea production hardware over the forecast, both in terms of units and Capex. SURF is also primarily driven by subsea well numbers, Capex on SURF and production hardware is similar at almost US$40 billion.
Capex on trunklines totals US$25 billion over the forecast period; Eastern Europe and the former Soviet Union will dominate trunkline Capex – driven by large projects such as South Stream, which will transport gas from Russia.