June 2019

The last barrel

Deepwater resurgence?
Craig Fleming / World Oil

Houston’s Offshore Technology Conference kicked off Monday, May 6, at NRG Park, with keynote talks by four industry executives, who discussed how companies are preparing for the future with advances in machine learning, digitalization and automation. Roger Jenkins, president and CEO, Murphy Oil, said the offshore industry weathered the downturn by increasing efficiencies and lowering cost structures. Mr. Jenkins suggested that future growth will be accentuated by improvements in automated pipe handling, which will move more rig personnel away from the make-and-break connection. He also said that technologies to improve directional drilling accuracy will play a role, including real-time fiber optics embedded further into the wellbore, and on-bottom seismic that will enable drillers to improve geosteering and stay-in-the-zone capabilities. This year’s event featured 2,300 exhibitors, with 59,200 attendees from 100 different countries.

Offshore decom is booming! Although OTC 2019 marked the conference’s 50th anniversary, it was muted and lacked the enthusiasm of previous events, despite the showcasing of sophisticated technologies that enable deepwater drilling and production. It’s apparent that the novelty of drilling offshore has long since faded, and many fields and marine structures in the Gulf of Mexico and the North Sea are undergoing decommissioning.

The dismantling of infrastructure has been accelerating in shallow shelf areas, and in some deepwater fields, as well. A study by Boston Consulting Group’s Eric Oudenot, entitled Preparing for the next wave of offshore decommissioning, states “No area in the world has more experience with decommissioning than the Gulf of Mexico. Since the late 1980s operators have removed structures at a rate of 150 to 250 a year.”

Although the rate of decommissioning slowed during the downturn, because many companies could not afford to undertake non-productive projects, the pace is starting to gain momentum again. More than 2,000 structures must be removed in the next several years, in addition to approximately 9,000 wells that will be plugged and abandoned, according to estimates by BSEE and the U.S. Government Accountability Office.

“Shallow water decommissioning has been relatively routine, with topsides and jackets being removed and brought to shore for scrapping and re-purposing,” explained Alan Clifton, London Offshore Consultants. But deepwater dismantling has become increasing complex and more heavily regulated since the Macondo incident, causing a significant change in the way our industry approaches offshore P&A. “Companies’ want to be recognized as responsible operators—reputation is upmost—and businesses are approaching decommissioning in a different manner,” Mr. Clifton concluded. Eventually, experts say the decommissioning arm of the industry will have more work than the exploration side.

Efficiency gains driving deepwater activity. Although offshore decommissioning is thriving, deepwater drilling activity in the GOM, and other global locations, showed signs of life in 2018, despite the buzz of shale mania. The industry has seen average time from discovery to first production cut in half over the last four to five years. Furthermore, the final investment decision to first production has dropped 33%, says Wood Mackenzie’s William Turner. “This is due to lean, simpler projects, and an increased role of phasing in behemoths such as Liza, Leviathan and Zohr.”

In the GOM, Shell was the main driver behind a deepwater resurgence, although several other companies have increased activity in deep water, too. Drilling efficiency from 2014 to 2018 also increased as a result of better planning. In 2017, the number of spuds in water depths greater than 1,000 ft dropped below 100. However, in 2018, this number rebounded to 130, which was a 30% year-on-year increase, and the largest year-on-year increase since 2012. Shell, alone, spudded 42 of these wellbores, followed by BP, Chevron and Anadarko, according to a European consulting firm.

Starting in 2014, the industry saw lower activity and a stringent focus on cost-cutting, which resulted in more efficient drilling and well operations. Data from the Bureau of Ocean Energy Management suggest a clear trend in efficiency gains. By estimating the perceived drilling speed from spud to TD in main wellbores, it reveals a significant improvement in efficiency among the top operators. The most efficient driller during 2018 was BP, followed closely by Anadarko; both firms achieved perceived drilling speed above 600 ft/day.

At the same time, the market for operators has consolidated. Only 16 companies are actively spudding wellbores at the present time—a 20-year low, excluding the outlier year of 2011. This is almost half of what was seen in the beginning of the millennium. With fewer operators and efficiency gains due to increased drilling per operators, overall drilling speed is also increasing. This has resulted in an efficiency increase of 65%, as compared to 2014.

The disciplined style of efficiency drilling, along with the hub-and-spoke strategy, has helped boost lease sales among GOM operators. The March 2019 lease sales were double the total sales in August 2017, proving operators are willing to increase activity and are confident in their ability to competitively exploit GOM resources.

Pendulum swinging back to deep water? With each passing quarter, the potential fallacy of shale becomes more evident. The U.S. tight oil plays have yet to prove that they can consistently offer quarter-on-quarter positive cash flow, and investors are getting impatient, Turner continued. Independents need to think about life after U.S. tight oil. A faster deepwater investment cycle should make it an easier sell to the capital markets. But ultimately, “it’s wiser to maintain deepwater exposure than to double-down on unconventionals.”

About the Authors
Craig Fleming
World Oil
Craig Fleming Craig.Fleming@WorldOil.com
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