Posted on May 10, 2023
Offshore wind may be attracting all the media attention, but offshore oil and gas is entering a major boom cycle. The offshore oil industry can look forward to $100 billion a year in capex commitments through 2024 – twice the expected investment in offshore renewables – and offshore activity will outpace onshore oil projects by about 50 percent, according to Rystad Energy.
This influx of capital should bring a conclusive end to OSV and rig owners’ long, dark winter, and plans are now under way for the first new generation of offshore vessels in a decade.
Gigantic projects in the Middle East account for a third of the new investment total, led by Saudi Aramco’s expansion programs at the Manifa, Zuluf, Marjan and Safaniya fields. There will be so much activity in Aramco’s corner of the Persian Gulf that the company has commissioned a marine traffic control plan to reduce the risk of collisions.
In the U.S. Gulf, oil producers continue to focus on lower-cost subsea tieback projects, creating incremental value without the expense of new production facilities. In South America, Brazil is preparing a program of blowout investments that will nearly double production and vault the country into fourth place among oil producers by 2030.
Neighboring Guyana is also putting its foot on the gas by leasing acreage to international oil majors. Guyana is among the most promising offshore frontier regions, and ExxonMobil – as the earliest entrant – is positioned to make a fortune from more than two dozen significant discoveries.
Rig operators stand to benefit from the massive upswing in activity, and utilization now stands at 90 percent – a huge improvement over 2020 when the rate was just 60 percent. In a sign of the times, offshore drilling leader Transocean added $500 million to its contract backlog in one week in March, which CEO Jeremy Thigpen celebrated as “evidence of the strength of this cyclical recovery.”
With the flood of capital entering the market, day rates are high enough to pull idled rigs out of layup, despite the steep costs of reactivation. There’s even talk of newbuild rig orders after a decade-long drought.
“Rig reactivation will continue through 2023 while the fleet of available units will continue to diminish,” says Matthew Tremblay, ABS’s Vice President of Global Offshore. “To support the drilling programs that are forecast through 2030, it’s highly likely new construction in the drilling segment will need to begin again within the next 24 months.”
Offshore yards will also be getting orders to build FPSOs again. Brazil has plans for at least 16, and Guyana expects another 10-12. On their own, these new units would expand the global FPSO fleet by more than 10 percent, offsetting expected decommissioning of aging vessels. At up to $3 billion each, the gigantic floating plants will be a windfall for offshore shipbuilders like Sembcorp Marine, MODEC and HD Hyundai.
Even the OSV sector is in line for a revival after years of cold-stacking, bankruptcies and consolidation. According to Clarksons, the offshore market will need about 400 new OSVs as drillers ramp up operations, and newbuild orders will likely be coming soon.
“As of Q1 2023, we’re starting to see an uptick, more requests for quotations on new OSV projects,” confirms ABS’s Tremblay. “We expect to see a gradual increase through 2023 for OSVs and continued reactivation of the suitable laid-up fleet.”
Why is offshore E&P taking off now after so many years in the doldrums? A sustainable oil price is a big part of the picture – $80-100 oil looks much better than $60 oil – but offshore also has less competition for capital.
Russia’s vast onshore oil industry is now off-limits to most foreign investment and is not expected to be a source of supply growth. America’s shale-oil sector, once the king of the industry for its low cost and rapid well completion, is running up against the limits of its spectacular expansion. Steep cost hikes for oilfield services are eating into shale’s profitability, and (according to a recent analysis by the Wall Street Journal) there may be a finite supply of productive new wells.
“You just can’t keep growing 15-20 percent a year. You’ll drill up your inventories,” cautioned Pioneer Natural Resources CEO Scott Sheffield last year.
In the near term, more new oil will have to come from somewhere. The IEA expects global demand will increase by about eight million barrels per day (bpd) by decade’s end, and output from existing fields will drop by 18 million bpd. That’s a total of 26 million bpd of unmet demand that will need to be filled with new drilling by 2030.
With the right oil price, offshore E&P can meet that need, and that’s an attractive investment opportunity for oil majors flush with capital.
Long-term uncertainties about decarbonization may also fuel interest in near-term development. Offshore projects sanctioned this year will come online in the second half of the decade and be in service well into the 2040s-50s. Predictions for oil demand in 2050 are variable and highly contingent on the pace of the green transition. Forecasts range from a 75 percent collapse in demand to a healthy 10 percent increase, depending on the forecaster and their assumptions.
However, most ten-year forecasts align and look promising. As Goldman Sachs’ top commodity analyst, Jeff Currie, puts it, any “big substantial declines” in oil demand will not begin until the 2030s. For oil-rich nations like Guyana and Brazil, now might be the best window of time to monetize offshore energy prospects and secure the economic benefits for their societies – before the period of uncertainty arrives.
“We have a window of opportunity. We cannot miss the new pre-salt [offshore fields],” said Brazilian Minister of Mines and Energy Alexandre Silveira in March. “We need to take advantage of the wealth of the Brazilian people that is underground.”
Even if oil prices decline beyond the 2030s, offshore oil has some of the lowest incremental costs of production and can sustain its profitability below the levels needed for shale. Once built, breakeven for a platform can be as low as $18 per barrel for the most cost-efficient projects, according to Rystad.
That could make the offshore sector among the very last producers of oil if the green transition occurs – and some developers are counting on it. Petrobras CEO Jean Paul Prates recently told Bloomberg that the pure-play offshore giant will pick up market share in the years to come. “We may be the last to produce oil in the world,” he predicted.
Offshore development also has synergies with the drive for decarbonization. Properly managed, it has an attractive profile for emissions from production when compared with other methods.
“As one of the lower carbon-intensive methods of extracting hydrocarbons, offshore operators and service companies should expect a windfall in the coming years as global superpowers try to reduce their carbon footprint,” says Audun Martinsen, head of supply chain research at Rystad.
Platform emissions can be reduced further through electrification, including offshore wind power generation. Scotland recently auctioned the world’s first offshore wind leases for powering offshore oil installations, and Equinor has experimented with similar wind-to-platform power projects in the North Sea. These initiatives could result in some of the least emissions-intensive oil wells in the world.
The expertise that oil majors have developed in offshore projects can also be deployed for ambitious carbon storage initiatives. As a prime example, ExxonMobil has been quietly leasing up parcels of near-shore acreage off Houston.
Though the supermajor has declined to comment on its goals for these leases, which have little commercial potential, they are widely believed to be connected to plans for a carbon capture and storage service for industrial emitters on the Houston Ship Channel. Depleted reservoirs in these offshore lease blocks could be capable of holding CO2 for an indefinite period.
Offshore gas development can also directly reduce carbon emissions if it replaces coal or oil consumption. In the eastern Mediterranean, a burgeoning offshore natural gas industry is helping Israel replace coal-fired powerplants with modern gas-fired generating stations, and coal should be fully phased out of the nation’s power supply by 2030.
“It’s a beautiful gas resource,” said Chevron CEO Mike Wirth at the CeraWeek conference in March. “It’s helped decarbonize Israel’s power grid, which was a hundred percent coal-fired a decade ago and is now somewhere between 70 and 80 percent natural gas-fired.”
When combined with Israel’s plan to transition to an all-electric vehicle fleet, the offshore gas-powered electric grid will power the nation’s cars too.
Economic & Energy Security
Offshore oil and gas also help fulfill national objectives, including energy security and economic development goals.
Last year, the Russian invasion of Ukraine alerted Western Europe to the value of homegrown energy, prompting a surge of E&P interest in the North Sea. Norwegian offshore oil and gas output rose to near-record levels to help meet European demand, turning Norway into Europe’s biggest energy supplier (and raking in $50 billion for the Norwegian state). An estimated $20 billion a year in new investments will help sustain and grow Norway’s output, according to Rystad.
In developing nations, offshore energy can underpin economic growth and provide a path out of poverty for thousands. Guyana expects to quadruple per-capita GDP by 2030 on the back of its burgeoning offshore sector, and it’s building up regulatory capacity and expanding its lease auction program to drive development. The money will go into a sovereign wealth fund for projects in electrification, education and infrastructure.
“We believe there is this window now that we need to get all the exploration done in,” explained Vice President Dr. Bharrat Jagdeo in a recent interview. “We have to feed the people of Guyana. They have a legitimate aspiration to a better life too.”