May 19, 2017
Author: Espen Erlingsen and Audun Martinsen, VP Analysis, Rystad Energy
Publisher: E&P Magazine
The Gulf of Mexico (GoM) and the North Sea are two of the key offshore regions globally. Together these two regions make about 20% of the global offshore production and represent 25% of global offshore investments. This article will take a closer look at how these regions will develop going forward.
Looking at the historical offshore production, the trends have been similar for the two regions. Both the North Sea and GoM experienced a considerable decrease in production from 2000 until 2013. During this period, the North Sea production declined from 10 million boe/d to 6 million boe/d, while the GoM production decline from 4 million boe/d to 2 million boe/d. One key difference between these regions is that the North Sea production became more gas weighted during this period, while the GoM production became more oil weighted.
From 2014, the declining trend was broken for both regions, and production started to increase again. This was a result of sanctioning of new projects and the redevelopment of mature producing fields. In the North Sea, new fields such as Knarr, Gudrun, E. Grieg, Laggan and Jasmine started up, while mature assets such as Valhall, Ekofisk and Eldfisk were redeveloped. In GoM, it was the deepwater projects that halted the production decline, with Lucius, Jack/St Malo and Delta Horse being the primary source of new production.
In the medium term, production is expected to decline, due to lack of sanctioning activity over the last few years. The North Sea production could drop as much as 1 million bbl/d over the next five years while GoM production could drop around 300 kboe/d during the same period.
In the long term, production in both the North Sea and GoM has the potential to increase again, as non-sanctioned discoveries have the potential to produce 1.7 and 0.8 million bbl/d for North Sea and GoM, respectively. To realize this potential new sanctioning needs to happen.
As both the North Sea and GoM are competing with other sources of production for investments, it is important to consider the competitiveness. Figure 2 illustrates this by showing the average breakeven price and payback time for different sources of new production, compared to new projects in Norway, GoM and United Kingdom.
Figure 2 shows how the average breakeven prices for non-sanctioned projects in both Norway and GoM is less than 50 USD/bbl and lower than all the competing segments for projects to be sanctioned in the coming years. In fact, the Norwegian projects has a breakeven price that is 10 USD/bbl lower than shale.
The fact that the North Sea and GoM is competitive with other sources of production is a key reason why Rystad Energy expects activity to improve for these regions going forward. Increased sanctioning activity will result with an increase in investments in 2019. This will also contribute the stagnation of the production decline and eventually increase production.
Since 2013, the sanctioning activity in both regions has been trending downwards. From 2010 to 2013, 1.5 billion boe of new resources were sanctioned yearly in the North Sea, compared to 200 million boe in 2016. In GoM, the average was 700 million boe annually during 2010-2013, compared to 330 million boe in 2016. The reduced activity has affected both spending and the medium term production outlook.
Many projects were delayed due to the low oil price, but as E&P companies improve the concept and reduce the costs associated with these projects, Rystad Energy expects the sanctioning activity in both regions to increase again from 2018. Furthermore, as the oil price gradually improves, many projects are in the pipeline for being sanctioned. In the North Sea, around 2 billion boe of new volumes could be approved over the next three years, while for GoM the same number is 850 million boe.
Figure 3 shows the largest projects that are expected to be sanctioned over the next years. The single largest project is Johan Castberg in the Barents Sea. The Statoil operated discovery will be developed as an FPSO and could get the final approval already next year. Statoil and its partners have worked on reducing the costs for this project and have changed the development concept. In total, the breakeven oil price has dropped from 80 USD/bbl to around 35 USD/bbl through this process. The second largest project is the second phase of Johan Sverdrup. This second phase consists of both a new processing platform and subsea infrastructure, which will increase the plateau production from around 400 to around 600 kbbl/d.
In GoM, the Kaskida is the largest discovery in the pipeline for upcoming sanctioning. This HPHT field was discovered in 2009. Another discovery in the Lower Tertiary is Anadarko’s Shenandoah discovery. Anadarko is currently continuing to appraise this discovery, and is planning for a semi-submersible development solution.
Two other interesting discoveries are Wisting and Alta/Gohta, and together with Castberg, these projects will transform the Barents Sea to an oil producing province and a key artic region. To increase the resource estimates for these projects and improve the commerciality, several new prospects are being drilled in this area within the next two years.
Spending and OFS market
The low oil price environment has affected the service companies dramatically the last two years. In terms of revenue, service companies exposed to the service market in the North Sea and GoM have experienced a decline of 42% from the peak in 2014 to 2016. After five years of consecutive growth of 13% on average, the market came to a hard stop in 2015 when EP companies put on the breaks to halt investments. For some companies, such as NOV, Transocean and Subsea7, the revenue was reduced by more than 50%.
The high oil price from 2010 to 2014 stimulated many new field developments in both GoM and the North Sea. Large developments such as Jack/St. Malo, Mars B and Big Foot in GoM and Goliat, Martin Linge and QUAD204 in the North Sea caused a record high inflow of contracts to service companies, which led one of the largest booms in the service industry. The low volumes of sanctioned projects in 2014 coupled with many projects being completed in 2015, resulted in reduced backlogs for service companies. However, service companies in many other regions experienced larger drops, such as onshore North America where revenues fell by more than 60%.
All though oil prices has recovered substantially during 2016, 2017 still looks to be weaker than 2016 in terms of oilfield service purchases. As effective unit prices in the industry is still falling, the market is expected to contract by 15% and 7% in North America and Western Europe respectively. The good news is that E&P companies are willing to sanction new projects again after two years of FID-drought. Project commitments such as Mad Dog Phase 2, Kaikias and Johan Castberg shows that it is possible for companies to improve the project economics for offshore fields in these regions and make them competitive. It will take some time before these new projects offset the decline of spending in already existing fields, but with oil prices hovering around 50-65 USD/bbl for this year and next year, we expect to see much more activity in terms of project sanctioning. The second phase of Johan Sverdrup in Norway, the revival of Rosebank in UK and smaller subsea tie-backs in GOM will stimulate spending growth from 2019.
In terms of the market growth for various segments, the EPCI market and MMO market looks the most promising with an average compounded growth of 13% and 7% respectively from 2016 to 2022. For the other segments, the annual growth is expected to lie in the range 4-6%. The rapid EPCI growth is due to the portfolio of projects being heavily tilted towards larger stand-alone developments with a large EPC scope rather than many small subsea tie-backs.
For early recovering segments, suppliers should look after the maintenance and operations market, which is expected to grow from 2018. The new fields such as Kraken, QUAD204, Gina Krog and Jack phase 2 commencing production in 2017 will generate many new frame agreements. A lot of delayed maintenance at aging fields will be up to grabs by service companies from 2018 when this work is overdue. Another service segment that will witness growth in 2018 is the subsea market where brownfield activity will drive intervention and replacement of equipment for subsea installations. For other segments, growth are expected from 2019 when the development of new resources is at full speed.
Having been through such a deep cut in this market, it will take some time before a full recovery. Even with oil prices of 90-100 USD/bbl for the next decade, it will not be back to 2014 levels before 2024. If oil prices are kept at 50 USD/bbl long term, this service market his highly challenged and expected to stay at the levels of 2017. There is not a lack of potential projects to be sanctioned, but even though some best-in-class projects has shown stellar improvement in the cost base, it cannot be enforced for the complete portfolio of discovered but non-sanctioned projects due to complexity. With smaller reserves, HPHT, heavy oil and other complex factors, breakeven prices is typically above 60USD/bbl for many developments. Hence, for the North Sea and GoM oil field service markets to truly see a comeback, we will need to see oil prices improving above these levels. If not, service companies needs to look elsewhere for growth.
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Espen Erlingsen, VP Analysis
Phone: +47 24 00 42 00
Audun Martinsen, VP Analysis
Phone: +47 24 00 42 00
About Rystad Energy
Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
Rystad Energy’s headquarters are located in Oslo, Norway. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), as well as Singapore and Dubai.