December 3, 2014
Author: Jon Fredrik Müller, Senior Project Manager
Publisher: Offshore Magazine, February edition
Oslo, December 3rd 2014. The OPEC resistance to reduced production quotas has spurred on a continued oil price drop, following the trend from June this summer. With Brent oil prices currently at 70 USD/bbl how robust are deepwater and ultra deepwater developments? Will ultra deepwater costs related to water depth, drilling time and other complexities favor the deepwater developments, or will the sheer size of the ultra deepwater elephants wrestle its way through to development no matter what?
At the time of writing, OPEC had just recently completed its 166th membership meeting and conveyed to the world that they are not reducing the OPEC quotas from the current level of 30 MMbbl/d. The market responded by sending the oil price further down; currently it is trading around USD 70 per barrel (Brent). The market has now dropped close to 40% from June 2014 and the reason for this is the surging US shale oil supply and weaker global demand prospects, which is causing an over-supplied market. Prices may continue to slide towards 2015 as the market realizes that the price level, where US shale production growth stops is lower than 60 USD/bbl (on field level).
Figure 1 shows the historic OPEC production and the Call-on-OPEC (difference between demand and rest of world production). In our baseline scenario, the need for OPEC’s crude production declines to a low of 28.3 MMbbl/d in 2017 compared with an estimated September production rate of 30.7 MMbbl/d. In a scenario where OPEC crude production is kept at current levels, given our assumptions for global oil demand and production from the rest of the world, the oil market would become increasingly over-supplied in the next few years.
Stock builds/draws are often mentioned in periods with over/under supply, but such a large build of inventories over several consecutive years would not be realizable in practice as global oil inventories will not be able to absorb these projected excess volumes. Oil demand would have to rise much faster than expected to prevent either a supply response or lower prices – barring any major unforeseen supply disruptions. So, either the oil prices “collapse” and the imbalances will self-correct over time, or supply growth will pre-emptively have to be meaningfully reduced (by eg. OPEC and/or others).
The forecasted oversupply will have a different effect on different sources of production. To understand the potential impact on deepwater (500 -1500 meter) and ultra deepwater developments (1500+ meter) we first need to take a look at what has been done historically.
Developments deeper than traditional shelf (125 meter) began back in the mid-1970s with developments off the coast of United Kingdom and Norway, and with other regions following from the early 1980s. However, developments in waters deeper than 500 meters did not really commence until the late 1980’s. It was first in the mid-1990s that production from 500+ meters really ramped up, led by developments in the US Gulf of Mexico (GoM) and Brazil. From the middle of the 2000’s Africa stepped up to the plate with significant developments like Girassol, Bonga, Kizomba, Dalia and others.
The production ramp up from deepwater is now behind us, however the ramp up from ultra deepwater is still to come. Production from these water depths began in the late 1990s in the US GoM and Brazil, and currently we stand at the beginning of a production ramp up that is forecasted to take us from the current level of 1.5 MMboe/d in 2014 to more than 5 MMboe/d by 2020, as shown in Figure 1.
Ultra deepwater developments are in many ways more complex than deepwater developments. First and foremost you have the water depth. The deeper water brings challenges in many ways but this has particularly been an issue for the risers. Not only is pressure and structural integrity an issue, but the weight pulling down on the FPSO also becomes significant at these depths. By the end of the 2000’s flexible production risers where approved down to around 2,000 meters, however, there where rigid and hybrid solutions (riser towers/submerged bouys) capable of handling deeper waters. Currently, there are flexible production risers capable of withstanding 2,500 meters, and the qualification of equipment for deeper waters is likely to continue. Into the 2020s we might see water depths at around 3,000 meters with the giant Libra development moving forward in Brazil. These depths are at the limits of what is possible today, but the hope is that emerging composite flexibles (more strength and less weight) will be qualified to handle water depths beyond 3,000 meters.
With the push into ultra deepwaters, the reservoir pressure and temperature in general increases, causing additional complexities both for the drilling operation and the processing equipment. Of the deepwater resources expected to be put into production over the next five years, approximately 50% have a reservoir pressure above 500 Bar. For the deepwater resources, the equivalent ratio is only 15%. The high initial pressure and large pressure drops over the life of the reservoir also brings with it increased need for injection capacity on the topside. In addition, the ultra deepwater resources are in general located further from shore than the deepwater resources, and due to the share volume of discoveries in pre-salt Brazil, the ultra deepwater fields take longer to drill due to the salt layers.
On the positive side, due to the more mature nature of deepwater resources, many of the largest and most prospective fields have already been developed. This favors future ultra deepwater fields in that the discoveries to be developed are on average larger than the deepwater discoveries. Over the next five years (2015-2019) close to 65% of the ultra deepwater resources to be brought on stream come from fields larger than 1 Billion boe. For the deepwater resources the same ratio is 30%. In addition, early production tests for several of the Brazilian ultra deepwater developments have shown significantly higher flow rates than what Petrobras expected.
The oil and gas ratio also differs between ultra deepwater and deepwater resources. Close to 70% of ultra deepwater resources estimated on-stream next five years are oil. For deepwater the oil ratio is only slightly above 40%, reducing the profitability of these developments compared to the ultra deepwater developments.
Taking the different aspects of deepwater and ultra deepwater into account, one can compare and contrast the robustness of the different resources. Figure 3 shows the resources to start up over the next three five-year periods (2015 indicating period 2015-2019) split by Brent breakeven prices. Studying the graph, one discovers that there is a higher share of ultra deepwater resources with break evens below 60 USD/bbl in all three five-year periods, indicating a higher robustness to oil price changes going forward. While approximately 75% of the resources to be put into production 2015-2019 are already sanctioned, most of the resources from 2020 onwards are not. This indicates that the short term effect of a weaker oil price is limited, while a prolonged period with lower oil prices might affect a substantial part of the projects going into the 2020s.
That ultra deepwater is more robust than deepwater may be contrary to what many believe, but what we see here is that larger fields and higher oil/gas ratios of the ultra deepwater fields out-way many of the increased cost components in terms of water depth, reservoir pressure, drilling times etc. Another important factor is that the some of the increased costs related to ultra deepwater developments are coming down. For example, back in 2006 the fastest Petrobras was able to drill a pre-salt well was 134 days, while they sat a new record of 60 days in 2013 with increased knowledge about these drilling operations. Now, not all pre-salt wells are ultra deepwater, but the ratio is much higher than for deepwater.
The upcoming ultra deepwater developments are more robust to changes in oil price than deepwater developments, primarily given their size. This relates to the ultra deepwater development boom is lagging 15 years behind the deepwater developments. A lot of these ultra deepwater developments are located in Brazil, which might actually strengthen the robustness further, given that the decision to develop is not always driven 100% by business rationale but also by political decisions. Off course, everything kept equal, a deepwater development will be more profitable than an ultra deepwater development. However, at current we are in a situation where, due to size, the ultra deepwater elephants seem to be cutting in line on behalf of the deepwater discoveries and other developments with higher breakeven.
Contact: Jon Fredrik Müller, Senior Project Manager
Mobile: +47 92 49 90 56
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Phone: +47 24 00 42 90
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Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
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About the Author
Jon Fredrik Müller, Senior Project Manager
Jon Fredrik is a Senior Project Manager within the consulting department of Rystad Energy. His main area of expertise lies in the oil field service segments and particularly within offshore related services. He holds an M.Sc. in Industrial Economics from NTNU, Norway, with specialization in mechanical engineering and finance, including a graduate exchange program at University of Calgary. Jon Fredrik works for Rystad Energy's Oslo office.