Crude oil prices may be at multiyear highs, but offshore operators and service companies remain determined to ensure profitability at $50/bbl.
That’s because offshore operators, particularly those focused on the Gulf of Mexico, have stiff competition from onshore unconventionals, where cheaper wells and shorter cycle times are more appealing to investors. Also fresh on operators’ minds is the market volatility that shelved many of their major projects that were supposed to deliver big output increases.
During a 30 April panel discussion at the Offshore Technology Conference in Houston, Susan Farrell, vice president and co-head of Energy-Wide Perspectives at IHS Markit, noted that the recent oil-price increases aren’t driven solely by market fundaments, and it has become evident that “geopolitical risk is back in the market.”
US foreign policy is hardening, with sanctions on Iran likely to be reimposed. Venezuela has reached its production “tipping point,” losing some 400,000 B/D in 2017 and 500,000 B/D in 2018, IHS Markit, estimates. Saudi Arabia needs to keep prices higher to finance its foreign policy and economic transformation, which isn’t drawing as much excitement as originally expected.
IHS modeled 54 offshore projects with cost structures in third-quarter 2014 and third-quarter 2017, finding breakeven costs were cut 45%–50% during that time to less than $40/BOE. Half of the costs savings came from service-sector deflation, “which is a cyclical cost change that will unwind at some point,” Farrell said. A structural cost, design changes have also resulted in “dramatic savings” that are more sustainable. For the first quarter of 2018, however, “the cost changes appear to have leveled out,” she said.
Operators and service companies have claimed that “structural changes are a much bigger portion of the pie” going forward, Farrell added. “The offshore industry is on a mission to change the way they look at projects in order to compete in that short-cycle business” of onshore unconventionals, Farrell said.