Nov. 27–The slow deepwater recovery in the Gulf of Mexico and the rest of the world is now threatened by falling oil prices and the projected cost rise of drilling rigs and other services.
A new report Tuesday by research firm Wood Mackenzie highlights how the offshore sector has returned to viability through costs reductions and greater operating efficiencies. The deepwater industry could grow 20 percent by 2022, but those gains could easily be undone by cyclical services cost hikes and weakening commodity prices.
“One of the key drivers in cost reduction in deepwater projects is lower rig costs, which is a cyclical factor,” said Wood Mackenzie research director Angus Rodger.
“The return of cyclical inflation could see this epic period of deepwater cost reduction come to a close,” he added. “We believe that many cost savings are not as ‘sticky’ as industry suggests, and are skeptical that many will stand the test of time during a sustained cyclical uptick.”
Promising growth areas thus far are in South America by countries like Brazil and Guyana, both the U.S. and Mexican sides of the Gulf of Mexico and gassy east African regions like near Mozambique.
The cost of developing deepwater barrels of oil and gas has been cut by more than half since 2013, according to Wood Mackenzie, making offshore more competitive again with much of the energy sector focused on onshore shale in the U.S., especially in Texas.
Those improvements have come by downsizing projects, focusing on expansions rather than expensive brand-new investments, slowly phasing in projects, drilling wells much more quickly, and keeping projects under budget rather than the industry’s history of exceeding cost projections. But a lot of the savings also have come simply from services companies discounting the costs of their rigs, drillships and other services in order to remain cost competitive.
That critical last piece could easily come undone if the industry keeps rebounding, Wood Mackenzie said, threatening to unwind much of the resurgence.
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