Gold rush fever has hit the offshore oil and gas market.
True, oil companies are proving to be skimpy with their needed investments and the oil prices (Brent) are holding relatively stable at $85.
Yet a tightening deepwater rig market, and a decreased number of deepwater basins from which to explore, have created a specialist market. The rig owners who own the deepwater drillships and rigs are virtually in a monopoly position and are able to extract day rates approaching $500,000; day rates not seen since 2014-2015.
Deepwater operators, anxious to maintain continuity of their exploration and production operations, are faced with fewer deeper basins to explore, and reduced budgets given the competition of new energy.
What can we anticipate? More gold rush fever?
The Case of the Operators
In a 2021 study of deepwater basins, Andrew Latham, Wood Mackenzie’s Vice President for Energy Research, predicted that deepwater upstream growth was expected to rise to over 17MillionBOEPD(barrels of oil equivalent per day) by 2030 from 10MillionBOEPD. He concluded that almost half of oil and gas reserves being sanctioned over the next 5 years will come from deepwater. Why are deepwater plays so important?
Simply because of reservoir fundamentals.
Deepwater reservoirs produce substantially more than shallow or onshore reservoirs. Estimated Ultimate Recovery (EUR) in deepwater averages 12Million Barrels of Oil Equivalent Per Day (12MMBOEPD) for oil wells and 43MMBOEPD for gas wells. Future deepwater fields enjoy twice the average EUR of fields already on stream, reflecting the industry’s success in Guyana and Brazil’s Santos Basins.
Brazil has an average EUR of 14MMBOEPD per well.
Angola has an average EUR of 10MMBOEPD per well.
Nigeria has an average EUR of 16MMBOEPD per well.
Guyana has an average EUR of 24MMBOEPD per well.
Average EUR for gas wells up to 2009 was 31MMBOEPD; that has now jumped to 90MMBOEPD, based on gas finds in the eastern Mediterranean, Mozambique, Mauritania and Senegal.
Rystad estimates that oil and gas consumption will continue at a rate of 100MMBOEPD per day through 2024. The breakeven price for developing 83% of undeveloped reserves is $65 per barrel. Offshore capex for 2023 is estimated at $191Billion and $198Billion for 2024.
In WoodMac’s analysis, much of the deepwater exploration will take place within the golden triangle— meaning– Latin America (Brazil, Guyana and Suriname); North America (US Gulf of Mexico, and Mexico) and Africa (Atlantic Margin and East Africa gas). These three regions plus the eastern Mediterranean account for 75% of global deepwater rig demand.
The Case of the Drillers
Currently, the total benign floater supply has declined to 156 units from a peak of 281 in 2014. Three contractors—Transocean(38), Valaris(51), and Noble(32)–own 121 of these rigs, creating a near monopoly. Their share prices have skyrocketed between July 2021-June 2023:
Transocean increasing 40%;
Valaris increasing 153%; and
Noble increasing 200%.
Table 1: Stock market prices of rig owners July 2021- June 2023
Rig utilization for benign ultra-deepwater hit 90% in the last few months with current day rates of $470,000/day – only marginally below the 2014 peak. Demand momentum will continue through 2025.
There are only 10 competitive warm or cold stacked drillships remaining. Only eight (8) newbuild drillships remain in the South Korean shipyards. Will the demand gap set off a new building spree? Not likely. Drilling contractors will be reluctant to commit to new builds without long-term contracts, which operators are unlikely to offer. Many rig owners will continue to manage and enhance margins on their existing fleet, while taking the lower-risk option of reactivating the most capable and viable stacked rigs under firm contracts.
Future building of new rigs will depend on timing: wells drilled in 2023 could lead to new oil supplies by 2030 and payback time perhaps by 2035; deepwater gas wells require a longer lead time.
The deepwater play has become a specialist market between oil and gas companies and the drilling fraternity. Their relationship, though fraught with ongoing bickering regarding dayrates and rig availability remains a prisoners’ dilemma: each requiring the other to ensure project closure.
Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report, and is a guest contributor to IEEFA(Institute for Energy Economics and Financial Analysis). His book ‘The 10 Commandments of the Energy Transition ‘is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition