Deepwater spend trends grow stronger, but the shallows still rule the waves for now.

The earth is becoming a crowded planet. According to United Nations statistics, the world’s seven-billionth inhabitant was born on October 31, 2011 – just 12 years after the birth of the six-billionth. This rapid population growth alongside the economic development of the BRIC nations not only is placing an increasing strain on the planet’s natural resources but also the industries that bring them to market.

With an annual depletion rate of 8%, the oil industry has been tasked to bring an additional 7 MMbbl of production onstream every year to maintain current levels. However, current levels are unlikely to suffice. As the global population rises, oil demand is likely to follow suit, and this will have an inflationary impact on oil prices. With these most basic drivers of exploration and production activity firmly in place, the question is, where will the additional reserves come from?

Production trends

The offshore industry today is an increasingly important part of global oil and gas supply. As conventional onshore production has levelled off, and in some cases declined, it has been new offshore developments that have sustained the level of production required to meet increasing global demand.

Total offshore oil production accounted for 22% of global production in 2000 – 1% of which was from deep water. In 2010, these figures had risen to 33% and 7%, respectively. The prospects for the future remain equally positive with total deepwater production expected to account for 11% of global oil production by 2015.

Translating these future production curves into capital spending trends reveals some interesting comparisons. The shallow-water sector commands by far the greater proportion of total offshore spending – both on a historical and forecasted basis.

Between 2006 and 2010, the shallow-water market accounted for 61% of total offshore capex. Looking ahead over the next five years, this figure is expected to remain steady. Meanwhile, the deepwater market accounted for 30% of total spend over the last five years, and this is expected to rise to a forecasted 34% over the next business cycle.

Oil production trends – onshore vs. offshore. (Images courtesy of Infield Systems)

Shallow-water spend trends

Despite the growing bias toward deepwater and ultra-deepwater activity in the trade press – a result of impressive growth rate and the use of cutting edge technology and innovation – shallow-water E&P activity is expected to continue apace over the next five years.

Of the more than 1,000 offshore oil fields that are forecast to be developed between 2011 and 2015, some four-fifths of these will be in less than 100 m (328 ft) water depth. Moreover, shallow-water fields account for 85% of the total oil and gas reserves expected to come onstream over the next five years. Statistics such as these provide compelling evidence of the continued importance of shallow-water E&P activity.

In terms of capital spending, the shallow-water platforms, subsea, and pipelines markets are forecast to grow from an estimated US $50 billion in 2011 to nearly $60 billion by 2015. In the shorter term, a considerable level of growth is expected as 2012 capex is forecast to finish nearly $6 billion higher than 2011, representing a year-on-year growth rate of 11%.

The year 2012 also should herald first oil on a number of major projects, including Kashagan in Kazakhstan, South Pars Phases 12 and 17-18 in Iran, and Obskoye Bay in Russia. These reserve-rich national oil company (NOC)-operated projects are driving forward capital spending in shallow water. Moreover, these projects underline the size difference between shallow-water and deepwater reserves – Kashagan, at an estimated 9 Bbbl recoverable, is more than 10 times larger than its closest 2012 deepwater rival, Usan, at 800 MMbbl.

In terms of capex, the pipeline market dominates shallow water. Over the next five years, however, the fixed and floating platform markets are expected to outperform the pipeline sector in terms of relative growth.

The level of platform expenditure is expected to double between 2008 and 2014, driven by developments in traditional international oil company (IOC) and NOC basins.

Traditional, shallow-water, easy-to-access reserves are dominated by NOCs, and IOCs are being forced into increasingly difficult operating environments. This is certainly true in terms of the access to reserves.

When acting as the lead operator, however, NOCs control more than double the shallow-water reserves that are expected to come onstream over the next five years compared to IOCs. Looking beyond 2015, this gulf only widens. Contrary to these trends, it is IOCs and independent operators that are expected to invest more heavily in shallow-water developments – with a particular emphasis on the North Sea, North Western Australia, and West Africa, whereas NOCs are more prevalent in the Middle East, South East Asia, and Latin America.

In the North Sea, a host of independent oil companies are seeking to bring smaller oil and gas fields, which had previously been deemed too marginal, on production. The use of subsea technologies plays a key role here as their deployment negates the requirement for an often costly fixed production platform that would otherwise render the field uneconomic.

Infield also continues to observe much larger projects being developed in the shallow waters of the North Sea. In the UK, BP recently received the green light from the UK Government to push ahead with Phase 2 of the Clair oil field. Situated in 140 m (459 ft) water depth, and to be developed by a further two production platforms with an expected capex of $7 billion, the Claire Ridge project could extend field production through 2050.

Further evidence of continued shallow-water success lies in the discovery of the 1.7 Bbbl Aldous Major South field on the Norwegian Continental Shelf earlier this year.

Elsewhere, the regional shallow-water markets are displaying various signs of strengths and weaknesses. In the US Gulf of Mexico (GoM), for example, a continued lack of shallow-water exploration and appraisal activity has depressed the number of shallow-water installations. The market is expected to gain strength, but the exact timing of a recovery remains unclear as supressed gas prices and onshore shale investments continue to have an adverse impact on the region’s offshore activity.

Offshore capex split by water depth.

Deepwater growth

Driven by floating production and subsea technologies, the global deepwater market is probably the fastest growing sector of the offshore oil and gas industry.

With many onshore and shallow-water regions facing production decline and NOCs in control of prolific resource-rich regions such as the Middle East, operators are increasingly seeking to explore and develop reserves in frontier regions. This is occurring not only in the three deepwater ‘heavyweight’ regions – the GoM, West Africa, and Brazil – but also in Asia, Australasia, and Europe.

In terms of capital spending, Infield forecasts the deepwater and ultra-deepwater platforms, subsea, and pipeline markets to grow from $21 billion in 2011 to more than $37 billion by 2015. Like the shallow-water market, deepwater should see significant year-on-year growth in 2012 driven by the installation of seven floating production platforms, including five FPSOs (all operated by Petrobras in Brazil), one tension-leg platform (TLP) (Walker Ridge 029-A TLP Big Foot) and one semisubmersible (Gumusut Kakap FPU).

Moreover, the continued development of a further 20 deepwater floaters (all under or nearing construction) will ensure deepwater spending is back on a robust growth trend following the recent contraction.

Looking ahead to 2013-2015, the deepwater market is expected to gain considerable momentum as developments in Brazil, West Africa, the GoM, and South East Asia are executed.

The presalt Brazil province is set to be the deepwater success story of this decade, and as a result, Petrobras is expected to be a major player in the global energy market approximately 10 years from now. The development of deepwater presalt reserves offshore southeastern Brazil in the Santos basin is likely to be the main driver behind this trend (though presalt fields also have been found in the Campos and Esp?rito Santo basins as well).

Not only is Petrobras’ deepwater capex expected to represent one-third of total capex among the top six deepwater operators during 2011-2015, but deepwater capex from the Brazilian NOC is expected to comprise 22% of total global capex among all operators during that period ($209 billion).

Overall, however, Infield expects West Africa to surpass Latin America as the largest deepwater region in terms of capex during the forecast period 2011-15.

This is not the result of an expected decline in the Latin American market – far from it – but because of spectacular growth in investment in West Africa (especially in Angola where deepwater capex is expected to reach $34.5 billion compared to Nigeria’s $15.6 billion over the 2011-15 period). The Angolan deepwater market will be one to watch over the next five years.

Deepwater capex split by infrastructure type.

Deepwater growth, shallow-water dominance

While things have moved on from the financial crises of 2008/2009, the global economy is still far from healthy. With Greece in turmoil and the spotlight shifting to Italy, the Eurozone crisis continues to plague global markets, and fears for other European nations’ growth. Meanwhile, in the US, the Federal Reserve has sharply downgraded its forecasts for the US economy and has issued warnings of lackluster growth and high unemployment for the coming years.

News such as this could have a negative impact on near-term oil demand in Europe and the US, but the longer-term global drivers for oil demand are firmly in place.

Indeed, the world is becoming more crowded and increasingly wealthy – both key drivers of energy demand. This, in combination with slowing production trends onshore, is creating a solid environment for increased E&P activity offshore. Robust commodity prices will continue to encourage deepwater growth, but Infield expects the shallow-water sector to rule for now.

Shallow-water capex split by infrastructure type.