HOUSTON—Lower commodity prices are expected to continue slowing some deepwater investment as the world’s conventional fields decline, adding to the possibility of an overall supply drop.

This could result in a recovery of both oil prices and offshore activity, considering global energy demand is forecast to rise. Production from the U.S. Gulf of Mexico (GoM) will be critical for the sector.

That is according to Adrian Dorsch, senior associate for Infield Systems Ltd.

“We all know that the oil price drop and the volatility that we are seeing have created significant uncertainty. We do, however, see signs of stabilization,” Dorsch said Nov. 19 during Hart Energy’s Gulf of Mexico Offshore Executive Conference. “We see a reduction in oversupply and also depleting assets not being replaced. This leads the potential for stabilization in 2016.”

Global energy consumption is expected to grow, possibly reaching a five-year high of 1.7 million barrels per day in 2015 before slightly dipping in 2016, he added.

Meanwhile, the prolonged downturn—caused by a global oversupply that has outpaced demand— lingers as oil and gas companies prepare for what could be another round of capex cuts. Oil prices have fallen by more than 40%—at times more—since OPEC opted in November 2014 to maintain production to keep market share as U.S. shale operators reached record production levels. Both contributed to the supply glut, which eventually prompted spending cuts and asset sales, including offshore.

“The impact of persistently low oil prices has been felt throughout the offshore supply chain,” Dorsch said in his presentation. “Global offshore EPIC capex is anticipated to fall by 9% this year from $91 billion in 2014 to $83 billion, followed by a further decline to $78 billion in 2016.”

The state of the sector is also evident in the number of subsea tree orders, considered a barometer for activity in the offshore industry. Tree orders for the GoM, for example, have plummeted from 85 in 2014 to 36 this year. Infield projects the number to recover by 2017. Worldwide, about 2,500 subsea trees are expected to be awarded between 2016 and 2020, with growth mainly attributed to large developments offshore Africa and Brazil.

GoM Still Competitive

Operations in the U.S. GoM have also competed with onshore shale gas and oil plays.

Yet, “At an average sanction cost of around $35/bbl the offshore industry remains competitive compared with unconventional resources,” Dorsch said in his presentation. “Some unconventional developments such as oil sands in Canada and extra heavy oil in Venezuela are expected to be uneconomic under $80/bbl.”

Today most operators are focused on existing fields to maintain margins, he said, or bidding on fields with low geographic risk and known reserves at high prices. Deepwater GoM acreage in particular has been highly susceptible to oil price due to the more complex economics.

But when the recovery arrives Infield believes it’ll be led by deepwater activity.

Looking at the field economics of global projects in the pipeline, Dorsch added there is even the potential to surpass activity seen in the last five years by 20%. But he noted that capex is more likely to recover to 2014 levels in the coming years.

Given the expected recovery in oil prices and cost cuts, “We do believe the Gulf of Mexico will be critical for the deepwater industry going forward,” Dorsch said. But its recovery “depends on a stabilization of oil prices probably happening in 2016, potentially in 2017.”

Offshore Elsewhere

Other regions have potential, too. But capex plans, regulations and the pace of recovery are among the factors everywhere.

“We do believe Mexico has the potential to provide a stable level of demand going forward, but it’s not going to be astronomic growth in the next five years,” Dorsch said.

Mexico’s second bidding round attracted more bids than its first. Nine companies vied for the lease to a block, while another block attracted five bidders. In all, three blocks were awarded in September, but the remaining two had no takers. The outcome was in contrast results from the July 15 auction when only two of 14 blocks offered were awarded.

Interest is expected to be greater when Mexico offers deepwater acreage. But industry experts warn further adjustments to terms may be needed.

“Improvements in the fiscal regime will have a positive effect,” Dorsch said.

Still, capex plans will impact spending. He pointed out that PEMEX has cut capex by 12% to $23.5 billon.

Revised spending plans are also impacting the outlook for Brazil, a key region for ultradeepwater activity. Petrobras will lower its spending by 35% through 2018, he said, noting there is a potential for further reduction.

In addition, prospects offshore Iran may have sparked interest from some oil and gas companies.

However, near-term capex is likely to be subdued due to weak project sanctioning since 2012, according to Dorsch. Iran’s focus will initially be on starting defunct oil fields once sanctions are lifted. But “this country will be a critical demand player in the next decade.”

Velda Addison can be reached at vaddison@hartenergy.com.