Deepwater capex by component 2008-2012 (Graph coutesty of The World Deepwater Market Forecast - Douglas Westwood Ltd.)

The forecast for global capex of $108.5 billion for 2008-2012 is some 33% more than the amount spent in the preceding five-year period.

Overall, the deepwater sector is forecast to continue its growth trend, reaching an annual total of over $24.6 billion by 2012. Between 2008 and 2012, expenditure in the deepwater sector is projected to expand at a compound annual growth rate of 5.9%, with particularly strong growth coming from the Asia and Latin America regions. The “Golden Triangle” of deep water ? namely offshore Africa, the Gulf of Mexico and offshore Brazil ? will still account for almost 85% of global deepwater expenditure over the forecast period, but the rapid emergence of Asia as a significant deepwater region should not be overlooked. Asia, which accounted for only 3% of deepwater capex over the historic period, will develop rapidly and will account for some 10% of expenditure over the forecast period.

Deep water is developing into a long-term growth sector. In recent times, this has considerably benefited the financial performance of suppliers to the sector. Since Nov. 1, 2006, to Feb. 1, 2008, stock prices of a grouping of 10 companies with significant exposure to the sector (the Douglas-Westwood Deepwater Index - DWD) has risen by 50% compared to the Philadelphia Oil Services Sector Index (OSX), which showed a gain of 36%, and the Financial Times Oil Index of E&P companies, which registered only a 4% gain.

Deepwater components

Three main elements dominate deepwater spend over the next five years, namely platforms, pipelines, and the drilling and completion of development wells.

The drilling and completion of development wells is by far the largest single component of deepwater activity. The sheer volume of activity in some areas may lead to increased costs (as increased use of rigs drives up day rates) so there could be some potential upside to the values presented here, which assume constant costs throughout the period.

After the drilling and completion of subsea wells, it is pipelines and platforms that form the main remaining spend for deepwater developments. Over the next five years, some $38 billion is likely to be spent on drilling and completing subsea wells, $32 billion on flow lines and control lines, and $28 billion on deepwater floating production systems. Subsea hardware and surface completed wells could account for a further $10.5 billion.

The deepwater “shopping list” for the forecast period includes over 1,270 subsea trees, 300 templates and manifolds, 68 platforms, and nearly 8,073 miles (13,000 km) of pipelines. Annual expenditure in the deepwater business is expected to reach $24.6 billion by 2012, with the overall spend for the 2008-2012 period totaling $108.2 billion.

Deepwater drilling

Deepwater drilling is a technically complex and highly expensive activity. Deepwater wells routinely cost upwards of $35 million, and according to BP’s estimates, drilling typically accounts for half of the development cost for a deepwater project.

A number of factors contribute here:

  • The technical sophistication of vessels that can drill in deep water increases their construction and operational costs ? this premium is reflected in the day rates which such vessels can command;
  • Deepwater wells tend to take longer to drill than wells in shallow water, due in part to the longer time required to deploy and retrieve equipment to/from the surface;
  • Larger volumes of consumables (casing strings, drilling muds, etc.) are required for deepwater wells;
  • Deepwater wells tend to be located farther from shore, increasing the cost of supporting the drilling operation.

Because of its high-cost profile, drilling offers some of the strongest potential for cost reductions in deepwater E&P activities. A number of innovative approaches and techniques have been proposed to increase deepwater drilling efficiency.

Deepwater drilling fleet

In February there were over 200 rigs rated for operations deeper than 1,640.5 ft (500 m). For water depths greater than 8,202 ft (2,500 m), drillships dominate, while for shallow depths there are greater numbers of semisubmersibles. In terms of ownership, many of the major players formed from a series of mergers and acquisitions that occurred earlier in the decade (e.g., Transocean & R&B Falcon, Pride & Marine Drilling, Santa Fe and Global Marine). Transocean is now the clear leader in terms of fleet size, followed by Diamond Offshore, GlobalSantaFe and Noble. In fact, these four companies own 61% of the deepwater drilling fleet. Further consolidation has occurred recently, with Transocean and GlobalSantaFe announcing their merger.

High oil prices throughout 2006 and 2007 have led to a surge in drilling activity, and as a result, usage has increased, along with day rates.

The dramatic increase in day rates has prompted a new round of rig-building activity. There are nearly 50 units currently on order, the majority of which are scheduled for delivery in 2009/2010. However, construction of new rigs is extremely expensive. The drillship under construction for Stena Offshore is reported to have cost $520 million. Deepwater semisubmersible units are being built at prices around $500 million. Cost increases have largely been driven by higher steel prices and increased costs for rig equipment. Lead times are also long, with many established shipyards such as Keppel FELS reportedly at or nearing capacity.

The move into deeper water is driving rig operators to incorporate different features in newbuild and upgraded rigs:

  • Larger hulls and drill floors to stockpile supplies and accommodate more tools and pipes;
  • Taller, stronger derricks to rack longer sections of pipe;
  • More mud pumps to operate at higher pressures and tanks for rapid changeover;
  • More powerful draw-works to hoist larger and longer drill-strings;
  • Larger wellheads with multiplex control systems to respond faster;
  • Larger rotary tables to accommodate larger equipment;
  • Longer riser sections to reduce connections;
  • Automated pipe handling for use while drilling; and
  • Permanent well test equipment and oil storage capacity.

Deepwater subsea well expenditure

Over the 2003-2007 period, 520 deepwater subsea wells were drilled and completed, requiring a total capex of $29.8 billion. Major areas of activity were North America, Latin America and Africa. Africa saw the most dramatic growth over the period with well numbers increasing from 44 in 2003 to 142 in 2007.

For the period to 2012, activity in North and Latin America is expected to remain high. Development levels, however, are greatly overshadowed by the massive level of development activity in Africa over the next couple of years. A large number of world-scale developments are moving ahead, mainly off West African countries such as Angola and Nigeria but also offshore Egypt on Africa’s north coast. Activity is expected to leap in 2010 and 2012, with annual expenditures almost reaching $9 billion.

Overall capex for the period is expected to total $38.2 billion, 47% of which will be accounted for by Africa. In the previous period, Asia, which accounted for just 1% of activity, is now forecast to account for 12% of expenditure over the period to 2012.

Deepwater growth ahead

The deepwater sector will continue its growth trend through to 2012. Development activity will largely remain on the deepwater “golden triangle” of Africa, Gulf of Mexico and Brazil, with Asia emerging as a sizeable new opportunity.

Growth in the deepwater sector will undoubtedly be constrained by the availability of suitable pipelay vessels, drilling rigs, and experienced personnel. Operators sanctioning new projects in 2008 may well see the impact of these shortages in terms of cost (as vessel day-rates head skywards) and project timing. In the longer term, newbuild vessels/rigs will eventually serve to moderate day-rate increases.

The largest component of the forecast remains the drilling and completion of subsea wells (34%). Pipelines and control lines are the next largest component (30%,) followed by platforms with a 26% share of expenditure.

Overall, the outlook for the business is one of significant opportunity, but also many challenges — there is undoubtedly major potential for the players with the resources and capability to tackle both.