Increasing concern over soaring costs has led a growing number of oil majors to significantly scale back their planned capex plans for 2014 and beyond, but the long-term outlook for deepwater remains robust.

According to industry analyst John Westwood of Douglas-Westwood, oil price increases have failed to keep pace with rising E&P costs since 2011—but the future remains positive. Talking to delegates at an OTC topical luncheon entitled “Capex Compression and the Impact on the Offshore Services Community,” he highlighted recent evidence of oil companies tightening their belts and increasingly focusing on cost efficiencies.

Global E&P spending has soared since the year 2000 onward, but costs have increased dramatically, by tenfold. “Production growth has lagged behind spending growth,” he added.

Why has capex soared? According to Westwood, simple factors such as demand for products and services exceeding supply, increasing technical challenges, over-engineering and project management issues have all contributed.

Specific sectors such as the subsea market have an order backlog that has nearly doubled in recent years, while the floating production sector has suffered substantial cost overruns.

He highlighted a recent study carried out by Douglas-Westwood in which nine FPSO cost studies were examined, with the results highlighting a rise in extra costs over-budget for all nine floaters combined of $2.6 billion—an alarming 38% increase.

In time terms the total delays suffered by these same nine FPSO projects amounted to 146 months, he added.

He further flagged up other contributing factors for increasing costs, including the "people issue," with the limited number of skilled people driving up prices, and the issue of local content (often with a 70% figure involved). “While being very desirable and delivering benefits locally, the local supply chain may be inadequate, and also create a de facto purchasing obligation,” he said.

Westwood encouraged oil and gas operators to better understand the supply chain, and to better assess if the capacity will be there to supply goods and services when it is needed. Determining local future supply and demand pinch points will be key, he said, so that the companies know when and how severe they might be. This will help them to better understand how these will impact upon individual projects, he said.

He also highlighted the industry’s propensity to still over-engineer or “gold plate” on projects, and stressed the need for a return to "fitness for purpose" and standardization. “Will an existing solution suffice? If not, can an industrywide standardised solution be developed?” he added.

New approaches are also needed for developing better technologies, with risk-averse operators reluctant to pilot new technologies on offshore trials. “New initiatives are needed to get new technologies across the R&D ‘valley of death’,” he said. “And they must share the results.”

Lastly, he stressed the need for governments to accept the realities of the industry, and adopt realistic local content ambitions, for example. “Some will have to accept that it will take time to develop capabilities,” he commented.

So what does the future hold for the industry? Westwood pointed out that there is “no single solution” to cutting industry costs, and that it remains a problem that has to be addressed on a number of levels.

“The industry is facing a massive and growing demand, and the key fact here is that we have to drill more and more wells. More than 670,000 development wells will need to be drilled worldwide through 2020,” he said. “We do not think there will be a collapse.

“With growth areas such as deepwater, for example, we see a 5-year capex growing by almost 130%, totalling $260 billion. Deepwater is expected to be a long-term secular growth story. And natural gas is another growth story that will follow a similar path.”

Overall, he concluded, the long-term outlook remains good. “Those 670,000 development wells must be drilled,” he said. “The industry will become more capital efficient. Capex growth rates will reduce, but they will not collapse. But with long-term stories like deepwater, there will continue to be major opportunities for new long-term growth.”

Offshore