From Vienna (MT): Deepwater has been dramatically impacted by the industry’s sustained downturn, but according to Eni’s head of global exploration it represents and remains by far the offshore industry’s biggest opportunity to access new reserves.

Capex in the deepwater sector has unsurprisingly plummeted over the past couple of years—last month analyst Douglas-Westwood forecast spending on deepwater projects at $137 billion between now and 2020, a 35% fall compared to its own figures from March last year (33/4). Of that total spend figure, subsea production equipment; subsea umbilicals, risers and flowlines; pipelines; and trunk lines represented 34%.

But realistic optimism abounded at the annual gathering of explorationists organised by the European Association of Geoscientists and Engineers (EAGE) in Vienna, Austria.

Falling entirely coincidentally the same week as all the VIPs from OPEC also descended on Vienna for that cartel’s quarterly meeting to essentially decide on changing nothing regarding its output ceiling, some of the world’s leading explorers were in full agreement on one thing—deepwater is where it’s at in terms of large future discoveries.

An immature play

Industry veteran Luca Bertelli, chief exploration officer at Eni, pointed out that deepwater had been the base of large discoveries in past years and that it would continue to do so. “Deepwater will remain the main source for significant discoveries for the industry in the future,” he said, stressing that the industry would need, however, to at least do two things: drill less but more valuable wells, and explore, develop and produce projects more efficiently.

Ceri Powell, Shell’s executive vice president of global exploration, agreed, observing that with only 7% of the world’s oil produced currently coming from deepwater, “it’s still an immature play. There’s 270 Bbbl recoverable reserves out there in deepwater, according to the International Energy Agency.”

With the industry reducing the deepwater breakeven price towards less than $50/bbl, Powell added that further advances in seismic would help achieve better success rates, while a “direct enabler” for further developments would be increasing amounts of deepwater infrastructure, allowing easier connection of discoveries to existing networks.

New geological concepts, such as that proven by Shell in the eastern Gulf of Mexico on its Norphlet Trend, would continue to also access fresh reserves, she continued. The Jurassic period formation already has produced sizeable deepwater discoveries for the operator such as the Appomattox, Vicksberg and Rydberg fields.

“Who would have thought just a few years ago that the Eolian and Fluvial sands would have produced these?” she added with excitement that only geoscience folk can truly empathise with. But it produces tangible results and investment; Shell is of course initially developing Appomattox, which will be produced by a semisubmersible production facility linked to a subsea system with six drill centres, 15 producing wells and five water injection wells.

Mature basins

Eni’s Bertelli also flagged up the important role that mature basins would play in making small incremental discoveries, both in deep and shallow waters, and tying them back to existing infrastructure. “With this kind of exploration, it’s very important that the explorers do not work alone but with the asset production and operations teams. They can make small, incremental discoveries and tie them back in just a few months. But this provides really good value returns.”

It wasn’t all sunny talk and silver linings, of course. The very first thing Shell’s Powell pointed out in EAGE’s opening panel discussion was that there will be “74% less wells drilled in 2016 compared to 2014.”

Eni’s Bertelli told delegates not to expect high oil prices to return, describing the high price environment of recent years as “an anomaly” with today’s levels more the norm. “Before that period of high prices the industry had been working at lower price levels and everybody was happy. What changed during the high price period was the cost. Now the price has dropped—it’s currently 50% less than it was last year—but the average cost drop is about 25%, no more than that. So there’s a big gap between the price of the oil and the cost. We cannot control the price, but we can control our costs, so we need to work together to further lower industry costs and reset the cost structure.”

He went on, however, to frankly describe the E&P sector as having already been “in crisis” before the price began its plunge. “If we look back at this cycle, we had the lowest number of exploration discoveries in 50 years. Last year we discovered even less because global exploration was cut by around 30% on average.” With a lack of big discoveries over the past three years, he said, it was clear “there was already a crisis in exploration. And then the price slump came.”

Shell’s Powell did highlight emerging evidence that the industry is turning the corner on costs. “I have been very encouraged by how we have cut drilling costs, with deepwater wells, for example, now being drilled for much less than $100 million per well in some parts of the world. It’s also about efficiency, about how many days it now takes to drill those wells. We are still not drilling enough at present, but we are now doing it very efficiently.”

Windfall projects

Tim Dodson, Statoil’s executive vice president of exploration, highlighted how the industry had to a certain extent used the time of higher oil prices to develop and produce older discoveries as “windfall projects” that previously had not been economic to develop.

“But most of us are starting to struggle with our resource base. Not our actual numbers but what makes them up. It’s an area of some concern. They are at the wrong end of the cost curve. There’s an absolute need for the likes of us all to explore, but the fundamental challenge is delivering sufficient volumes.”

He also stressed that anyone who thought large oil companies could replace their significant production levels by exploration alone “was living in dreamland.” There is a need to acquire as well, he said. But it will be crucial that companies ensure they acquire the right quality of asset. Although relatively little M&A [mergers and acquisitions] activity is happening at present, said Dodson, “I think we will see more in this ‘lower for longer’ situation.”

What the industry is really lacking, he added, was “enough new good ideas. We can easily get swamped by the need for efficiency and controlling costs. But how can we come up with more and better ideas?”

Costs vs. sustainability

There was a service company on the panel too, of course, to add a dose of extra realism.

Jean-Georges Malcor, CEO of CGG, spoke from a supply chain perspective, “Here are some numbers on the seismic side. For the last three years we have been squeezing down costs. There has been a fall of between 50% to 60% in our costs. The question is, is it sustainable? None of us are making any money.”

The seismic industry, he added, works in a “very capex-intensive industry, but we have no visibility. We need to reinvent the way we are doing exploration and find a way where we can have more [visibility]. If we could have five years of visibility, for example, we could then be more innovative with that time.”

Another issue that several panellists flagged up was that of production model contracts, both in terms of their lack of change despite the sustained price downturn and also their time scales.

Eni’s Bertelli commented, “We need more incentivised model contracts. We need to find contractual forms that enable the possibility for more investment in exploration.” Statoil’s Dodson added, “Essentially nothing has happened on these contracts. Nothing has been changed by governments. The way the costs are set up, the way profit is shared—it’s the same as when the oil price was $100 per barrel. There are big reserves out there that will not be developed because there’s not enough cake left for us. So it’s a paradox that we have not seen more movement on this issue.”

Shell’s Powell also stressed that there is not currently enough time set into present contracts to do the upfront exploratory work required. Licence periods need to be longer, she said, adding however that the oil industry “has to ask itself if as an industry it has not lobbied in the right way.”

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