As nations seek greater energy self-sufficiency, they will turn in increasing numbers to offshore oil and gas sources.

The fallout from the events of Sept. 11 will continue for many years into the future. The effects are of particular significance when superimposed upon the underlying trends previously evident within the oil industry. Most worrying for oil majors and governments alike is the issue of security of supply.
Within the United States, the reaction has been to protect such oil and gas installations as pipelines and terminals, the Alaskan pipeline being a particular concern. However, there are broader strategic issues. The United States is massively dependent upon imported oil; therefore the greatest threat to the United States and the rest of the world is the disruption of production in the Middle East, particularly from Saudi Arabia. It must be remembered that Osama bin Laden is a Saudi dissident. The events of 1973 and 1979 show just how devastating to world economies the restriction of Middle Eastern supplies can be.
And the widely held view that in the event of supply disruption, other producers within the Opec cartel and elsewhere can magically switch on massive reserves is likely to be proved unfounded.
Security of supply
One way to increase supply security is to increase the diversity of sources, and in this respect offshore oil and gas has historically been of great strategic importance; the strong growth of the North Sea industry was largely driven by such considerations following the events of 1973. The problem for the future is that such shallowwater offshore areas are depleting at an alarming rate, and even more importantly, prospective replacement fields are one-quarter the size of those of 5 years ago. The Infield Systems database shows that during the past 5 years, Europe has been responsible for 51% of all the offshore oil and gas reserves bought onstream worldwide. Europe's share of development prospects under consideration by oil and gas companies for the next 5 years falls to 13%.
These global offshore development prospects total some 107 billion boe and are dominated by the phased startup of the South Pars field in Iran. The first phase of this giant development is expected to hold some 5.8 billion boe and come onstream in 2002, with further phases from 2004 to 2009. The giant Kashagan field in the Kazakh sector of the Caspian Sea is also expected to start up around 2005. However, neither of these fields can be regarded as being in politically benign areas.
Deep water
The major operators already have voted with their dollars and are leaving the mature provinces to invest in new, usually deepwater, areas. In 2001 global deepwater capital expenditures are expected to total some US $5.6 billion and grow to $10.6 billion by 2005 - a total of $40 billion over the period. The largest capital expenditure growth is expected in West Africa. In the other deepwater hot spot, Brazil, Petrobras has announced plans to spend more than $12 billion on 10 new projects during the next few years. As well as huge reserves and high productivity, foreign deepwater operations also have another key feature, namely enhanced security relative to those in shallow waters. In the words of Vanco's president, Gene Van Dyke, "The guerrillas don't have navies."
Floating production
In many instances, floating production offers the only viable means of developing the more remote, deepwater fields. But in all water depths, it is often becoming the development method of choice. Global forecasts expect capital expenditures on field developments using floaters of all types to show strong growth, totaling $42 billion on 123 floating production systems during the next 5 years. This is mainly in West Africa, Latin America and to a lesser extent Asia. Although North America has 20% of the forecast market by floating production system numbers, it is only 11% by value due to the predominance of low-cost solutions such as spars and mini-tension-leg platforms. Greatest capital expenditure growth is likely off Africa due to some very large field prospects. Only northern Europe, being a mature region, is expected to experience any significant decline.
Strong interest also is expected in the use of floating production for gas conversion, either in the form of floating liquefied natural gas or floating gas-to-liquids plants. Development of these technologies will be driven by supply- and demand-side factors. First, huge amounts of stranded gas offshore are awaiting some means of economic exploitation. Second, global demand for gas - perceived as "the fuel of the future" - is growing more strongly than for oil.
Subsea
More floating production means more subsea wells, which together with subsea tiebacks to existing platforms will cause total subsea well numbers to grow dramatically in future years. Research conducted in preparation for Douglas-Westwood Associates' World Subsea Report found that from 2002 to 2006, northwest Europe is likely to see the most number of subsea completions installed, followed by West Africa, the Gulf of Mexico and Brazil. Deepwater projects are expected to be a key driver in the latter regions.
One key to accessing the smaller reserves is the ability to increase flow distances, and much effort is going into the development of multiphase pumping and subsea processing technologies. The Alpha Prime system, designed to handle 40,000 b/d, is a leading example of the latter.
Oil prices
With so much offshore activity in prospect, where do the problems lie? At the macro level, oil prices remain the great unknown. Opec seems to be getting its act together, but with the present reduction of demand, why should Opec cut its production to support prices when the non-Opec producers that make up the other two-thirds of world oil supply will not cooperate?
Oil prices are difficult to predict as they are controlled by the actions of politicians and oil traders - groups not generally noted for their long-term thinking. But could there be upper and lower oil price limits?
Recently $10 has been the lower limit. In theory, much of the Middle East can produce at $2/bbl to $3/bbl, but in practice this would result in the total economic collapse of many supplier countries. In this event, Middle Eastern governments could topple and be replaced by fundamentalists who have little interest in maintaining the Western world's oil supplies.
The upper limit seems to be about $30. At this point the highly taxed European motorists start blockading refineries, demanding lower-price gasoline.
It would seem, therefore, that $20 oil is highly desirable for a number of reasons.
Growth limits
So the problem is how to increase security of supply by developing even more deepwater offshore oil reserves than Douglas-Westwood Associates forecasts. But this raises some serious issues.
The first is human resources. The offshore industry in general is facing a major problem of aging engineering staff and few new entrants. Estimates suggest the industry could lose more than 50% of its most experienced workers by 2007. Also, deepwater experience is thinly spread across relatively few contractors and oil companies.
The second is physical resources. It is unlikely there are sufficient deepwater rigs and vessels to seriously increase activity beyond present plans.
The third is subsurface. Deepwater reservoirs are still capable of coming up with a few nasty surprises that at the very least will delay some project onstream dates.
The offshore future
The industry must evolve a new way of approaching offshore field development projects.
With North Sea capital expenditures in decline, global offshore industry decision-making is consolidating in Houston, Texas. However, the yards of Southeast Asia are the main builders of floating production systems, with topsides in many cases being built or designed in the West. In the medium term, Douglas-Westwood expects some of this topsides work to migrate to Southeast Asia. In the longer term, it expects much of the hull construction to transfer to China, a country becoming "the workshop of the world" (a title held 100 years ago by the city of Birmingham, England).
To face a future of declining human resources in the established engineering centers of London, Paris, Milan and Houston, Western contractors will have to change their approach and package design work into standard work modules that can be undertaken by engineers in new locations. This demands more standardization of offshore production concepts.
It is within the developing economies that the future of the offshore industry probably lies. Huge numbers of highly educated young people are becoming available in places as diverse as India and Russia, and many face a bleak future with few employment prospects. Ironically, of particular significance is the situation in the Middle East, where much of the problem underlying Sept. 11 might be traced to educated but disaffected young people see few prospects for their future and are easily led into blaming others. The oil industry has a major role to play; increasing local employment prospects in Middle Eastern countries and emerging economies generally may bring more stability and a reduction of the long-term threat to the Western world.
The long view
Above all, the offshore oil business demands that players take the long view. To assure a future in a highly cyclical business where the average 5-year business plan can be totally destroyed by one short-lived oil price downturn, oil companies and contractors must be prepared to take a view measured in decades.
They also must safeguard and build their reserves - reserves of oil and gas in the ground, reserves of cash to carry their companies through the down cycles and, if they are to equip themselves to profit fully from the potential of the next upturn, reserves of the ultimate resource, experienced people.

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