There was realism aplenty at Hart Energy’s second annual Gulf of Mexico (GoM)-focused Offshore Executive Conference. While much of the focus was on how to get those reserves out of the ground as economically as possible, percolating throughout the event was a clear recognition of the upstream industry’s current plight.

Any gathering of the GoM’s great and the good is bound to produce the full gamut of views, especially on the proposed best path that the industry should take on the road to recovery. With the vast majority of the audience consisting of individuals who have experienced two or three similar downcycles, their hard-earned views have been based largely on actual experience rather than something learned in a classroom.

A case in point was the event’s keynote speaker, Noble Energy’s CEO Dave Stover, who came out fighting with an upbeat assessment of the current situation. Stover stressed that the key for Noble in the U.S. Gulf has been maintenance of a high exploration success rate, having competitive economics and an inventory that contains “a prize worth chasing.”

Resource visibility
Dire market conditions might have caused some to halt investment offshore, especially given the strong shale presence onshore. But according to Stover, “the resource visibility has probably never been greater.”

Technology improvements that paved the way for deeper drilling and seismic advances have given improved visibility to the region’s resource potential, he said. “We see an opportunity this year to get into some low-cost entry positions on things that probably wouldn’t have been available in other years,” he said.

Developments offshore might have taken a backseat to headline-grabbing onshore unconventional plays in the U.S. But the resurrection of the GoM quietly continues due in part to the region’s low aboveground risk, favorable fiscal terms and low breakevens. Investment research by Goldman Sachs of the top 420 oil projects worldwide revealed the breakeven for the GoM was as low as $40/bbl (as of May 2015).

“One of the keys that has continued to drive our involvement has been our track record of success and our exploration and discovery rate,” Stover said. “We’re bringing on about 20,000 bbl/d net in new projects. It’s going to give us great momentum as we end this year [2015] and into next.”

Shorter cycle times
Since entering the U.S. Gulf in 1968, Noble has grown its portfolio to 524,000 acres, now holding about 42 MMboe in proved reserves as of year-end 2014. Its eight producing fields fl owed more than 18,000 boe/d in 2014, but that recently increased when production—mostly oil—started at its operated Big Bend and Dantzler deepwater projects in late 2015. Stover highlighted the projects’ short cycle times and prolific rates as examples of how offshore projects can compete economically with unconventional plays.

The two fields in the Mississippi Canyon area, both tiebacks to the Thunder Hawk platform, are expected to add more than 40,000 boe/d, half of which is net to Noble. Big Bend went from discovery to production within three years, while Dantzler was quicker, in just two years.

“That’s how you compete economically,” Stover said. “You can still have very good margins in the Gulf compared to some other areas. The resource prize has to be there. There has to be a prize worth going for.”

Noble Energy’s operated Rio Grande development in the U.S. Gulf saw its Big Bend and Dantzler deepwater discoveries developed and come onstream in 2015 via subsea tiebacks to the Thunder Hawk floating production facility. (Source: SBM Offshore)

Deepwater success rate of 55%
According to Stover, the 10-year deepwater commercial success rate for the industry is 20%, while Noble’s is 55%. In 2016 the company’s focus will be on exploration and appraisal in the GoM, he added. “We’ll hit the ground running at the beginning of the year on a new exploration well, followed by our Katmai appraisal well later in the year,” he said.

Noble also hopes to have operations at its Gunfl int discovery, also in the Mississippi Canyon area, up and running by mid-2016. The subsalt Miocene find also will be a subsea tieback to the Gulfstar One facility. So far, the second development well has been sidetracked, and completion operations along with the installation of pipelines and subsea installations have begun.

Stover also said that opportunities for the industry generally in the GoM are represented by areas such as further advances in 20,000-psi technology to drill deeper wells in HP/HT reservoirs, the potential use of HIPPS (high-integrity pressure protection systems), which are prevalent globally but not in the U.S. Gulf, and—of course—standardization as a path toward reduced costs, cycle times and project delays.

Challenges it also faces, he added, include post-Macondo regulations, which need more proactive engagement with regulators, and the highly competitive environment in what is a mature basin.

2016 ‘in the trash can’
Another speaker, James K. Wicklund, managing director of Credit Suisse and oilfield services analyst, stated bluntly that 2016 “is already in the trash can. It’s going to be a terrible year” for oil and gas production, specifically offshore.

He pointed out that 2016 will be the first time since the 1980s that capex would be down two years in a row, and he could “only hope” that it does not extend into 2017 and 2018 for the offshore sector.

He likened the economic curve as being akin to a bathtub, with the industry currently sliding along the bottom. When it finally makes its way back up, offshore drilling will recover financially only after onshore drilling. Wicklund said onshore will recover before offshore due to its faster cash-return cycle, diverse activity base, and ease of logistics and infrastructure. Offshore will recover later because majors are currently delaying projects and spending and have a slower decision and logistics cycle.

But costs will come down, and returns will improve. “Deep water is the future, with lots of assets already identified and where the long-term, steady, stable future lies,” he said.

Those who claim they already know where the bottom of the market is going to be are being a little hubristic, he said, but added that the hope is that it will be balanced by 2017.

W&T Offshore’s CEO Tracy Krohn noted that, in the end, it is the operators who drive down costs because they are the ones who sanction projects or delay them. “You have to ask for that and speak louder,” he said. “It’s a simple formula: Oil and gas have dropped by 50%, so costs have to drop by 50%.”

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