Lower commodity prices will continue to hobble deepwater investment as the world’s conventional fields decline, adding to the possibility of an overall drop in supply. This, in turn, could propel a recovery in both oil prices and offshore activity, because global energy demand is expected to rise. And production from the U.S. Gulf of Mexico will be critical for the offshore sector’s supply recovery.

“We all know that the oil price drop and the volatility that we are seeing have created significant uncertainty. We do, however, see signs of stabilization,” said Adrian Dorsch, senior associate for Infield Systems Ltd. He spoke at Hart Energy’s Gulf of Mexico Offshore Executive Conference held in Houston in late November.

“We see a reduction in oversupply, and also depleting assets not being replaced. This leads the potential for stabilization in 2016,” he said.

Global energy consumption is expected to grow, possibly reaching a five-year high of 1.7 million barrels per day (MMbbl/d) of growth in 2015 before dipping in 2016, he added.

Meanwhile, however, with the downturn lingering, E&Ps are braced for another round of capex cuts.

“The impact of persistently low oil prices has been felt throughout the offshore supply chain,” Dorsch said in his presentation. “Global offshore EPIC capex is anticipated to have fallen by 9% from $91 billion in 2014 to $83 billion in 2015, followed by a further decline to $78 billion in 2016.”

Capex dollars in the Gulf are expected to strengthen by 2017-2018 and onward.

The state of the offshore sector is also evident in the number of subsea tree orders, considered a barometer of the industry’s health. Tree orders for the GoM, for example, have plummeted from 85 in 2014 to 36 this year. Infield Systems projects the number will recover by 2017. Worldwide, about 2,500 subsea trees are expected to be awarded between 2016 and 2020, with growth mainly attributed to large developments offshore Africa and Brazil.

The GoM competes

Operations in the U.S. GoM have had to compete for capex against the onshore shale gas and oil plays.

“At an average sanction cost of around $35 per barrel, the offshore industry remains competitive compared with unconventional resources,” Dorsch said. “Some unconventional developments, such as the oil sands in Canada and extra heavy oil in Venezuela, are expected to be uneconomic under $80 per barrel.”

Today, most operators are focused on working existing fields to maintain margins, he said, or bidding at high prices on fields with low geographic risk and known reserves. Deepwater GoM acreage, in particular, is sensitive to lower oil prices due to its more complex economics.

And when the recovery arrives, Infield Systems believes it’ll be led by deepwater activity.

Looking at the field economics of global projects in the pipeline, Dorsch said there is potential to surpass by 20% activity seen in the last five years.

Given the expected recovery in oil prices and companies’ cost-cutting efforts, “We do believe the Gulf of Mexico will be critical for the deepwater industry going forward,” Dorsch said. But its recovery “depends on a stabilization of oil prices probably happening in 2016, potentially in 2017.”

Interest in the ultra-deepwater was sharper in recent years.

Offshore elsewhere

Other regions have offshore potential, too, but capex plans, regulations and the pace of recovery are factors everywhere.

“We do believe Mexico has the potential to provide a stable level of demand going forward, but it’s not going to be astronomic growth in the next five years,” Dorsch said.

Mexico’s second bidding round attracted more bids than its first. Nine companies vied for the lease to one block, while another block attracted five bidders. In all, three blocks were awarded in September, but the remaining two had no takers. At the July 15 auction, only two of 14 blocks offered were awarded.

Interest is expected to be greater when Mexico offers deepwater acreage. But industry experts warn further adjustments to terms may be needed.

“Improvements in the fiscal regime will have a positive effect,” Dorsch said.

Capex plans will also affect activity. Dorsch pointed out that Pemex has cut capex by 12% to $23.5 billon.

Revised spending plans are altering the outlook for Brazil, a key region for ultra-deepwater activity. Petrobras plans to lower its spending by 35% through 2018, he said, with further reductions possible.

Prospects offshore Iran may spark interest from some oil and gas companies, but near-term capex is likely to be subdued due to weak project sanctioning since 2012, according to Dorsch. Iran’s focus will initially be on starting defunct oil fields once sanctions are lifted. But “this country will be a critical demand player in the next decade,” he said.

Noble Energy Inc.’s strategy in the U.S. GoM involves maintaining a high exploration success rate and competitive economics, while having an inventory with a prize worth chasing, according to CEO David Stover.

Noble’s take

Managing a global oil and gas company active offshore without knowing when commodity prices will rebound or how global instability will impact business isn’t easy. The strategies for Noble Energy Inc. in the U.S. GoM have been to maintain a high exploration success rate, competitive economics, and an inventory with a prize worth chasing, Noble CEO David Stover said at the conference.

Stover’s words came as depressed commodity prices were forcing E&Ps to pay closer attention to costs and seek out technologies capable of improving efficiencies and growing production. Dire market conditions have caused some companies to consider halting investment offshore entirely, especially if they have a strong shale presence onshore.

But “the resource visibility has probably never been greater,” Stover said of the GoM, thanks to technology and seismic advancements.

“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,” Stover said. Noble has essentially two business lines—onshore, in the U.S. shale plays, and in the deepwater.

Developments offshore might have taken a backseat to the headline-grabbing onshore unconventional plays, but GoM drilling is quietly continuing, due in part to the region’s low aboveground risk, favorable fiscal terms and low breakevens. Investment research by Goldman Sachs into 420 oil projects revealed breakevens for the U.S. Gulf as low as $40, although those numbers were 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 barrels a day net in new projects. It’s going to give us great momentum as we end this year and into next year.”

Since entering the U.S. GoM in 1968, when Noble acquired a single offshore block, the company has grown its Gulf portfolio to 524,000 acres. The company had about 42 million barrels of oil equivalent (MMboe) in proved reserves as of year-end 2014.

Noble’s eight producing fields yielded more than 18,000 boe/d in 2014, but that number recently increased when production—mostly oil—started at the Noble-operated Big Bend and Dantzler deepwater projects. Stover discussed the projects’ short cycle times and prolific rates as an example of how offshore projects can compete economically with the unconventional plays.

The Mississippi Canyon fields, both subsea tiebacks to the Thunder Hawk platform, are expected to add more than 40,000 boe/d, half of which is net to Noble. The Big Bend development went from discovery to production within three years. The Dantzler project moved even more quickly, from discovery to production in two years.

“That’s how you compete economically,” Stover said.

The feat is something Noble aims to replicate with each of its projects.

Attracting capital to the GoM requires a sizable resource prize, a stable regulatory environment and competitive economics, he said. The latter necessitates lowering cycle times, improving cost structures and having strong cash operating margins. Additionally, Stover said, existing infrastructure helps the economics. And drilling, deepwater facility and pipeline costs have all declined.

“You can still have very good margins in the Gulf compared to some other areas,” Stover said. But “the resource prize has to be there. … There has to be a prize worth going for.”

Original reserves of the GoM Outer Continental Shelf’s 1,300 oil and gas fields were estimated in 2013 at 22.19 Bbbl of oil and 193 trillion cubic feet (Tcf) of gas, according to the U.S. Bureau of Ocean Energy Management.

Data from Wood Mackenzie indicate that production continues to grow in the deepwater Gulf despite falling rig counts. Liquids production rose from about 1.4 MMbbl/d of oil in 2014 to about 1.5 MMbbl/d by August 2015, while the average rig count has dropped 32% since 2014.

The 10-year deepwater commercial success rate for the industry is 20%. Noble’s is 55%.

In 2016, the company’s focus will be on exploration and appraisal in the Gulf, Stover said. “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.”

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

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