Deep-Water Drilling is Challenging Shale.
The shale boom in the US has jolted the oil industry and has brought about major change in deep-water oil exploration initiatives as production companies started moving to downscale these major operations. Angus Rodger, upstream oil and gas research director at Wood Mackenzie believes that it's more to do with a change in mind-set than actual innovation that is fuelling this shift. The cost of deep-water projects is being reduced by making them smaller and by improving well designs. This means that although fewer barrels are produced, profit margins are maintained.
Leaner and Meaner
Projects in the Gulf of Mexico are setting the precedent for the rest of the oil drilling world and are fast becoming leaders in the field of this leaner approach. The break-even is anticipated to move to under US$50 a barrel of oil equivalent, down from over US$70. Since shale oil is currently priced at approximately US$50 per barrel, this means that soon these prices could give shale oil some serious competition despite OPEC and non-OPEC production companies working on output restrictions. Oil prices drastically increased when the restrictions were put into place in November 2016. It got to as much as 20% higher than the average of US$50 a barrel. This year so far has seen it dropping again to below the US$50 mark at as little as US$48 per barrel. Conversely, Brent crude oil fell to just over US$50 a barrel in March 2017. According to Rystad Energy consultancy, the break-even price for shale production companies in the US is averaging at around US$35 per barrel. It would seem that the playing field is finally starting to level.
It's a Game for the Big Boys
Three big deep-water projects have thus far been approved for 2017 – Mad Dog Phase 2, Leviathan and Kaikias. As many as eight projects in total are anticipated for the year – the same number as 2015 and 2016 combined. What's more is that the industry giants like Total, Statoil and BP are once again showing interest in this resource class. BP has conducted transactions in Egypt and Senegal and Total and Statoil are exploring the Brazilian market. Because project timelines are longer and investment capital is significantly larger it is expected that companies like this will dominate the deep-water arena, while smaller players have just about abandoned the space to invest in shale instead.
The Future of Oil
Matt Smith, commodity research director for ClipperData is suggesting that what is happening now is that a foundation for the future of oil is being laid. Although crude inventories in the US have significantly risen to 55 million barrels so far in 2017, it is probably just a trend of the season and will likely level off in the next month or so. But, in a world constrained by a lack of capital, fewer operators will result in fewer deep-water drilling projects being sanctioned. Only the leanest projects are expected to attract investment.