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Outlook 2019: Uptick in global deepwater spending to boost Asia Pacific projects

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Outlook 2019: Uptick in global deepwater spending to boost Asia Pacific projects

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Singapore — An uptick in global deepwater spending could benefit projects in Asia Pacific in the form of lower exploration and production costs, as well as technological efficiencies, although low oil prices remain a cause for concern.

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Deepwater capital expenditure had nosedived since the oil price crash of 2014 and has not quite recovered due to the high level of breakeven prices required, but some oil companies maintained their interest in the sector and went ahead with big ticket projects anyway. Most believe the sector has bottomed out.

Total annual deepwater capex is expected to rise from around $50 billion currently to nearly $60 billion by 2022, driven mainly by projects in Guyana, Brazil and Mozambique, according to consulting firm Wood Mackenzie.

In Asia Pacific, deepwater exploration is supplemented by energy security considerations of national oil companies like Malaysia's Petronas and China's state-run CNOOC, whose capex decisions are slightly less dependent on oil price fluctuations.

The region desperately needs to boost oil and gas production, and deepwater exploration in domestic waters and equity stakes in international deepwater projects continue to draw interest. For instance, a big chunk of CNOOC's overseas growth is from deepwater assets in regions like Brazil and the US Gulf of Mexico.

"In our view, lower deepwater costs will benefit projects across the globe, including Asia-Pacific. The largest pre-FID projects in our region are located in Indonesia, Australia, Malaysia and India. And we are already seeing how lower costs is helping the operators of these fields make real progress," Wood Mackenzie's research director Angus Rodger said.

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ASIA PACIFIC DEEPWATER PROJECTS

In November 2018, Petronas introduced new fiscal terms for Malaysia deepwater production sharing contracts aimed at attracting more investment and opening up new exploration plays in Malaysia.

The new PSCs with modified cost recovery and profit sharing mechanisms are being offered for new deepwater licensing rounds. Petronas' existing deepwater projects include Gumusut-Kakap, Malikai and Kikeh in offshore Sabah, and two new deepwater developments in the Limbayong field in Sabah and the Kelidang Cluster in Brunei.

"In Indonesia, lower cost development plans for Chevron's Indonesia Deepwater Development are now being discussed, while Eni is fast-tracking its Merakes deepwater tieback in the same basin," Rodger said.

The Indonesia Deepwater Development comprises two natural gas deepwater projects in the Kutei Basin -- the Chevron-operated Bangka project that started production in 2016 and Gendalo-Gehem that is awaiting a final investment decision.

In April 2018, Eni announced the approval of the development plan for Merakes, which is estimated to hold about 2 tcf of gas in offshore East Kalimantan in Indonesia. In the same month, oil major BP announced plans to develop satellite clusters of deepwater gas fields in India, the second of three deepwater projects designed to bring 1 bcf/d of new production by 2022.

In Australia, Woodside Energy is developing the deepwater Scarborough gas field offshore Western Australia with a 7.3 tcf of gas potential. Last month, it entered the front-end engineering design stage for expanding Pluto LNG.

"The deepwater sector in Asia-Pacific therefore has a lot more diversity and life to it than any time I can remember over the last few years," Rodger said, adding that deepwater capex fell to an annual low of around $3 billion across the whole region in 2017 - with a similar level expected for 2018.

"[B]ut we expect it to pick up sharply and be closer to $9 billion/year through 2020 and 2021. This will not only lift deepwater production, but will be a real boost for a regional service sector that has been hit hard by the downturn," Rodger said.

COST CONSIDERATIONS

Deepwater production is set to decline in coming decades unless investment ramps up, especially with the reserve replacement ratio falling below 100%, according to Barclays estimates. The IEA estimates that deepwater accounted for around half of discovered oil and gas resources over the last ten years.

However, deepwater projects are also the first to face the axe, and not all the factors contributing to the current decline in costs will stick.

"For a variety of reasons oil companies are now saying that deepwater will not only compete but actually is more attractive than onshore developments in many cases. And some of them are saying these are fundamental long term structural changes," David Boggs, managing director of consulting firm Energy Maritime Associates, said at an energy conference in December.

However, he also acknowledged skepticism as some of the costs are already increasing. For instance, a lot of the cost reductions came from drilling rates falling by 50% but going forward, looking at 2020 and beyond, drilling rates are expected to double, Boggs said.

"We assume new contracts on ultra-deepwater rigs will be in the $200,000 to $225,000 per day range, on average, in 2019, increasing to about $250,000 per day in 2020, with some variation depending on the rig quality and location," according to S&P Global Ratings.

-- Eric Yep, eric.yep@spglobal.com

-- Edited by Norazlina Jumaat, newsdesk@spglobal.com