The offshore oil industry faces an uncertain future amid low oil prices and tepid interest in costly new projects.
After oil prices collapsed in 2014, many oil companies held off on new greenfield offshore oil projects, and the majors began to pivot to short-cycle U.S. shale as a way of hedging against volatile oil prices. Shale profits have largely failed to materialize, and as U.S. shale begins to slow, there has been somewhat of a revival in offshore interest. Looking out further, however, new investment could grind to a halt as the industry faces the prospect of decline.
Peak offshore?
A recent report from Sanford C. Bernstein said that beyond the production gains from projects currently in the works, there will be very little growth in the offshore sector at all. Bernstein says that peak offshore supply could arrive as soon as 2020. To be sure, the analysis said that this offered investors a unique opportunity in which spending cutbacks are coupled with rising oil prices because of the supply shortfall.
Bernstein says that peak offshore supply could arrive as soon as 2020.
A series of reports from Oslo-based Rystad Energy are not quite as pessimistic regarding the fortunes of the offshore sector, but still point to problems ahead. The market growth rate for companies servicing the offshore industry is expected to fall by half after 2022, the firm said earlier this year. Much depends on OPEC’s willingness to continue to sideline production and balance the market. “If the group decides to rein in production to protect commodity prices, momentum in the offshore market could continue. If not, the offshore renaissance party seems destined to come to an end in 2022,” Audun Martinsen, Head of Oilfield Service Research at Rystad, said in May 2019.
Separately, Rystad found that the wave of offshore oil projects that were sanctioned between 2010 and 2014 could be “valueless.” The investment came at a time when oil prices often traded above $100 per barrel, even as many of them were not completed until well after the 2014 downturn. Rystad said that offshore oil projects given the greenlight between 2013 and 2014 are expected “to have no value creation,” while the projects that moved forward between 2010 and 2013 “have barely been able to generate any value for E&P companies.”
“From 2010 through 2014 around 3,000 new oil fields were sanctioned, and we estimate that around 800 of them did not create value,” Espen Erlingsen, Rystad’s Head of Upstream Research said in October.
The more recent wave of investment – those that were sanctioned after 2014 and, thus, were based around a much weaker set of price calculations – should turn out in better shape. Costs are lower, and the industry is more careful about giving a final investment decision to multi-year offshore projects.
Peak demand
Ultimately, however, interest in oil projects with time horizons that span decades is on the wane – and with good reason. While the oil market has reliably lurched from boom to bust and back again throughout its history, the future is more uncertain than ever. The market won’t hit peak offshore production because of a shortage of reserves, but because of uncertainty about demand and long-term prices. “The pipeline of things that have been discovered just won’t get sanctioned,” Bob Brackett of Sanford Bernstein told Bloomberg.
While the oil market has reliably lurched from boom to bust and back again throughout its history, the future is more uncertain than ever.
Even the International Energy Agency (IEA) says that oil demand will plateau in the 2030s, and the agency has a track record of underpredicting the rise of renewable energy. If the IEA sees peak oil demand ahead, then oil executives are probably taking the threat pretty seriously.
The recent flop in a highly-hyped and widely-anticipated offshore oil auction in Brazil is a testament to the lack of interest from the industry. While many blamed the unattractive terms put in place by the Brazilian government, the risk of betting on long-term projects with Brent stuck in the low-$60s was likely also at play.
The oil majors are currently shopping an array of offshore assets, hoping to divest from over $27 billion combined, according to Rystad. “While oil and gas majors increase their focus on core areas and divest mature assets and interests in geopolitically unstable regions, observers will be following closely to see how investors react and what other steps these energy giants will take to keep stakeholders interested amid rising climate concerns and geopolitical volatility,” Ranjan Saxena, an analyst on Rystad Energy’s upstream team, said.
Another analysis from Rystad Energy found that the expected utilization rate of offshore drillships over the next 12 months is at a record low. If a company wanted to sign a contract for a drillship 12 months out, the company could “pick and choose from about half of the global fleet,” Rystad said. In 2008, there were no drillships available for a similar 12-month period. In a reflection of the problems that lie ahead, the stock prices for the largest 9 drilling companies have fallen sharply this year.
In other words, even in the medium-term, the interest in offshore drilling is looking shaky.
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