Crude oil prices are back to pre-epidemic levels, and while there are still concerns about the outlook for oil demand, at least optimism is back.
Now, there are many factors supporting the bullish belief, such as a strong rebound in demand after economic recovery and Opec’s move to cut production. Beyond that, however, there is one dynamic you might miss – the offshore oil market is recovering.
Exxonmobil recently discovered a new oil field off the east coast of South America. The news set off a heated debate among crude oil investors.
Offshore oil drilling was one of the areas most affected by the collapse in oil prices in 2014-15, when offshore drilling companies went bankrupt, exploration projects were shelved and staff were laid off. But oil companies then turned to other methods, such as developing techniques to improve drilling efficiency, which greatly reduced the cost of offshore oil production.
Five years after the oil price crash, offshore drilling is still very active and cheaper than ever, even though the collapse in oil demand has hit rig owners hard.
According to Rystad Energy, the break-even cost of offshore oil fell by about 30 per cent between 2014 and 2018 and is now below the average break-even cost of US shale oil. Offshore oil is indeed becoming cheaper to extract than shale.
International oil majors are taking advantage of this trend. Exxonmobil last week discovered oil and gas offshore in Guyana’s Suriname basin, along with Petronas of Malaysia.
Exxonmobil also announced that it would list exploration in Guyana as one of its future priorities, along with exploration and chemicals in the US shale oil industry and Brazil. This reprioritisation makes sense in the midst of the worst oil price crisis in history, because it implies that the industry is now focused on the parts of the business that really make the most money, such as offshore exploration.
Exxonmobil is not the only company making a big bet on offshore exploration in this outbreak. Petrobras said last month that it was planning to focus on deepwater oil exploration and production over the next five years and announced lower spending plans for that period.
The Brazilian oil giant said in a filing that it would spend $55 billion over the next five years, down 27 percent in 2019. Of this, 84 per cent will be used for offshore oil exploration and production, much of it in pre-salt reservoirs that are estimated to hold billions of barrels of undiscovered oil.
In addition, Petrobras plans to expand into Guyana. The plan is at a tentative stage, either because of regulatory hurdles in Brazil. However, Guyana shares its offshore geology with northern Brazil, and Brazil will not ignore its offshore oil potential. Roberto Castello Blanco, Petrobras’s chief executive, was quoted by Reuters as saying recently:
“We have huge oil potential [in northern Brazil] but we are shut out. At the same time, Guyana is taking advantage of the situation.”
Meanwhile, in the North Sea, Equinor’s Johan Sverdrup field is producing more than 400, 000 b/d, approaching 500, 000 b/d as of last month, in spite of falling demand. The Norwegian company has also ramped up production at the Snorre field, adding 200 million barrels of recoverable reserves and extending the field’s life until 2040.
The United States is also encouraging more offshore drilling, which Oilprice reports will continue for at least another month until a new administration is in place. The Bureau of Safety and Environmental Enforcement said earlier this month that it would give lower royalties to operators of offshore oil fields that invest in increasing their asset capacity, in an effort to maximise the capacity of those fields.
Offshore oil has historically been one of the most expensive sectors of oil production, but it makes up for this with a long life of productive assets. However, the cost trend for oil and gas has been falling, as has offshore oil. According to Rystad Energy, deepwater oil is by far the world’s second-cheapest oil, after onshore oil from the Middle East. Middle East onshore oil breaks even at about $30 a barrel, while deepwater oil breaks even at an average of $43 a barrel.
This is actually good news, because most of the world’s untapped oil reserves are offshore.
Despite the gloomy demand forecasts, many believe the world will still need tens of millions of barrels of oil in the coming decades, many of which will come from offshore fields.
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