Shale gets the headlines today, but as oil and gas companies look for growth opportunities, offshore investments can offer higher returns over the long term.
When crude prices collapsed in 2014, many domestic exploration and production (E&P) companies – out of necessity – shifted their focus to shale production, where lower capital requirements and new drilling processes made it possible to stay profitable at US$40 to US$60 a barrel. Since then, most offshore development has been limited to shallow-water formations or tieback investments.
But there is reason to believe a return to offshore exploration can be a valuable strategy for oil and gas companies interested in higher-risk and higher-return projects.
Watch for rebound signs
The rebirth of the offshore sector may be closer than we think. Revitalized interest in offshore has been quietly developing among oil and gas companies, even while shale has dominated their current focus. Driven by the need for baseline production growth and refining demand for heavier crude, companies will likely begin moving more aggressively to lock down new offshore plays – especially since the long-term viability of successful offshore projects delivers more attractive returns than shale over the life of a field.
The rebound will be marked by two primary signs: first, demand outpacing supply; and second, a reduction in costs, making offshore projects more attractive.
Overall, we expect a steady increase in offshore development over the next two to three years. Shale will remain a dominant play, but offshore will become increasingly important to many companies’ portfolios.
How will offshore change?
It won’t be “business as usual” for a newly energized offshore industry, however. Look for:
- Expanding areas of geographic focus.
Offshore auctions in both Mexico and Brazil have been successful recently, and the Mediterranean (especially off the coast of Egypt and Israel) is attractive as a natural gas play to supply Europe.
- New approaches to oilfield services’ operating models.
Continued improvement in the way service companies design and implement their offerings is a necessity to enhance efficiency and reduce costs. Technology advances, the creation of larger, more focused service firms and fully integrated service packages will help make offshore more viable.
- A rise in robotics.
Digital labor will automate many routine tasks and free employees to focus on improving efficiencies and other value-added activities. Digital is expected to be a big driver of offshore profitability; at the recent Baker Institute Global Energy Summit, one speaker suggested deepwater drilling costs could be halved by new technologies, such as digital monitoring of equipment. But E&P companies must embrace implementation across the enterprise, rather than attempt piecemeal rollouts in select back-office functions.
- Modern skill sets for employees.
As digital becomes more commonplace, smart operators will recognize a more collaborative organizational structure is possible, and that employees in many functions will require new skills and mindsets. It won’t be enough to simply install software and equipment; companies will need to rethink and restructure how they approach E&P from start to finish.
- Project decisions driven, in part, by environmental and climate change considerations.
Offshore investments necessitate a long-term view, and companies will increasingly incorporate regulatory risks related to climate change into their cost/benefit calculations, especially with regard to “difficult to reach” oil.