The oil industry's response to the collapse in prices has been to cut back Capex significantly. But the vast divergence between deepwater and tight oil production profiles, producer attitudes and payback periods means it is the former that is bearing the brunt of the cutbacks.
Today, around 6 mb/d is produced from deep and ultra-deep waters, or about 6.5% of global liquids production. This is set to rise to 10% by 2035. However, costs have yet to fall significantly and so current price levels are hurting. Several projects have already been delayed and oil majors are postponing final investment decisions for many more. Indeed, Conoco has decided to cut deepwater exploration spending in the Gulf of Mexico. Of the near 3 mb/d of global upstream projects delayed so far, nearly 78% is deepwater.
We compared the economics and production profiles of ultra-deepwater and tight oil wells. Costs for these two unconventional sources appear to be at the opposite end of the spectrum. Deepwater can see initial investments running into the billions, while a tight oil well can be drilled for less than ten million. So, even though our model indicates that over the long run, the return seen on a deepwater well is twice that of a tight oil well, committing to billions of dollars in today's price environment and based on today's weak forward curve is challenging.
So far, the hardest hit country has been Brazil, where state operator Petrobras is faced with lower oil prices, an escalating debt load and a corruption scandal. The result was a $50 billion reduction in spending and 2020 oil production forecasts being reduced by 1.4 mb/d.
The US Gulf of Mexico also faces steep challenges. The ‘easy' and ‘economic' deposits have already been developed. Our production profile indicates that 2018 output will decline by 0.23 mb/d. The outlook beyond 2018 will be dictated by future oil prices, although the deferral of investment decisions bodes ill for future prospects.
The final vertex in the deepwater golden triangle, West Africa, is made up of Angola and Nigeria. In the former, 1.2 mb/d of capacity coming online will yield a 0.38 mb/d increase over the next few years, as major projects have already been sanctioned. However, beyond this, the line-up is weak. The initial enthusiasm around the Angolan pre-salt has waned substantially, as poor exploration results and challenging geology have deterred further investment.
Finally, Nigeria, the smallest deepwater producer analysed in this report, will see deepwater production stagnate at 0.75 mb/d, as structural, technical and economic challenges prevent reserves being developed at the pace required to offset natural declines.
So, come 2017, as the effects of high investment in a $100 environment begin to fade and Capex cuts being implemented now start to bite, deepwater production will begin to fall. The reserves and long term returns on deepwater are still far more attractive and low EUR per well makes tight oil far more capital intensive and a free cash-flow negative business. But what works for tight oil is the producers are far more nimble and quick to react. So, the uncertainty of future oil prices and the lack of flexibility of IOCs mean deepwater production from the Golden Triangle is likely to plateau and potentially even fall briefly around 2017 and 2018.