The offshore sector will increasingly focus on natural gas instead of oil over the next few decades, while policy support and technology improvements could also see offshore investment shift in favor of wind power. However, in the short run, offshore drilling is set for a resurgence.
The oil market downturn in 2014 hit offshore drilling hard. Developing an oil field offshore is a huge, complex, expensive and long-term undertaking, a proposition that fell out of favor when oil prices crashed. By comparison, shale drilling is relatively cheap and short-term and over the last few years, capital flowed out of the offshore sector and into the shale patch. Even the oil majors pivoted towards small, short-cycle shale drilling.
Today, a quarter of the world’s oil supply comes from offshore at about 26-27 mb/d, a figure that has remained steady over the past decade, which translates into a declining share of the overall market as total supply continues to grow.
But offshore costs have declined significantly over the past four years, so much so that the industry is starting to step up spending once again. Whereas a typical offshore project in the North Sea or in the U.S. Gulf of Mexico had a breakeven price between $60 and $80 per barrel prior to 2014, these days those costs have plunged to $25 to $40 per barrel, according to a new report from the International Energy Agency.
“Designs are being simplified, standardized and (in some cases) downsized, and a large overhang in the market for offshore services and equipment is also helping to exert downward pressure on costs – although this could be reversed as activity levels pick up,” the IEA wrote in its report.
An estimated 100 offshore projects could receive a greenlight this year, according to Rystad Energy, up from just 60 last year and 40 in 2016. “The offshore suppliers have created their own comeback,” Audun Martinsen, VP of Oilfield Service Research at Rystad Energy, said in a statement. “Their constant search for cost reductions and streamlining of operations has enabled them to cut offshore project costs by almost 50% compared to the heights of the last cycle.”
But even as offshore makes a comeback, the makeup of the sector is set for dramatic change in the years ahead. Oil companies are going to shift away from shallow water drilling, which tends to be mature, and move into deeper waters.
Meanwhile, companies will also increasingly target natural gas production instead of oil. Offshore wind is also set to grow dramatically, although the pace of growth depends quite a bit on the extent to which governments push policy in the direction of low-carbon energy.
The IEA lays out two scenarios, which it dubs the “New Policies Scenario” and the “Sustainable Development Scenario.” The former is a more business-as-usual approach, although it incorporates technology innovation and some policies that have already been announced. The Sustainable Development Scenario encompasses a much more dramatic energy transition, as it assumes policies go into effect to reach the goals in the Paris Climate Agreement.
In both scenarios, natural gas takes on a greater role in the offshore sector, and wind power also makes gains. But in a business-as-usual future, offshore oil production remains relatively unchanged through 2040, and oil demand does not peak before then. U.S. shale levels off in the 2020s, and because the world will still need new supply, particularly to offset mature oil fields, the offshore sector will be called upon. Because offshore production is generally higher cost, “the marginal project required to balance the market in the New Policies Scenario becomes steadily more expensive, despite the assumption of continued technological progress,” the IEA said.
Most activity will be concentrated in a relative few number of places. “Brazil remains the global leader in deepwater production; Mexico also sees rapid growth as a result of successful bidding rounds since 2016, alongside the United States, African producers and some new players including Guyana and Suriname,” the IEA said.
Natural gas takes on a larger share, with gas demand set to rise and questions surrounding long-term oil demand. Most of the new production will come from the Middle East and offshore Tanzania and Mozambique.
Still, there is a tidal wave of decommissioning looming. The IEA says that between 2,500 and 3,000 offshore oil and gas projects will have to be decommissioned through 2040.
Offshore wind generation surges ten-fold through 2040 even in the more cautious scenario, pushed along by supportive policies in the EU and China, among other places. Technology is also improving rapidly, with the height of turbines doubling from 2010 to 2016 to over 200 meters. The IEA notes that a 12-megawatt turbine design is now in development. Floating turbines are also now getting underway.
The scaling up of wind generation, moving further offshore and into more attractive areas, is allowing for more generation at a lower cost. Those trends will continue. Offshore wind is currently 150 percent more expensive than onshore wind, but those costs will continue to fall.
However, in the IEA’s Sustainable Development Scenario, a much more dramatic transformation takes hold. Wind captures a third of total offshore investment by the 2030s, pulling equal to offshore oil and gas. Wind power rises from 14 gigawatts (GW) today to 160 GW in the New Policies Scenario in 2040, but it rises to 350 GW in the Sustainable Development Scenario. But even here the IEA offers a rather conservative estimate – offshore wind only accounts for 4 percent of global electricity generation by 2040 in that scenario.
Oil production remains flat at 27 mb/d in 2040 in the New Policies Scenario, but dips to 20 mb/d in the Sustainable Development Scenario as oil demand peaks and falls, which results in permanently lower oil prices.
