Offshore in depth

ConocoPhillips’ announcement, that it was phasing out its deepwater exploration program, was a clear signal that the slump in crude prices is not only affecting budgets, but it also has forced operators to re-examine their core strategies.

ConocoPhillips’ retreat. Recall that in 2012, when oil prices were high and still climbing, ConocoPhillips (CoP) shed its downstream businesses, forming Phillips 66, to concentrate on E&P activities, while positioning itself as the world’s largest independent with the scope of an IOC. With oil prices below $40/bbl, CoP’s management now has devised a flexible, short-horizon strategy that is closer to an independent’s business model than one designed for a major oil company.

With the expectation of continued low oil prices, CoP reduced its capital spending $7 billion during 2015, or 55% from 2014’s level. The company is redirecting its capital expenditures to find and develop reserves that can be produced for less than $60/bbl of Brent crude-equivalent. This means that the company will make a decisive shift away from expensive, long-term deepwater projects toward North American unconventional plays.

And, like other operators, CoP has “moved quickly to capture deflation,” or to put it plainly, they have been successful at obtaining substantial price concessions from contractors and service companies. CoP also has established a supply chain policy that calls for short-term contracts that enable the operator to negotiate even lower rates in subsequent rounds, should commodity prices remain depressed. This approach is best-suited to nimble onshore operators.

Despite its intended withdrawal from deepwater exploration activity, CoP will spend $400 million in 2016 on deepwater projects that are already underway. After 2016, CoP expects its phase-out from deepwater exploration to free up $800 million/year in capital to pursue lower-cost alternative prospects.

Anadarko’s commitment. In contrast, Anadarko, another large independent, appears to have made a long-term commitment to deepwater E&P, complementing its strong position in North American unconventional plays. Anadarko has been a successful deepwater operator in the Gulf of Mexico (GOM), with seven floating facilities in operation, leading technology in the Independence Hub, and project management and engineering skills that have shortened project timelines for the Lucius and Heidelberg developments. Anadarko also is continuing its appraisal efforts in the Shenandoah basin.

Anadarko’s international deepwater activities include three major projects off Ghana and its gas activity off Mozambique. As of fourth-quarter 2015, Anadarko had five deepwater drillships under contract.

Shell’s competitive advantage. Major IOCs, with large financial reserves and extensive asset portfolios, continue to pursue deepwater strategies, while optimizing development costs and “high-grading” projects to focus capital on work with the highest potential returns. Shell, a perennial leader in the deepwater GOM, has the distinct, competitive advantage of being able to tie back new deepwater discoveries to existing infrastructure.

Responding to lower prices, Shell has revised project plans and achieved “supply chain savings” on its Stones subsea/FPSO development to reduce capex by $1 billion, compared to the original financial investment decision (FID). In July 2015, Shell made the FID on its Appomattox project, after reducing its budget 20% through optimization and contract negotiation. As part of its project re-evaluation process, Shell is reviewing the FEED for the Vito and Powernap discoveries off Louisiana.

Shell also confirmed a major deepwater discovery at Kaikias, near its Ursa and Mars developments, adding 100 MMboe of recoverable reserves. Discovery and appraisal wells were drilled for 80% of budgeted costs.

Shell’s Cardamom field, which went onstream in 2014, produces to the Auger platform, extending its useful life.

Shell also expects its planned acquisition of the BG Group to enhance its position as a leader in the LNG and deepwater sectors. With BG’s Brazilian deepwater assets in the Lula, Lapa and Replicant Blocks, Shell can extend its footprint beyond its BC-10 development.

Petrobras’ dilemma. While Shell’s diverse asset portfolio includes some deepwater blocks in Brazil, Petrobras’ business is primarily dependent on high-cost production in its domestic offshore fields. Pressured by low oil prices and ongoing corruption scandals, Petrobras has been forced to reduce its activity and lower its expectations for the future. The NOC cut its E&P budget more than 20% in 2015. Petrobras’ domestic rig count has declined from a peak of 74 rigs in 2012 to 47 during first-half 2015. Petrobras drilled only one pre-salt exploration well during the first half of 2015.

In its revised business plan for 2015-2019, Petrobras indicated that it will delay six offshore projects for one year, two projects for two and three years, respectively, and push back 10 planned offshore projects beyond 2020. Consequently, Petrobras has revised downward its oil and NGL production forecasts substantially, compared to estimates from its 2014-2018 master business plan. Production estimates for 2015 were dropped to 2.1 MMbopd from 2.4 MMbopd in the 2014 plan. More significantly, project delays announced in 2015 lowered Petrobras’ 2020 production forecast 33%.

Balancing short and long term. Deepwater E&P remains a key component of the strategies of IOCs, like Chevron, Total, Exxon Mobil and BP, which all are scrutinizing their project portfolios and aggressively reducing costs. However, one consistent theme is that lower oil prices have required operators to balance achievement of short-term profitability with building long-term pipelines of viable projects.  

About the Authors

Ron Bitto

Contributing Editor

Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM