According to Wood Mackenzie, the deepwater industry seems in a good condition, after a cost reduction through the downturn. However, this positive situation could change because upcoming cyclical cost inflation could increase break-even costs.
The cost of developing new deepwater barrels is less by 50% since 2013. The most important steps deepwater operators have taken to achieve lower costs include:
- Downsizing projects;
- More focus on subsea tiebacks and brownfield developments over greenfield;
- Less project lead times;
- Less well counts;
- More phasing of larger developments;
- Faster well completions;
- Better project execution;
- Lower rig/service sector costs.
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In addition, better project execution has also decreased overspend and enhanced returns. In fact, the average deepwater project sanctioned between 2014 and 2016 has started-up about 5% under budget, in comparison to the projects from 2006 to 2013, when cost overruns between 10 and 15% were the norm.
Moreover, overall annual deepwater capital expenditure (CAPEX) will increase from US$50 billion to almost US$60 billion by 2022. Projects in Guyana, Brazil and Mozambique will be the main factors of this increase.
Nevertheless, this increase in spend and activities will lead to a return to cyclical cost inflation. With total deepwater rig capacity expected to decrease in the future, rig day rates could double by the beginning of 2020s.
Research director Angus Rodger commented:
The question now is how much of the ‘structural’ cost savings we have seen through the downturn will prove sustainable through the investment cycle, and which are just short-term company adaptions
