WoodMac: Deepwater oil & gas production on the rise steered by small number of players

As deepwater oil and gas production is set to increase by 60 per cent by the end of the decade, Wood Mackenzie, an energy intelligence group, has outlined in its global upstream report the drivers of deepwater’s rapid growth, along with the challenges and opportunities the sector offers and faces.

Wood Mackenzie disclosed last week that deepwater was the fastest-growing upstream oil and gas resource theme with production anticipated to hit 10.4 million boe/d in 2022 from just 300,000 barrels of oil equivalent per day (boe/d) in 1990. By the end of the decade, that figure is expected to pass 17 million boe/d.

According to the energy intelligence provider’s report, deepwater production is set to increase by over 60 per cent between 2022 and 2030, growing from 6 per cent to 8 per cent of overall upstream production. By 2024, ultra-deepwater production – from depths of 1,500 metres and above, which Wood Mackenzie says is growing the fastest –will account for more than half of all deepwater production (400 metres of water depth or above).

Furthermore, Brazil remains “the leading deepwater producer,” accounting for around 30 per cent of current global capacity and will continue to grow. On the other hand, Guyana, as “the most significant new entrant,” will be producing one million boe/d within the next five years. In addition, 14 other countries will contribute to the deepwater supply mix in the coming years, as underscored by the energy intelligence group.

Despite the diversification of sources and corporate participants, Wood Mackenzie highlights that the control over major deepwater projects sits in the hands of relatively few companies, which are seen as “key players.” This is illustrated by the fact that eight companies – Petrobras, Shell, ExxonMobil, TotalEnergies, Chevron, ConocoPhillips, BP, and Eni – account for 65 per cent of deepwater production and 67 per cent of the remaining project value.

In line with this, Brazil’s Petrobras and these seven oil majors dominate deepwater production, operating 22 of the top 25 deepwater assets. The Brazilian giant’s deepwater portfolio is around twice as big as the one owned by Shell, which stands out among the oil majors for leading production and cash flow. Additionally, ExxonMobil and TotalEnergies show the highest rates of growth this decade.

Wood Mackenzie further explains that typically, “only the best subsurface plays” become commercial in these water depths, thus, deepwater basins tend to be “hyper-productive, recovering huge volumes” of oil and gas from each well. This translates into “high economic returns” and low Scope 1 and 2 emissions intensities relative to most other oil and gas resource themes.

However, the energy intelligence player points out that there is still room for emissions improvement, demonstrated by the oil majors’ focus on cutting deepwater emissions by reducing flaring and methane leaks, optimising operations at existing platforms and, where possible, facility electrification. Due to Brazil’s scale, it is “the highest absolute emitter” and its performance is contingent on Petrobras’ decarbonisation aspirations.

While there is “a robust” pre-FID project pipeline, offering plenty of investment opportunities across a range of jurisdictions, average investment returns in Wood Mackenzie’s global database of deepwater development projects are 24 per cent, at $60/bbl Brent, but the bookends are far apart. The firm elaborates that the best returns are generated by smaller oil fields which can be tied back to nearby infrastructure while the lowest come from long lead time gas supply projects.

Moreover, service companies have made “huge fleet reductions for key equipment” such as floating rigs and production systems, since the peak in the 2010s. As a result, equipment and service availability will be a constraint as activity levels keep growing.

Meanwhile, cost inflation will continue to risk project economics as higher utilisation combines with higher commodity prices. Thanks to this, deepwater rig costs have doubled in some regions compared to 2021 day rates. This has hit hotspots like the U.S. Gulf of Mexico and Brazil even more strongly. In line with this, the Gato do Mato project in the Brazilian pre-salt will be delayed by up to two years due to rising costs.

Wood Mackenzie emphasises that global deepwater supply chain constraints will increase lead times and unit costs across the board. While participants have pushed operational efficiencies – cutting drill days and modularising facilities – to offset some of the impacts, “the hard-fought efficiency gains made during previous downturns are starting to reverse.”