By Sebastine Obasi, Houston, Texas

THE rampaging global low oil prices may have cost Nigeria, West African countries, the Gulf of Mexico and Brazil about $200 billion in capital expenditure due to deferred investments in the deepwater projects, Julie Wilson, Analyst with Wood Mackenzie, a global energy research and consulting Group, said.

Wilson stated this at a technical session of the just concluded Offshore Technology Conference, OTC, held in Houston, Texas. While emphasising the need for exploration investments to continue despite the low-priced environment, he explained that, “Deepwater projects have been deferred around the world, but the “Golden Triangle” of West Africa, the Gulf of Mexico, GoM and Brazil have been particularly hard hit.

“A total of 20 of the 29 deferred projects are in those three regions, including high profile proposed developments such as Mad Dog Phase 2, Canada and Bonga South West (Operated by Shell Nigeria Exploration AND Production Company, SNEPCO).

“Frontier gas developments also have been affected. The Browse project in Australia and Golfinho in Mozambique, with a combined 6.6 billions of barrels of oil equivalent, Bboe of resources, have been held back from the beleaguered liquefied natural gas, LNG, market due to the high predicted breakevens.”

High predicted breakevens

Wilson further explained that between the years 2005 and 2014, deepwater exploration spend increased more than threefold, from less than $15 billion to more than $45 billion, while well numbers increased by less than 50 percent over the same period. According to him, 10 years ago, most deepwater fields were discovered in the giant tertiary deltas of West Africa and the U.S. Gulf of Mexico.

“As these well understood basins matured, explorers ventured into more frontier areas in deeper waters. Targets were in increasingly complex and deep reservoirs and as a result, costs rose, while success rates fell,” he said.

Outlining the effects of low oil prices on exploration budgets, Wilson said that the fall in oil prices has led to the devastating cuts in exploration budgets, such that deep water exploration and appraisal spend is expected to be slashed from a 2014 peak of $45 billion to about $18 billion in 2016. According to him, “While the cut in exploration is dramatic, it is small in comparison with the cuts in future deepwater CAPEX as operators defer final investments decisions, FIDs, on the previously mentioned 29 major projects. “These deferrals leave close to 16 Bboe of prospective resources in the ground and push back $125 billion of forecast CAPEX beyond 2020. Oil production also is forecast to be impacted by about 1 million barrels daily, MMbbl/d in 2021 and 1.7 MMbbl/d in 2024.” He however said that despite the misfortune of low oil prices, difficult market conditions and the complexity of many projects, some projects are still moving ahead. As a way forward, Wilson said that companies must employ various strategies to improve project economies at low prices, cost reductions through the supply chain, simplified project designs, standardized equipment and optimised project scope. “While operators target reservoir sweet spots, they will leave marginal barrels in the ground, but this will improve commerciality at low oil prices,” he said.

According to him, “Exploration needs existing discoveries to move ahead to demonstrate that the pursuit of deepwater is economically viable. The current process of prospect high-grading should improve success rates and returns from exploration.

“As the Exploration and Production industry emerges from this part of the oil price cycle and company budgets increase, the backlog of deferred projects will compete with exploration for scarce capital. “But for the long-term health of the entire oil and gas sector, deepwater exploration investment needs to continue through the downcycle and into the recovery.