By Irina Slav
Smack dab in the middle of an oil price crisis caused by an unprecedented demand loss, Exxon announced the latest in a string of discoveries off the eastern South American shore, this time in Suriname. It must have felt like adding insult to injury for OPEC producers and reckless behavior for investors, but offshore oil may yet thrive despite the crisis. During the 2014-2015 oil price collapse, offshore oil drilling was one of the most affected areas. Offshore drilling companies went bankrupt, exploration projects were shelved, and staff was laid off. And then oil companies turned to other ways of cutting costs, such as developing technological solutions that boosted drilling efficiency.
Five years after the last crisis, despite a heavy blow to rig owners from the slump in oil demand, offshore drilling is very much alive and cheaper than ever. According to Rystad Energy, the breakeven cost of offshore oil fell by about 30 percent between 2014 and 2018 and is now lower than the average breakeven for U.S. shale oil. That may not be saying a lot since shale is among the higher-cost oil resources, but it is saying something loud and clear: offshore oil is getting cheaper to extract.
It may be surprising that oil companies are taking advantage of this trend instead of lying low and waiting for the price storm to pass. Exxon announced its latest discovery in the Guyana-Suriname Basin just last week. Together with Malaysia’s Petronas, the supermajor discovered oil and gas in an exploration block offshore Suriname.
The company also announced Guyana exploration will be among its priority areas going forward, along with U.S. shale, exploration in Brazil, and chemicals. This re-prioritization is important as it comes amid the worst oil price crisis in history, meaning the industry is really focusing on the most profitable business divisions. Exxon is not the only one betting strongly on offshore exploration amid the pandemic. Brazil’s Petrobras is planning a focus on deepwater exploration and production for the next five years, the company said last month, when it also announced a downward revision to its spending program for the period.
The Brazilian major said in a filing that it will spend $55 billion over the next five years, down by 27 percent in 2019. Of the total, 84 percent would go towards exploration and production, most of it in the prolific pre-salt zone, which is estimated to hold billions of barrels of undiscovered oil.
And this is not all: Petrobras has plans to expand into Guyana. In all fairness, the reason for this plan—tentative for the time being—is regulatory hurdles in Brazil. Yet Guyana’s offshore potential could not have passed unnoticed by the state oil company of the tiny nation’s huge neighbor, which shares offshore geology with it in the north.
“We have (in northern Brazil) the potential for a great oil basin and we’re barred. At the same time, Guyana is taking advantage of the situation,” Petrobras’ chief executive Roberto Castello Blanco said at a recent industry conference as quoted by Reuters.
Meanwhile, in the North Sea, Equinor is pumping more than 400,000 bpd from the Johan Sverdrup field, nearing 500,000 bpd as of last month, despite the continued demand slump. The Norwegian company is also boosting production at the Snorre field, unlocking an additional 200 million barrels of recoverable reserves and extending the field’s life to 2040. Indeed, Equinor is fighting natural depletion and fewer new discoveries. But it is boosting production amid lower demand for oil both domestically and internationally, and forecasts for the chronification of this lower demand.
The United States is also encouraging more offshore drilling, at least for another month, until the administration changes. The Bureau of Safety and Environmental Enforcement earlier this month said it would award lower royalties to offshore field operators that invest in boosting the capacity of their assets. The aim: boosting these fields’ capacity to the maximum. Again, despite the oil demand slump and the oil price slump that followed it.
Offshore has traditionally been among the highest-cost oil production segments, but it has made up for this with long productive asset life. Yet cost trends in oil and gas have been consistently downward, and they have not excluded offshore oil. To date, according to Rystad Energy, deepwater oil is the second-cheapest in the world, after onshore Middle Eastern oil, whose breakeven price is around $30 per barrel. The average breakeven price for deepwater oil is $43 a barrel.
This is good news because most of the untapped oil reserves in the world are located offshore, and despite pessimistic demand forecast, many believe the world will continue needing dozens of millions of barrels of oil in the decades to come. Many, if not most, of these dozens of millions of barrels will be coming from offshore fields.