April 2014, Vol. 241 No. 4

Projects

Offshore Expert Expects Deepwater To Dominate

Michael Haney founded Douglas-Westwood’s Houston office in 2012 and has more than a dozen years of experience consulting for energy and chemicals clients. He has completed consulting projects for most of the IOCs, many NOCs, and several oilfield service clients.

Here, Haney discusses offshore prospects for the next five years and where a strong upturn in activity is likely. He is particularly bullish on the deepwater and is intrigued by Mexico’s decision to allow foreign investment in its oil fields.

P&GJ: You’ve held several energy management consulting positions, worked with several NOCs and oilfield service firms. What did you learn from this experience and how has this affected you?

Haney: Since the early 1990s I have seen clients grapple with many different challenges in boom and bust markets. The common theme is seeing the industry improve efficiency while bringing much-needed energy resources to market.
Yes, there have been a few “fads” – remember when all the majors were going to be big players in independent power generation? However, in general, energy people are extremely hard-working and committed to delivering energy to hungry markets around the world – safely and efficiently.

It is hard to imagine a more international industry than energy, and the geopolitical and technical factors and developments are interwoven with world history and political power. Energy helps economies grow so access to energy at market prices is crucial to providing employment opportunities for people everywhere.

When you combine all this with its diverse business, social, and technical aspects – as well as the sector’s colorful cast of characters – it’s easy for me to see how all of this has shaped my thinking about and approach to the energy business.

P&GJ: What is the outlook for the global offshore industry over the next five years and where do you anticipate seeing a strong upturn in activity?

Haney: The biggest incremental growth will come from deepwater and everything associated with it. For example, we expect deepwater (>500m) capital expenditure to total $260 billion over the next five years, up 130% compared with the previous period. Drilling and completion of the 1,500 deepwater subsea wells involved will cost $90 billion.

Deepwater floating production deployments are expected to total $68 billion and account for over two-thirds of the total global floating production spending. Moreover, 82% of global deepwater spend will be in the ‘Golden Triangle’ of the Gulf of Mexico, Brazil and West Africa. Other regions are developing, including the eastern Mediterranean, East Africa and Southeast Asia. It’s an incredibly exciting time for the offshore sector in particular.

P&GJ: Who will the key players be and do you expect majors and others to cut back expensive offshore work in favor of onshore development?

Haney: The only reason oil majors are investing so much capital in deepwater is that Big Oil needs big fields and deepwater is virtually the only place left to find them. Many onshore opportunities are much smaller in comparison, or big, but politically challenging. As some of the late entrants learned with the U.S. shale plays, some of these are better suited to smaller, more dynamic players.

P&GJ: Mexico’s proven reserves are estimated between 10.07 and 10.12 Bboe and they plan to allow foreign investment in its oil fields. What opportunities can U.S. companies expect?

Haney: PEMEX has struggled for the past two decades with aging fields, declining production and an inability to develop new fields through either lack of technology or lack of investment capital. Reform of Mexico’s oil industry is a landmark event, opening up one of the world’s largest relatively unexplored areas for development.

From a technology and services perspective, the highlights include the potential for deepwater drilling and production and development of the country’s sizable shale reserves. The first to benefit will likely be rig owners, drilling services companies and firms focusing on front-end engineering and design.

Don’t expect an overnight boom: the first licenses under the new bill are expected to be awarded late in 2015 at the earliest, and the impact on the oilfield services sector is likely 24-36 months away. Whether Mexico will achieve the projected volumes (4 MMbop/d by 2025) of production is to be seen, but the energy sector reform is the most significant upstream development in the Americas since the U.S. shale boom and Brazilian pre-salt discoveries.

P&GJ: The Floating Production and Storage market is a viable option open to operators in water depths beyond 1,650 feet. What is forecast for this market?

Haney: Our latest report suggests between 2014- 2018 over $99 billion will be spent on floating production systems – up 138% over the preceding five-year period. FPSOs form the largest segment of the floaters market (80%) both in terms of units installed and forecast capital expenditure during 2014-2018. Brazil accounts for 29% of the 139 installations forecast and 38% of projected capex.

P&GJ: Where do you see new LNG facilities and expansions of existing facilities coming online over the next five years? What is your outlook for floating LNG facilities?

Haney: LNG already accounts for 30% of global natural gas imports and its importance is set to grow. Recent growth has been driven by the Middle East, but Australia is set to significantly increase production in 2014-15. Further ahead there is potential future supply from many countries; most notably the U.S. where exporting LNG could be a great boost for the shale gas industry.

The world has large volumes of natural gas economically stranded offshore, and FLNG offers a way to develop it. The industry is watching Shell’s massive Prelude project and there have been announcements of builds by other operators. We expect annual FLNG project spending to grow from $2-9 billion by 2016.

P&GJ: We’ve seen a decline in the North Sea. The UK government, in particular, appears to be putting more emphasis on reviving UK North Sea developments. What is the outlook for this region?

Haney: The UK North Sea still has lots of potential, both in terms of undeveloped prospects and EOR. Considering the oldest province, the highly explored Southern North Sea, Hannon Westwood lists 102 undeveloped gas discoveries possibly containing 5 Tcf. The largest undeveloped discovery is Tolmount with 350 Bcf. In addition, there are 466 undrilled prospects and leads possibly containing 33 Tcf of unrisked undrilled recoverable resource. Overall, the UK North Sea is probably at around the peak in development drilling – about 150 wells this year.

Norway’s combined oil and gas production peaked in the early 2000s before declining to 3.4 MMboe/d in 2014. We expect production to rise slightly to 2020 to 3.5 MMboe/d. This requires about 190 development wells this year, rising to about 210 in 2019.
In total, we expect Western Europe’s total offshore production to grow slightly from 5.6 MMboe/d in 2014 to a peak of 5.9 MMboe/d in 2017.

P&GJ: Does the offshore industry face a shortage of executive talent as well as a lack of employees with the required competencies that companies need to compete in globally?

Haney: Yes, but this affects all engineering-related sectors, not just the offshore industry. It begins with the education system which in so many countries is not fit for purpose, which must be to endow people with the skills needed by industry.
Oil and gas has had trouble attracting talent both because of its cyclicality and the negative perceptions which affect so many of its operations. Although we see oil and gas companies addressing these perception problems individually and nationally, there is a strong case for the industry getting together internationally to inform public opinion.

Because of the gyrations in price and activity from the 1980s and 1990s, the industry missed out on hiring at least one generation of engineers and business people to help address these issues. I am pleased to see that more people are considering the energy industry, and we need to demonstrate how attractive it can be to young people. In my career, for example, I have traveled to five continents and met an absolutely amazing and broad range of people.

A typical offshore project will likely encompass just about every interesting business concept you could imagine: technology, logistics, manufacturing, service, marketing, geopolitics, and many others. We need to communicate that to the next generation and show them how exciting and rewarding an energy career can be.

Physics experts define energy as the ability to do work. Energy indeed powers the global economy, allowing every other type of industry to produce all types of goods and services. It can be argued that oil and gas is probably the world’s most important industry, producing a big share of the energy that powers the modern world – and we should be telling people this.

R. Michael Haney can be reached at: +1 (713) 385-2588; Email: mike.haney@douglaswestwood.com; LinkedIn: www.linkedin.com/in/rmichaelhaney; Website: www.douglas-westwood.com.