April 2023, Vol. 250, No. 4
Features
Offshore Innovation Seen as Key to Overcoming Obstacles
By Richard Nemec, P&GJ Contributing Editor
(P&GJ) — At mid-year 2022, an online industry report service using artificial intelligence (AI) enabled analytic tools released a worldwide assessment of offshore oil and natural gas prospects with a decidedly upbeat tenor.
In its “Oil and Gas Upstream” research report, researchers at ReportLinker called for a strong rate of growth between 2023 and 2030, tied to growing demand from end-user industries.
Among other findings, the “complete analysis” of offshore oil and gas upstream market trends, market insights, drivers and market restraints projected the global offshore oil and gas rig market will increase in size at a steady compound annual growth rate (CAGR) of 5.69% during the forecast period, reaching $22.5 billion annually by 2027.
“The market is driven by the rise in the demand for oil and gas across the globe and increasing investments by the public and private players to boost the oil and gas industry,” according to the report.
Also weighing on the positive side were worldwide economic growth worldwide and rapid industrialization and urbanization which is generating the demand for fuel, and they are expected to propel the demand for the global offshore oil and gas rig market over the next five years.
The report authors noted that several government authorities across the globe have been raising their capital expenditures (capex) to attract more energy investors into their countries.
“Market players are investing to find new innovative solutions to fulfill the energy requirements across the globe,” the report said.
The global offshore oil and gas rig market is segmented based on type, water depth, regional distribution and company. Based on type, the market is divided into jackups, semisubmersibles, drill ships, and others. Jackups, which have the advantages of quick deployment and mobility, have been the dominant segment, accounting for 66.02% of the overall market share in 2021.
Maintaining Dominance
“They are the most cost-effective offshore drilling option requiring fewer crew members, and the segment is expected to maintain its dominance through the next five years,” according to the report.
Along with the supermajors, such as BP plc, Royal Dutch Shell, ExxonMobil, TotalEnergies, et al., which invest in the major areas, major operators include Halliburton, Valaris Limited, Baker Hughes, Sembcorp Marine Ltd, SLB, China Oilfield Services Limited and Samsung Heavy Industries.
There are many others with global reputations, as well, such as Jindal Drilling & Industries Limited, Keppel Offshore & Marine, ADNOC Drilling, Arabian Drilling Company and Shelf Drilling.
“(It) is really a matter of the capital requirements for project development, which are considerably higher than onshore,” said Kenneth Medlock III, a nationally recognized energy economics expert at Houston-based Rice University. “This is particularly salient when we move beyond the United States where international experience and a balance sheet large enough to provide a diversification hedge can help support investment. Smaller players just cannot absorb the risks of doing business in many places around the world. In the U.S., offshore shallow water remains a viable place for smaller operators to do business, but deep water remains the domain of large, heavily diversified global operators.”
The future for U.S. offshore oil and gas development in the Gulf of Mexico (GOM) is a three-legged stool involving federal government policies, global economics, and continued climate-change driven support for renewables, such as offshore wind development, according to Mike Moncla, president of the Louisiana Oil and Gas Association (LOGA).
Within days of the international offshore report’s release last year, the Biden administration unveiled a five-year offshore oil and gas drilling development plan that blocks all new drilling in the Atlantic and Pacific Oceans within U.S. territorial waters while allowing some GOM and south Alaska lease sales. Environmental groups and industry officials alike have expressed concerns with the current federal administration’s response to climate change for different reasons.
Various industry assessments point to a climate-driven energy transition being an existential threat to the entire offshore universe in the long term, although they acknowledge that the prospect of elevated oil prices from mid- to the end of the 2020 decade offers some short-term opportunities. As asset values rise on the backs of improved revenues and profitability, investors will find potentially attractive exit opportunities, industry sources have indicated.
“Lenders, for their part, can take the opportunity offered by the favorable short-term outlook to review and rationalize their loan portfolios. The potential for higher collateral values and lower loan-to-value ratios also creates an opportunity for lenders to exit their positions,” according to one recent assessment. “Over the longer term, however, if offshore players do not successfully implement one or more mitigation strategies, they will face tremendous adverse financial consequences by 2050.”
In the meantime, the federal Interior Department’s Bureau of Ocean Energy Management (BOEM) continues to view U.S. offshore oil and gas production as a cash cow for the nation’s economy.
The ocean agency noted the Gulf continues to be the nation's primary offshore source of oil and gas, generating 97% of all U.S. OCS oil and gas production, and acknowledging that means substantial revenues from lease sales, royalties on production, and rental fees.
“These funds are distributed to the U.S. Treasury and several different programs through various revenue sharing laws. The largest portion goes to the General Fund of the U.S. Treasury, which benefits all U.S. citizens through funding of daily operations of the federal government. In FY2021, revenues totaled $4.1 billion from OCS oil and gas activities,” according to BOEM.
At the outset of 2023, about 3,500 offshore drilling structures covered the Gulf of Mexico with more than 3,200 remaining active. A clear majority (66%) of industry pundits in 2022-23 were convinced that peak oil demand will come before 2030, but a minority of investors remain bearish on oil and gas, predicting it will recede in importance in their portfolios as they get increased pressure to divest fossil fuel investments.
GOM dry gas production, for example, in the last month of 2021 was slightly more than 61 Bcf for the month, compared to monthly peaks above 256 Bcf in 2006.
Government Imperative
Future offshore activity levels are dependent upon three things: the federal government’s approval of future lease sales, a timely permitting process, and profitable commodity prices for investors,” LOGA’s Monela said. “It is imperative that the government recognizes what the GOM provides to the United States. There just needs to be growth opportunities for oil and gas operators to explore new leases.”
“In general, the GOM will be active for a while, with activity evolving over the next decade,” said Medlock who is a fellow and senior director at the Center for Energy Studies in the Baker Institute for Public Policy at Rice. “In particular, the opportunity for offshore wind is very real.”
He noted that in the GOM the transition will present some engineering and design challenges that do not exist in other regions of the world where offshore wind has already taken off. This is largely due to the Gulf’s extreme events such as hurricanes.
“We are still a way away from the first kWh delivered due to long lead times, but deep interest in the future build-out of offshore wind is evident from the robust movement in the Texas region by nations like Denmark and by companies such as Denmark’s largest energy provider and the world’s biggest offshore wind producer, Orsted Corp.,” Medlock said.
“With billions of dollars coming in as subsidies for offshore wind, investors will be jumping at these opportunities,” said Loga’s Monela, adding that wind promises to be vitally important in the decades to come. “However, wind doesn’t furnish the nation with plastics, rubber goods, asphalt, fertilizers, pharmaceuticals, gasoline, diesel, and jet fuel. Only oil and gas provide these essential everyday products.”
Calling offshore oil and gas a ‘wild ride” since late 2014, analysts at global consultant Alix Partners have concluded that overhanging the entire offshore market has been an ongoing transition to more sustainable forms of energy.
“The transition gained momentum with the Paris Accords of 2015, ratified at the COP21 climate summit, and took on new visibility and scale in the wake of the COP26 climate summit, which culminated in the ratification of the Glasgow Climate Pact, an agreement between nearly 200 nations to hold the global average temperature increase in 2050 to 1.5° C.,” the consultants noted. “Signatories publicly committed to accelerate the transition to renewable, sustainable energy sources and to lower carbon emissions by reducing fossil fuel usage – the first explicit mention of fossil fuel reduction in the history of such agreements.”
Alix analysts see the offshore-drilling subsector as the most exposed by the transition, and they think engineering, procurement, and construction (EPC) players are probably best placed to deal with the challenges.
Somewhere caught in the middle, they say, are the seismic, offshore-service-vessels (OSV), and floating production, storage, and offloading (FPSO) subsectors. Alix consultants offer four potential strategies – decarbonization, diversification, consolidation, and continuous oil and gas focus. The options are available to mitigate or at least lessen the impact of the transition, according to the analysts.
While climate change advocates’ voices have certainly grown louder since President Biden’s proposals in mid-2022, oil and gas industry supporters have raised the level of their rhetoric, too, criticizing any options that would totally exclude offshore fossil fuel development.
“At a time when Americans are facing record high energy costs and the world is seeking American energy leadership, [the Biden administration proposals] leave open the possibility of no new offshore lease sales,” said Frank Macchiarola, senior vice president of policy, economics and regulatory affairs at the Washington, D.C.-based American Petroleum Institute (API).
Also, at the time of the federal administration’s announcements, Ben Cahill, a senior fellow at the Center for Strategic and International Studies, noted that even though new leasing won’t help lower energy prices anytime soon, the Biden administration could use it as part of a broader, strategic effort to push the president’s climate agenda.
Cahill thinks the pandemic and efforts to wean Europe off Russian oil and gas have created an energy supply crunch that could last years, supporting the argument that U.S. fossil fuel production can play an important role in global energy security. He wants the Biden administration to support oil production in the short term, while also pushing policies that will reduce fossil fuel demand.
Cahill would prefer more discussion about what is needed to support more short-term fossil fuel production, using it “to unlock an opportunity to get climate policy moving,” and taking a lot of the things that were in Build Back Better – the support for electric vehicle adoption and the tax credits for clean energy –and making them happen. “It is urgent to do both,” he said.
At Davos, Switzerland, at the annual World Economic Forum in January, U.S. energy executives and some international leaders discussed global energy matters in the wake of the now more than year-old war incited by Russia in the Ukraine and the turbulence in the global liquefied natural gas (LNG) markets. Occidental Petroleum Corp.
CEO Vicki Hollub and an International Energy Agency official discussed the importance of the new U.S. Inflation Reduction Act (IRA) to the ongoing energy transition, renewables, and climate change mitigation.
Spurring Investment
IRA eventually will direct billions of dollars toward climate and energy issues, according to Hollub, who supports the Biden administration-backed legislation passed last year. Its backers contend that it will spur investment in new infrastructure that would put the United States on track toward net-zero emissions by 2050.
“It’s an important bill for us [the industry] in that it does provide subsidies, not just for carbon capture, but for electric vehicles, for lithium, and for many other things that will help the energy transition,” she noted.
Hollub acknowledged that the U.S. oil and gas sector has long relied on subsidies.
“There have been hardly any game-changing and transformational technologies that have ever been developed in the world that did not at some point have some sort of subsidy,” she said.
Closer to home in examining offshore prospects for the Gulf, Rice’s Medlock sounds clear-eyed and realistic, noting that oil and gas continue to have significant interest in production, which is largely focused on offsetting declines. There is also interest in carbon dioxide (CO2) injection, he said.
“This will also take time given the infrastructure build-out required and a clarity of the rules [pore space access, liability, etc.] for federal offshore injection of CO2 for sequestration,” Medlock said.
Finally, Medlock thinks near-shore development will continue as port infrastructure is expanded and enhanced to facilitate exports of oil, gas and petroleum products, as well as imports of all the supply chain components needed for wind, solar, and batteries.
The engine for all of this will be provided by technology advances in offshore oil and gas development, renewables, and CO2 capture and storage. The latter, most climate scientists agree, is absolutely essential in any scenarios for achieving net-zero carbon emissions by 2050.
“Offshore provides a robust fairway for all of the above,” Medlock said. “Wind, in particular, is being explored, but it is expensive. Inflation along the supply chains for wind development has created difficulties for development plans, as witnessed by several attempts to renegotiate fixed price deals.
He added this would be “an obvious challenge for electricity sales,” and that does not affect oil and gas development because pricing for oil and gas is market-based.
“Anything that can reduce the cost of offshore wind development, or raise the productivity of wind turbines offshore, will be a tremendous benefit, especially since there is no other hedge against rising costs and selling into regulated electricity markets,” he said.
Longer term, Medlock also thinks CO2 sequestration will prove to be viable but U.S. regulatory guidance is still too unsettled. There are some rule-makings needed to define how offshore pore space can be used for CO2 storage, he said. Currently, offshore operators are seriously addressing their emissions, with many operators wanting to use more renewable energy to power facility operations, with “efforts to reduce flaring remain a point of emphasis.”
Meanwhile, offshore operators also continue to focus on general infrastructure and investment needs with the same fervor these two topics are addressed in the onshore oil and gas plays. However, at the outset of 2023 there were no projects underway on federal lands, and most proposals were concentrated in offshore Texas state waters.
Near-shore development, which is do-able for smaller operators, holds some promise among the net-zero emissions advocates who view the IRA’s added $85/ton credit (Q45) as a boost toward commercial viability for CO2 sequestration, according to Medlock.
Current domestic U.S. efforts focused on replacing declining production from legacy wells are simply stressing the development of new wells in sufficient quantities to offset the declines.
“Subsea tie-backs to existing platforms are the first best option, especially given the cost environment,” Medlock said. “I don’t see a lot of emphasis on [added] platforms in the U.S., although in other regions (Guyana) this is necessary, especially given the size of the resource base and amount of activity being planned.”
While the GOM offshore is of much concern to the United States, the future of offshore globally is vastly broader and more complex, involving shallow, deep water and ultra-deep water plays in five different regions (Asia-Pacific, Middle East-Africa, Europe, North America and South America) and dozens of nations.
So, for a clear snapshot of offshore’s future, a truly wide-angle view must be applied globally with the added overlay of worldwide climate change mitigation aspirations.
By any measure, offshore energy presents an epic challenge.
Richard Nemec is a long-time contributing editor based in Los Angeles. He can be reached at: rnemec@ca.rr.com
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