Strong Growth Drives Capital Investment in Deepwater Oil & Gas Drilling in Gulf of Mexico

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Three years after the lifting of a moratorium on deepwater oil & gas exploration, the Gulf of Mexico is humming with drilling activity, part of a worldwide trend of finding and extracting hydrocarbons at ever-deeper ocean depths. The Gulf is not the only region seeing a surge of deepwater and ultra-deepwater exploration, but it is the world's most active spot for that type of drilling, with more than 500 wells operating and many more scheduled to be brought online in the next few years.

Deepwater drilling takes place at depths of between 1,000 and 5,000 feet of water, while ultra-deepwater drilling takes place in water depths of more than 5,000 feet. Deepwater and ultra-deepwater wells have pushed current Gulf of Mexico oil production to about 1.4 million barrels per day (BBL/d), about double the level of production from 1989. Offshore Gulf production is expected to exceed 2 million BBL/d by 2020, according to the U.S. Energy Information Administration (EIA) (Washington, D.C.), the statistical and analytic branch of the U.S. Department of Energy (DoE) (Washington, D.C.).

"High crude oil prices, safe operating practices and strong global demand are the keys to realizing a bright future for deepwater and ultra-deepwater oil production in the Gulf," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipeline and Terminal industries. "We're seeing a number of advanced drilling technologies and techniques being deployed there. Also, with each passing year, operators gain valuable experience drilling in the deeper waters of the Gulf. All of that is contributing--and will continue to contribute--to sizable gains in offshore Gulf production. There are significant risks and costs to drilling in that part of the world, but operators continue see a huge upside in the form of billions of barrels of new reserves."

Busily plumbing the depths of the Gulf are some of the world's leading oil & gas companies, including BP plc (NYSE:BP) (London, England), Chevron (NYSE:CVX) (San Ramon, California), Exxon Mobil (XOM) (Irving, Texas), Hess Corporation (NYSE:HES) (New York, New York), Petroleo Brasileiro S.A. (NYSE:PBR) (Petrobras) (Rio de Janeiro, Brazil) and Anadarko Petroleum Corporation (NYSE:APC) (Houston, Texas).

As companies drill in deeper waters for ever-greater volumes of oil & gas, capital spending is expected to soar, according to a recent study from consultants Wood Mackenzie Group (Edinburgh, Scotland). The study, "The Future of Global Deepwater Markets," predicts worldwide spending will rise to $114 billion by 2022 from last year's level of $43 billion. It said that the industry will be challenged to keep up with this rapid growth.

Over the last decade, deepwater production "has accounted for most of the discovered (oil & gas) volumes, but this has not been without increasing technical and commercial challenges," said Malcolm Forbes-Cable, a senior management consultant at Wood Mackenzie and author of the study. "To meet the forecasted well demand, the fleet will require 95 additional deepwater rigs to be constructed between 2016 and 2022, representing $65 billion of investment. This will require the longest period of deepwater rig construction to date, representing a change for the deepwater sector from cyclical to sustained growth."

The blowout of the Macondo well in the Gulf in April 2010 led to a six-month moratorium on new drilling in the deepwater Gulf. But by 2012, global deepwater drilling had returned to the level before Macondo blew out. And it has continued apace since then. The Wood Mackenzie study predicts a compound growth rate of 9% per year for the next decade as drillers seek oil & gas in ever-deeper waters. Wood Mackenzie sees drilling in the Arctic picking up by the end of this decade, though wells drilled there will only represent 3% of all deepwater wells drilled by 2022.

"Major external and internal constraints must be addressed in order to (meet) deepwater and Arctic sector demand," said Forbes-Cable, adding that the deepwater frontier is increasingly viewed as the key driver for growth among international operators, oilfield service companies, and rig contractors.

One of the "internal" constraints identified by the study is skilled labor: The projected growth in demand for deepwater rigs is expected to require an additional 37,000 drilling rig workers over the next decade. The growing demand cannot be met by existing staff and the industry's historical level of recruitment.

Drilling in deepwater and ultra-deepwater is very expensive. Danish driller A.P. Moller - Maersk A/S (Copenhagen, Denmark) has committed $2.6 billion to build four ultra-deepwater drilling ships in 2013 and 2014. At least two of these new drillships will operate in the Gulf of Mexico. The Wood Mackenzie report caused some investment analysts to look more favorably on deepwater drillers like Transocean Limited (NYSE:RIG) (Zug, Switzerland), about which Forbes magazine recently wrote: "We believe that Transocean is one of the companies that are best posed to benefit from increasing deepwater and ultra-deepwater activity, given its strong asset base and contract backlog."

Another offshore driller, Noble Corporation (NYSE:NE) (Zug, Switzerland), recently decided to split its operations into two companies; one will hold "high specification" drilling assets capable of deepwater and ultra-deepwater drilling, while the other will own "standard specification" rigs that drill in less challenging conditions and shallower depths.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.