Part 2: Who gets what in offshore drilling? Exploration industry forecast to decline as field development, appraisal drilling dominate

By Michael R Smith, Energyfiles

This is the second of two articles discussing spending in the offshore drilling sector. The first, examining drilling spend by discipline, appeared in the July/August 2007 issue of Drilling Contractor. This part looks at spending by geographic area.

Offshore drilling represents a substantial part of CAPEX in all operating regions. The latest edition of “World Offshore Drilling Spend Forecast 2007-2011” from Douglas-Westwood estimates that drilling attracts nearly 45% of offshore capital expenditure and that, by 2011, the market will be worth around $62 billion, having grown from $58 billion in 2006.

Each region of the world holds significant offshore oil and gas producing centres exhibiting variation in and between them. In particular, disparities have appeared between shallow waters, where petroleum potential is reaching maturity, and deepwater, where new areas are still being exploited. In deepwater, expenditures will have increased to $18 billion by 2011, whereas in shallow waters they will have declined slightly. Meanwhile, exploratory drilling is losing ground to development drilling. These are the main reasons for the trends in Figure 1, in which North American, African and Latin American spending is growing whilst Western European and Asian spending falls.

BACKGROUND

Well number forecasts come from the Energyfiles Global Well Database, obtained from a variety of sources. Although some numbers are very precise, particularly in developed countries and where few wells have been drilled, some are less so. Inaccuracies may be due to poor reporting and differences in attribution.

A few definitions are worth mentioning. A well is drilled in the year in which it is spud. Sidetracks are defined as wells only if the original has seen its rig depart and if the intent is to acquire new data and/or production. As more multilaterals are drilled, this will represent an increasing uncertainty in development well numbers. Development wells include producers and dedicated injectors.

Offshore wells are drilled with rigs designated for offshore use but not including shallow-water barges, such as used in Lake Maracaibo in Venezuela. Thus, wells are onshore if drilled from onshore sites to tap offshore accumulations or from artificial islands used to support land rigs, for example Wytch Farm in the UK, Sakhalin I in Russia and Kashagan in Kazakhstan. Deepwater wells include those in over 500 m of water, except the US, where 1,500 ft (457m) is the cut-off.

Of course, forecasts are speculative. The oil and gas industry is dynamic, and forecasts beyond one or two years, especially of exploration activity, incorporate an opinion on the state of the world economy, the oil and gas price, the willingness of companies to invest, and the willingness of governments to encourage or discourage investment in fossil fuels.

A view is taken on whether private and government companies will carry out drilling programmes as announced and develop new drilling programmes in the future. Forecasts consider the prospectivity of an area being explored and appraised and assume that the world does not suffer dramatic economic upheaval. The regional share of wells drilled in 2006 is shown in Figure 2.

REGIONAL DRILLING SHARES

The world splits into eight regions, coinciding with subdivisions into regional business units used by many major oil companies: North America, Latin America, Western Europe, Eastern Europe/FSU, Africa, Middle East, Asia and Australasia.

North America comprises Canada, Greenland and the United States. Greenland lies in the Atlantic, while Canada and the US border both the Pacific and Atlantic. The Gulf of Mexico is the most important offshore area. Nearly 5,000 wells were drilled offshore North America from 2002 to 2006, 93% of them in the Gulf of Mexico. The numbers are expected to remain flat over the next five years, with approximately one-fifth of those in deepwater.

There are 53 countries in Latin America — 31 in the Caribbean, 7 between Mexico and Colombia, and 14 in mainland South America. Besides Bolivia and Paraguay, they have borders with the Pacific and Atlantic, the Caribbean Sea and the Gulf of Mexico. The only countries to have witnessed significant offshore drilling are Mexico, Trinidad and Brazil. Nearly 1,400 wells were drilled from 2002 to 2006, with 90% in these countries. A rise in offshore drilling is forecast over the next five years, with one-third expected in deepwater.

The bodies of water bordering Western Europe are the Barents Sea, the North Atlantic including the Norwegian Sea and the Bay of Biscay, the Irish Sea, the Mediterranean Sea, the Adriatic Sea, and the North Sea – the largest offshore producing area in the world. Drilling activity is dominated by the UK and Norway. Over 2,600 wells were drilled from 2002 to 2006, with 83% in these countries, mostly in the North Sea. A decline is forecast over the next five years, with few expected in deepwater.

In Eastern Europe/FSU, only Russia has access to an ocean, bordering Arctic Seas as well as the Sea of Okhotsk and the Sea of Japan. Lithuania, Latvia and Estonia border the Baltic Sea; Azerbaijan, Kazakhstan and Turkmenistan have acreage in the Caspian Sea; while Ukraine and Georgia border the Black Sea. Poland, Bulgaria and Romania have offshore regions in the Baltic and Black Seas.

Drilling activity is concentrated in the Caspian and off Sakhalin Island, where Russian technology has been unable to drill prospects at any significant water depth. A little over 300 wells were drilled from 2002 to 2006, with 95% in these areas. Substantially greater numbers are expected over the next five years, almost all in shallow waters.

Africa has 49 countries, with 33 having borders with the Atlantic, the Mediterranean Sea, the Gulf of Suez, the Red Sea, the Gulf of Aden or the Indian Ocean. The bulk of drilling occurs in the southern half of West Africa and Egypt. Over 1,400 wells were drilled in the region from 2002 to 2006, with 71% in West Africa and 17% in Egypt. A significant rise is forecast over the next five years, over half in deepwater. A chart showing one representation of the drilling forecast is shown in Figure 3.

The countries of the Middle East have giant fields in the shallow waters of the Persian Gulf. Saudi Arabia, the UAE, Iran, Qatar and Kuwait are the main producers. Iran also has a coastline on the Caspian Sea. Saudi Arabia, Oman and Yemen also border the Gulf of Oman, Gulf of Aden or the Red Sea with Syria, Israel and Turkey bordering the Mediterranean and/or Black Sea.

A little over 1,600 wells are estimated to have been drilled offshore the Middle East from 2002 to 2006, with 98% in the Persian Gulf, almost all of which were development wells. A rise in drilling is forecast due to a surge in gas drilling and the need to maintain production in older fields.

Offshore drilling in Asia mainly occurs in the Indian Ocean, Bay of Bengal, Gulf of Martaban, Gulf of Thailand, South China Sea, East China Sea and Bohai Gulf, Java Sea, Natuna Sea and Makassar Strait. Nearly 5,000 wells were drilled from 2002 to 2006, of which just under half were in Indonesia and Thailand. China, India, Vietnam, Malaysia and Brunei made substantial contributions to the remainder. Although a slight increase in the total is forecast over the next five years, with perhaps 10% in deepwater, the overall trend will be downwards.

Australasia is dominated by Australia, where 90% of the wells are drilled. New Zealand, Timor Leste and Papua New Guinea also see some drilling, but the many other territories of the South Pacific are unlikely to see any drilling in the medium term. Nearly 550 wells were drilled offshore Australasia from 2002 to 2006, and numbers are expected to remain roughly constant over the next five years.

REGIONAL SPENDING

The previous article explained how the Energyfiles spending model operates. Spending will reach $306 billion over the next five years, representing a rise of 49%. In view of the much smaller 9% rise in drilling numbers, the bulk of this can be ascribed to increased costs through inflation and higher-specification wells. There is an increasing disconnect between well numbers and well spend with drilling flat or declining while spends increase (Figure 4).

Asia attracts the highest spending, with shallow water spends beginning to decline but deepwater spends growing even though areas are limited. North America is second, mostly in the Gulf of Mexico where deepwater developments lead growth.

Western Europe comes third – almost all in the UK and Norway. Spending has increased in the last three years despite a downward trend in well numbers. Africa is fourth, the majority directed at Angola, Nigeria and Egypt. Africa has enjoyed rapid growth in deepwater spending. Latin America is fifth, mainly in Brazil, Trinidad and Mexico.

Despite its importance, the Middle East is sixth, dominated by low-cost field maintenance and new gas developments in the Persian Gulf. However, spending is growing as the area is called upon to maintain and increase output to satisfy world demand. Australasia is seventh, and Eastern Europe/FSU is eighth.

THE CHANGING WORLD

The first true oil exploration well was drilled in Azerbaijan in 1848. However, the well believed to have been most significant was Edwin Drake’s, spudded in 1859 at Titusville in Pennsylvania. Although Drake’s well cut only 21 m of hole, it began an exploration rush from which the modern oil industry was born.

In 1897, the first well to tap a reservoir directly beneath the sea was drilled from a wharf in California, but it was not until 1937 when the first fully offshore field was developed, and the earliest modern mobile drilling rig (a jackup) did not start operating until 1954. Offshore drilling has been around for only half a century, but it has developed rapidly. Its profitability, combined with OPEC’s oil conservation policies, have ensured that even the most expensive of offshore projects go ahead. Except where geological or other risk is unacceptable, high well costs are rarely a deterrent to drilling.

However, we have entered a new era. Higher prices and new technologies that reduce dry hole numbers and increase production rates have led to rigs and services becoming ever more costly. Opportunities, even high-cost ones, are dwindling. By 2015, the offshore drilling industry will be “fighting fires.” Energyfiles expects the exploration industry to be in decline, dominated by field development and appraisal drilling. Major companies will have solar, wind, biofuel and other energy sources firmly on their books. Independents will be severely reduced, and many will be niche players, specializing in onshore heavy oil, for example. The offshore service industry, after years of success in technologically demanding environments, may have begun to contract as opportunities fall off. And there will be regular and chaotic disruptions within the industry and the world as a whole, driven by scarce resources and ever increasing energy costs.

More about “The World Offshore Drilling & Spend Forecast 2007-2011” can be found online at www.energyfiles.com or www.dw-1.com.