Energy & Power

Special Report
Offshore Spending to Reach $275 billion by 2011

EP Desk

Steady increases in offshore oil and gas production will drive up industry's annual spending to more than $275 billion by 2011 from $219 billion in 2006, according to a forecast published by Douglas-Westwood and Energy files.

Oil & Gas Journal reports, World Offshore Oil & Gas Production and Spend Forecast 2007-11, said offshore oil production has risen by more than a third since 1991 and is forecast to continue to rise at about the same rate, reaching 35 million b/d in 2011. Offshore gas production, meanwhile, has more than doubled in the same period -- to 867 billion cubic meters in 2006, or 14.9 million boe/d. It will almost double again by 2011, forecast the report.

While offshore oil and gas fields are distributed across the world, only three regions -- he North Sea, the Gulf of Mexico, and the South China Sea -- attract more than half of this spending, said report author Michael R. Smith. "Yet relative shares are changing, with growth forecast everywhere except Western Europe," he said.

"Expensive deepwater projects in West Africa and the Gulf of Mexico as well as projects in the Caspian Sea and Sakhalin and new activity in the Persian Gulf are disproportionately increasing spending shares in these regions," Smith said. Offshore oil output is expected to peak within 10 years at less than 40 million b/d, but the global peak for gas is not predicted until at least 2030, he said.

Bangladesh Scenario
Neighboring country India, Myanmar and Thailand have already achieved good progress in offshore exploration. They are planning to invest more in this sector. But Bangladesh started its offshore exploration in the early 70’s. Despite many changes in the political dimension, the policy makers did not throw proper attention into this issue. They had first opted for mainland exploration through production Sharing contract (PSC) and then they made plan to go for offshore exploration only four yeas back. But still Bangladesh will not able to go for offshore exploration. Both India and Myanmar at the neighboring side have planned to start offshore exploration and achieved a lot. Thailand has also started its offshore exploration plan after Bangladesh and made good progress. When the whole world is eyeing on exploring new avenues of extracting oil and gas from offshore, Bangladesh is visibly reluctant to finalize its offshore bidding process.

Price Effects
The recent spending surge, said Smith, was driven by a shortage of spare oil and gas production capacity. "From 2002, prices significantly increased for equipment, consumables, and services, and this was especially so in 2005 and 2006 as demand rose and fuel costs escalated," he said. "The magnitude of growth, especially in rig rates, was attributable to intense competition within the service sector over the previous years of relatively low oil prices, which led to under-investment in higher-specification rigs, new production systems and associated hardware, and in personnel."

Over the next 5 years, oil prices will be "erratic," the report said, but "generally lower in 2007 as oil demand growth is forced down by higher oil prices, as new non-OPEC production enters the market, and as LNG and coal continue to replace oil use in Asia along with modest amounts of other alternative energy sources everywhere."

Oil prices are expected to escalate from 2009, however, eventually leading to more cost inflation. "But not all cost escalation can be ascribed to inflation," Smith said, adding, "Costs are also going up as more advanced rigs, production systems, and services are used for deeper and more complex reservoirs and more extreme conditions."

Operational Sector
Although high oil and gas prices over the period to 2011 will result in continued strong growth in all parts of the offshore oil and gas business over the next 5 years, the report continued, "the prime mover will be the less-alluring operational sector."

Conversely, he said, operational expenditures (opex) "will likely increase by more than 50 percent to 2011 as a result of increasing output and a higher share of more expensive oil." Last year, Smith said, opex accounted for 40 percent of global offshore spending, "but its share is forecast to begin rising again in 2007, and by 2011 spending on capex and opex could be approximately equal."

Smith said this report is "unique" in that it determines capex levels based on "production additions." He said, "Every year new production comes on stream, which both adds capacity and replaces lost capacity as older fields deplete. The expected volume of new production is modeled using these two increments of output—'growth' and 'replacement'—the sum of which corresponds to the amount and cost of new capacity that is added each year."

Constraints
Many sectors of the offshore industry up to 2011 will continue to be constrained by shortages of equipment and people resources, the report said. "Consequently, day rates will remain high, especially for capital assets such as high-specification drilling rigs and other vessels," it said.

Starting to enter the market, however, are new, high-specification rigs and vessels, which are serving to moderate day rate growth. Smith said, "These restraints are reinforced by limits on exploration opportunities in offshore regions available to private oil and gas companies. Moreover, only the most demanding environments in ultra-deep waters and arctic regions are expected to offer new large scale opportunities by the end of the period."