Feature: World Offshore Drilling Activity: A 5-Year Outlook

The following is an outline of some of the key conclusions of the "The World Offshore Drilling Report 2003-2007" recently published by energy analysts Douglas-Westwood.

Offshore drilling has, for the last 30 years, been the driving force behind growth in oil and gas industry activity and production. Beginning in the 1960s, after global opportunities on land had begun to decline, offshore drilling levels grew rapidly, peaking in 1981 following two decades of technology improvements and a decade of energy price rises. Since then, offshore drilling levels have broadly stabilized on a flat trend, albeit moving up or down in response to fluctuations in energy demand and oil price. Drilling levels increased through early part of the 1990s in an environment of increasing energy demand and stable prices linked to improvements in technology. However, it is expected that over the next five years, drilling levels will become opportunity-constrained with expenditures not increasing consistently even if there is real oil price growth. Furthermore better development wells, which make up the lion's share of drilled wells, incorporating horizontal elements and multilateral completions, will mean fewer will be needed per field. Only in the deepwater environment is steady drilling expenditure growth to be expected.

Shortage of Opportunities

From 1998 to 2002 Douglas-Westwood estimates that a total of 15,360 wells were drilled. The company forecasts that over the next five years 14,626 offshore wells will be drilled.

Estimated Offshore Wells Drilled

Since 1991 and Forecast to 2007

The main drivers for this anticipated steady decline in drilling numbers, despite relatively high oil prices, would appear to be an increasing shortage of shallow water prospects and field developments in the Gulf of Mexico, the North Sea and elsewhere. Some additional shallow water drilling is possible in the Persian Gulf, depending on controlling governments encouraging investment to a greater extent than they do now, but elsewhere there is little room for drilling sufficient to maintain current levels.

Increasing Water Depths

During the last decade reductions in opportunities in shallow waters have been counter-balanced by moves towards increasing water depths. Water depths capabilities will continue to grow beyond the current drilling record of 2,965 m partly offsetting declining activity in shallow waters. Of the approximately 3,000 wells drilled offshore each year, 12 percent are now located in deepwaters. The number of deepwater wells relative to shallow water wells is expected to increase to around 16 percent by 2007.

Estimated Shallow and Deepwater

Drilling Expenditure to 2007

Deepwater drilling expenditure is forecast to see strong growth over the next five years, with a total of $40 billion to be spent on approximately 2,000 wells. The deepwater share of drilling expenditure, which stood at around 15 percent in 2002, will increase to around 26 percent by 2007. This is both due to more spending in deepwaters but also to declines in spending in shallow waters.

Higher Cost of Development Wells

There are three categories of well —exploration, appraisal and development. Exploration wells make up approximately 20 to 25 percent of offshore wells and success rates have increased over the last decade. Appraisal wells make up approximately 10 to 15 percent of all offshore wells while development wells make up the rest. Since 1991 the percentage of development wells relative to exploration and appraisal wells has increased and this trend is expected to continue as success rates improve.

Relative Expenditures on Well Types

Drilled Since 1991, Forecast to 2007

Expenditure on development wells relative to exploration and appraisal wells has been consistently increasing and will continue to increase — from approximately 52 percent of total spending in 1991 to approximately 65 percent in 2007. Growth in the next five years is almost entirely expected to be due to the increase in the number of deepwater developments. Deepwater fields are often exploited using fewer wells, but the associated drilling costs are significantly higher than shallow water wells.

Drilling costs vary enormously, most falling within the very wide range from around $2 million to perhaps $30 million although some extreme wells have cost much more. The cost of the rig may be between 20 and 35 percent of total well cost. Support services, including transport such as boats and helicopters, make up by far the greatest portion of engineering costs, often reaching as much as the rig itself.

Some overall cost escalation might also be expected over the next five years due to an increase in average water, target and total depths. Conversely this will be partly counter-balanced by technology improvements that speed up drilling.

Changes in the Regional Mix

Throughout the next five years, offshore wells drilled worldwide are expected to have a total cost of approximately $170 billion. Total drilling and well completion expenditure in 2002 is estimated at $33.5 billion and global spending levels are expected to stay roughly at this level over the next five years. However changes in the relative shares taken by the regions are anticipated. North America will have the highest share of the total spend, slightly increasing compared to the previous five-year period and growth of a similar magnitude is also expected in Africa, Latin America and the Middle East.

Drilling Expenditure 1998-2002

However, Asia and Western Europe are both expected to see declines in expenditure. Asia's forecast five-year spend is approximately $4.5 billion less than the previous period, and the outlook is similar in Western Europe, where forecast expenditure is more than $5.2 billion less than the 1998-2002 level. The biggest influence on these drilling expenditure levels has been the growth in deepwater activity. Africa and Latin America are expected to see deepwater drilling expenditure exceeding shallow water drilling expenditure for the first time in 2003 and this will continue for the forecast period. With the exception of the Middle East where there is no deepwater activity, all other regions should also see a shift from shallow to deepwater.

Drilling Expenditure by Region 1991-2007($ million)

The deep and ultra-deepwater rig market is expected to remain at high utilization rates throughout the next five-year period, especially for drillships and fifth generation semi-submersible rigs water depth rated greater than 1,500 m.

The shallow water semi-submersible market will be weaker but decline in demand for semi-submersibles, particularly in the Gulf of Mexico and the North Sea, will be counter-balanced by a pick-up in demand in West Africa, India and China, at least over the first three years of the five-year period. Demand for high specification jack-ups is likely to remain strong as new gas projects are identified.

A steady improvement to drilling equipment and services is thus anticipated over the next five years facilitating wells to be drilled in more extreme situations, in greater water depths and reservoir depths, at higher temperatures and pressures, and in areas prone to greater hazards. However no radical new processes are expected to make an impact on expenditure over the period.

Because of the shortage of shallow water prospects most new expenditure on drilling rigs is expected to be directed at upgrading jackups and floating rigs to allow, deeper reservoir drilling and deeper water drilling in addition to the usual progress made in allowing faster and cheaper drilling. In fact towards the end of 2002 rig rates were moving downwards as rig counts declined for older jackups and semi-submersibles.

The World Offshore Drilling Report 2003-2007 comprises an in-depth analysis and a full five-year forecast of wells and expenditure. It is available from Douglas-Westwood Limited at http://www.dw-1.com, and is one of a series of reports used by over 200 companies in 28 countries including leading oil & gas companies, contractors and investment banks.

About the Author Dr. Michael R Smith is an independent energy consultant and writer based in the UK. He has worked throughout the world as a geoscientist, exploration manager and energy advisor with oil and gas companies and consultancy organizations. Two of his latest reports are available from Douglas-Westwood; "The World Oil Supply Report 2003-2050" and "The Offshore Drilling Report 2003-2007" discussed above. He is currently developing an Internet-based information service called EnergyFiles to be launched this summer. For more information: [email protected].