Hess chief warns on falling deepwater investments

The collapse of investments in deepwater and offshore oil projects is a key market risk, US independent producer Hess chief executive John Hess said.

"At these prices offshore and deepwater investment has been shut down and it will start showing its head in 2018-20," Hess said. US shale production will stay flat at $50/bl and will start growing if prices climb over $60/bl, he said during a discussion at the Washington-based think tank Center for Strategic and International Studies (CSIS).

Even though US shale output can recover quickly, "you are going to need Opec, you are going to need one cycle projects" to meet the future oil demand, Hess said. "Investment is not made in [the offshore and deepwater] business. That is the real risk we have."

Hess still is investing in its Stampede complex in the US Gulf of Mexico which is slated for completion in 2018. And BP just approved the second phase of its Mad Dog oil field project in the US Gulf after slashing costs by more than half to $9bn.

But the effect of delayed or cancelled investments from 2014-16 is expected to take a toll on the US Gulf production, according to the US Energy Information Administration's 2016 Annual Energy Outlook. The lower-48 offshore production is expected to peak at 1.98mn b/d in 2020-21 and decline at a 2pc/yr rate in the following decade.

The price of oil is not the only factor deterring deepwater projects globally, former Schlumberger chief executive and former BG Group chairman Andrew Gould said.

"Deepwater is only economic where there is critical mass, [such as] the Gulf of Mexico and Brazil," he said. at the CSIS event. Shell, which acquired BG, and Statoil are developing offshore gas projects in Tanzania but the political and legal uncertainty is a major deterrent for investors despite the resource potential, Gould said. The LNG project under development is based on total estimated offshore gas resources of 55 Tcf (1.6 trillion m³).

Hess and Gould were in Washington to moderate a discussion with former Saudi oil minister Ali Naimi, who is on a worldwide tour promoting his memoir.

Naimi's strategy to force high-cost oil producers globally to "find a way to lower their costs, borrow cash or liquidate" has succeeded because the market is getting into balance, Hess said. "Producers now have to compete on costs," he said, citing the success of US shale producers in dramatically slashing services and operational costs. US shale breakeven costs as a result dropped to about $50/bl, he said.

There are hugely divergent cost estimates for US shale breakeven costs, Gould said. "Even in the Permian, shale will not be viable at $50/bl. The service industry has been so decimated in the US that any increase in rigs is going to push up costs."

Naimi largely steered clear of discussing current oil market dynamics. But he offered a word of caution on the 30 November Opec agreement to cut output for a six-month period starting 1 January.

"If they make a concerted effort to get everyone, that can be done. But it remains to be seen," he said.

The agreement depends on Russia's cooperation, which was elusive in the past, he said.

"The only tool Opec has is to constrain production and the unfortunate part is we tend to cheat," Naimi said. "There is not much you can do if there is no maximum cooperation between the producers."