IEA sees deepwater growth eclipsing shallow water

Deepwater project production and investment will grow, and will do so at the expense of shallow water fields if the world sticks to current and announced energy policies, according to the IEA's Offshore Energy Outlook.

The IEA looks at two scenarios in the report. The New Policies scenario explores "the evolution of the global energy system in line with existing policy frameworks and announced intentions", and its Sustainable Development scenario assumes "the world gets on track to attain its climate, air quality and energy access goals".

In the New Policies scenario, total offshore oil production rises only slightly by 2040 from its current level of 27mm b/d. But deepwater output increases from less than 7mn b/d now to almost 10mn b/d in 2040. The IEA sees "a notable shift" from investment in shallow water to deepwater assets in the New Policies scenario.

"Brazil is by a distance the largest source of anticipated deepwater growth to 2040, more than doubling its current output of 2.2mn b/d," the IEA said. "Our projections imply that Brazil remains an important focal point for global spending on deepwater production, particularly in the period to 2025."

And Brazil is one of the main destinations for offshore oil and gas investment in the New Policies scenario, with annual capital spending there reaching $60bn by 2040, of which more than $50bn is for oil.

In the Sustainable Development scenario, offshore electricity production "gets a major boost as worldwide installed offshore wind capacity rises above 350 GW in 2040, more than double the level in the New Policies scenario". At the same time, offshore oil production falls to 20mn b/d by 2040, as shallow water oil production drops by more than a third while deepwater output stays close to current levels.

"Limited shallow water exploration and unfavourable cost competitiveness (in a lower price environment) are the two key reasons for the [oil] production trajectory in the Sustainable Development scenario," according to the IEA. "Investment in gas is relatively robust... but by the 2030s all regions see offshore oil investment at about half of the levels projected in the New Policies scenario, in some cases even lower."

"The continued need for upstream oil spending in this scenario is motivated entirely by the need to compensate for declining output at existing fields," the IEA said.

Under the New Policies scenario, global oil demand increases to 105mn b/d by 2040, and higher oil prices are required to keep supply and demand in balance, according to the IEA. The agency estimates that about 670bn bl of new oil resources need to be developed over the period to 2040, with the majority just compensate for natural declines at existing fields.

"Especially when tight oil in the US starts to level off, which happens in this scenario in the mid-2020s, there is a need to move to higher cost oil in more challenging and complex reservoirs; this creates a call for additional offshore projects, including deepwater projects, as well as smaller onshore fields and less productive areas for tight oil," the IEA said. "In sum, this means that the marginal project required to balance the market in the New Policies scenario becomes steadily more expensive, despite the assumption of continued technological progress."

Under the Sustainable Development scenario, "the resilience of US tight oil means that the upcycle that is visible in the New Policies scenario does not have time to play out before demand peaks around 2020", according to the report.

"This limits the call on higher cost oil to balance the market and the oil price therefore stays ‘lower for longer'," the IEA said. "The oil market is still large in 2040 - at 73mn b/d – and overall investment needs are still substantial, but uncertainty over long-term demand also militates against committing capital to large capital-intensive projects with long-lead times – as is the case for some "frontier" offshore projects."

According to the IEA, in both scenarios "the large current oversupply of services and supplies in the offshore [oil and gas] sector keeps costs on a similar trajectory in the short term". But further ahead, trends diverge.

"Supply and services markets start to tighten, pushing unit costs higher, although global average capital costs for all conventional projects in 2025 in the New Policies scenario are still 25pc below 2014 levels," the IEA said.

In the Sustainable Development scenario, "the slack in the supply and services markets is maintained, and so the increase in unit costs is therefore marginal: there is less need to develop more complex projects, and in an environment where demand has started to decline, the industry is able to proceed only with a smaller number of the most promising offshore projects", according to the report.

But in terms of gas investments, "more large-scale new offshore projects need to proceed to meet demand", it said.

"Yet by 2025 the costs of conventional projects in the Sustainable Development scenario are about 40pc below 2014 costs, with offshore projects remaining slightly below the global average," the IEA said.