Future Parallels Between Deepwater And The Permian

Future Parallels Between Deepwater And The Permian

11th April 2017

It seems a fair question since I have spent most of my career working on subsea projects that are moving into deeper and deeper water with increasingly complex developments.  I love this city, the people, the entrepreneurship, the “can do attitude” and good old fashioned Texas values, but, I’m a long way from my offshore oilfield roots.

It seems somewhat paradoxical on the surface.  When I first started in the oil and gas business, I was a graduate looking for an interesting project when old Bob Clarke told me to do something useful and work on that “subsea stuff.” The rest of the company was working on land equipment and thought subsea equipment was just an R&D project.  I heard many times that “subsea will never happen” but it did and, for many years, it has been the place to be for oil and gas innovators and investors.

The world is changing. Fast forward to today and the explosive growth we are seeing onshore in the Permian Basin. When I talk to subsea people, especially those from overseas, they have never heard of the Permian Basin and yet this is their main competition for capital funds. Just 5 years ago we were marveling at the massive deepwater pre-salt oil discoveries in Brazil. Today we are marveling at the land grab in the Permian Basin. The U.S. Geological Survey recently proclaimed the Wolfcamp the largest source of shale oil it has ever assessed (everyone in Midland already knows that), coupled with Apache’s recent Alpine High discovery and the mad dash for acreage in the Delaware Basin, makes the Permian an investor’s dream right now.

What are the upsides of US onshore domestic production compared to offshore and overseas? In my opinion, there are several key benefits. The first is that companies can gain a better share price multiplier on Wall Street for their domestic reserves and production compared to those held overseas. If you couple this with a Trump business tax cut, the US becomes very attractive. The second just comes down to straightforward economics. Technological advancements mean that oil can be produced very profitably for less than $50 a barrel in certain key producing zones, particularly the stacked pays of the Permian. These advancements have also led to an almost doubling of recovery rates from wells over the past few years. There is also a predictability factor around some onshore production. John Hess, when speaking at CERA week, basically said that Hess know what they are going to get when they drill, almost down to the nearest barrel.

While the recent significant reduction in oil price was a shock to everyone, this immediately spurred massive cost saving initiatives, slashed well costs and a created a drive towards large efficiency improvements. Add in the proximity to market for associated gas, new domestic pipelines and the local developments in downstream, mid-stream and chemical infrastructure and the Permian is incredibly well placed.

What has been the response of the subsea industry to the same market? Their challenge is significantly greater because the returns take a lot longer to mature. With some deepwater wells taking up to six months to drill, subsea equipment on a three-year delivery cycle and with an ever increasing level of complexity, costs have been escalating exponentially prior to 2014. The industry has not only had to reduce costs but also significantly adjust its mindset. In the past, engineers would typically solve problems with more steel, rather than through good operating processes, which would drive the cost up even more. I have been in many meetings where the topic was standardization in the industry, but we never really did too much about it. Every company had their own standard!!!!

These days that has all changed. There is a real drive to standardize equipment and materials, phase developments and look at a significant simplification of the subsea systems. The massive cyclical reduction in drilling rig costs ($600,000/day to $200,000/day) has gone a long way to helping make subsea more competitive. However, even with these cost savings it is still very difficult to compete with production costs in the Permian.

Perhaps there are some instances where increasing the subsea complexity can generate massive overall field development cost reductions.  Take, for example, the deployment of subsea compression for gas field developments. Imagine if we eliminate a complete platform offshore, we are talking about, potentially, billions of dollars in cost savings. These savings are real and the technology is no longer “first of a kind.” Yes, there are risks, but the upside is massive. The same applies for long distance tiebacks using high efficiency pumping systems.

The future, for both the Permian and Deepwater subsea, is standardization, focus on drilling cost reductions, time to market and improving recovery rates. The onshore developments appear to have the upper hand at the moment; however, don’t write off the subsea industry just yet. That entrepreneurial spirit and technological oomph that developed Shell’s early Central Cormorant UMC, Oryx’s Neptune Spar Development and Exxon’s SPS Project is still alive and well.

This brings me back to my original question, “Why am I sitting in a hotel in Midland Texas”? The answer is quite simple. I have moved on in my career and I am covering a much wider portfolio of energy resources. I recommend that every subsea engineer takes a trip to Midland to get a feel for the place. The Permian is the real competition now, not the adjacent subsea field or a different operator across the street in Aberdeen or Houston. Perhaps when you are flying into Midland you will catch a glimpse of the massive wind farms and the new solar projects that are being installed. This is the future competition for everyone in the oil and gas industry.

Author: Neil Macintosh

This article was originally published on Infill Thinking: https://www.infillthinking.com/infill-thoughts/sitting-hotel-midland-guest-post/