Given their extensive oil and natural gas capacity and their accessibility, U.S. shale reserves are increasingly the investment of choice for producers. Integrated oil companies like Chevron are making that clear as they plan to spend more on areas like the Permian Basin in Texas and New Mexico.
But don’t rule out a comeback for oil buried deep beneath offshore waters.
A new report by the consulting firm Wood Mackenzie says the deepwater industry is emerging leaner and more cost-competitive from the slump in oil prices that began in 2014, especially in the U.S. Gulf of Mexico.
On average, the costs of deepwater projects have fallen by just over 20% since 2014, the Scotland-based consultancy says. Assuming a 15% rate of return for producers, 5 billion barrels of deepwater reserves now break even at $50 per barrel or less.
By comparison, there are 15 billion barrels of tight, or shale, oil in undrilled wells with break-evens of $50 per barrel or less, at the same 15% ROR target, Wood Mackenzie said.
“However, the playing field between tight oil and deepwater is about to get a lot more level,” the report added. “There is still considerable scope to drive deepwater break-evens lower through leaner development principles and improved well designs, but in tight oil, cost inflation is back with a vengeance.”
Wood Mackenzie estimates that with another 20% reduction in deepwater costs, 15 billion barrels of reserves would become attractive to producers, on par with tight oil.
“The deepwater-value proposition will strengthen as tight-oil cost inflation returns,” the report said.
Or put another way, a 20% increase in tight-oil costs would mean tight oil and deepwater oil would offer the same opportunities for profitable development with oil prices at $60 per barrel, the report said.
That outlook appeared evident in a recent auction for drilling rights in federal waters in the central Gulf of Mexico, traditionally the prime area for development in those waters.
The sale by the U.S. Interior Department attracted nearly $275 million in winning bids for 163 tracts, or about 914,000 acres. The results surpassed an auction in the central Gulf last year that generated $156 million in high bids, though they fell short of one in 2014 that raised $960 million in winning bids. At the time, oil was selling for more than $100 per barrel.
Shell offered the highest winning bid at $56 million, followed by Statoil, Hess, Chevron and ExxonMobil.
“Deepwater is a big boys’ game. It’s not for everyone,” Angus Rodger, Wood Mackenzie’s research director for upstream oil and gas told CNBC’s “Squawk Box” in a commentary on offshore prospects around the world.
“Nonetheless, we’ve seen already in the first three months of the year three projects sanctioned in deepwater, and we think this year we’ll see about eight projects sanctioned, which is the same as 2015 and 2016 combined. So, the signs are there that companies are beginning to invest (again) in deep oil.”