Reducing drilling and development spend has largely been the focus of services and equipment providers in the Gulf of Mexico – with the aim of lowering costs at the most capital intensive period of asset lifecycles. Often overlooked, Opex costs have grown in line with other upstream costs – 7 percent CAGR from 2010 to 2014 in the Gulf of Mexico. The North American offshore market has some of the highest overall MMO costs per barrel – more than twice the global average.
Historically, offshore Opex has been largely ignored as a critical driver of deepwater project economics, yet this is beginning to change. The current rate of growth combined with the overall operational cost in the Gulf of Mexico is not sustainable. Operators are deferring and cancelling many historically routine operational objectives as long as they stay within safety and regulatory guidelines. Budgets for maintenance and modification projects are now being revisited and contractors will feel the impact. Within our offshore support sector clients, many firms typically point to the large proportion of revenue that is production-linked, implying that this insulates from the effect of oil price cycles. Whilst this may be true up to a point, the effect of the current prolonged downturn clearly reaches far further than exploration and development activities.
Mergers and acquisitions are likely to be a result of this operational spending compression, but there are still many efficiencies to be shaken out. Practices such as consolidating projects and optimizing contracting processes are already producing results in many cases. With breakeven economics at $70 per barrel or higher at some Gulf of Mexico prospects, recognition of operational costs and streamlining the value chain can no longer be overlooked.
Andrew Meyers is Associate Director (Houston) at Douglas-Westwood. Meyers joined DW’s Houston office in 2014 with over 10 years’ experience in the energy sector. Previously at Decision Strategies, Meyers was a Project Lead in the Market Intelligence practice where he focused on oilfield market research and due diligence. He has assisted energy- and oilfield-related clients in market analysis, decision analysis, M&A due diligence, commercial analysis, strategy development, market forecasting, technology strategic marketing and benchmarking for the upstream, midstream and oilfield service sectors. Prior to joining Decision Strategies, Meyers was an analyst for Anadarko Petroleum. He holds a BBA in Finance from Texas Tech University and a Master of Business Administration from Duke University.