Life in the deep
Wood Mackenzie’s CEO weighs in on offshore drilling and other energy issues.
Neal Anderson is the chief executive of energy research firm Wood Mackenzie and a Houstonian. He sat down with the Chronicle this spring to dish on the future of oil prices, the shale revolution, the industry’s budding recovery and why offshore drilling may someday overtake onshore.
Q: WoodMac grew revenues during the downturn. How did you do that?
A: When you have such a period of uncertainty, there are lots of really good questions that CEOs are asking of their business. Where’s the oil price going? How do we respond to that? How can we get more efficient? We came up with the mantra, survive, adapt, grow. We developed a new consulting offering called performance improvement, which was exactly aimed toward that.
Q: What worries you about the industry today?
A: People have been very encouraged by the OPEC agreement to curtail production. By and large, folks are holding to that agreement. The concern that we have is: How does U.S. tight oil respond? We’ve seen lots of the U.S. independents say they want to increase production. How does that upset the supply and demand balance? That’s what everybody’s talking about in Houston at the minute.
Q: What’s the answer?
A: You’re going to have a ceiling on oil prices driven by the interplay. When oil prices get north of $50-55, the U.S. independents start drilling. If they get too aggressive, too much oil comes on the market, then the market will respond and lower prices, and that will subdue activity.
Q: Any trends that worry you?
A: Longer term, 2020 onwards, we’ve had a phenomenal cut in capital expenditures. I think we’ve taken something like $355 billion of cap ex off the table in the last two years. That’s an absolutely huge number of potential developments for new oil and gas supply. Longer term, that will have an impact on oil prices, namely, there will be tight supply, and as demand grows, we’ll get a spike in oil prices.
Q: Where are oil prices going?
A: $50-$55 for the next couple of years, until 2019. Then the question we’re pondering is: Does that missing capital investment result in a price spike?
Q: Offshore is still really struggling. What’s going on there?
A: The interesting thing about deep water is, just as we’ve seen rapid cost deflation onshore, we’re actually starting to see that offshore. BP’s Mad Dog 2 in the Gulf of Mexico is the clearest example I can show you that deep water is not dead. They’re driving down costs.
Q: But aren’t we just starting to see the potential of the Permian?
A: Yes. This industry is at a really interesting juncture. It basically boils down to one question: How much U.S. tight oil is there, at what cost, and how quickly can it come onstream? Folks are radically changing their portfolios to reflect their answer to that question.
Q: The majors are playing both deep water and shale oil.
A: The independents used to be phenomenally successful in deep water. With this retrenching back to onshore and the Permian, it’s leaving more of that landscape to the majors, because they’re the ones that are continuing to invest in exploration in the deep water.
Q: That’s going to come back and bite the independents?
A: Correct. As they’ve retrenched onshore, they’ve lost all the skills, expertise and portfolio to play in the deep water. And that’s a hard thing to replicate in three or four years’ time. Exxon, Chevron, the majors, did not. They kept a foot in that camp.
Q: Deep water is phenomenally productive.
A: It is. Some of the best in the Permian may get 1,000 barrels per day. Whereas you get 25,000 to 30,000 per day at some of the best wells in the Gulf of Mexico.
Tight oil is a wonderfully quick outcome. I can get those wells on really quickly. Offshore has a much longer lead time. In some cases it can be six, eight, 10 years from discovery to first production. If you decide to develop it, you’re caught up in that. You can’t start and stop. But once that comes on stream, from that point forward the break-even cost is relatively low. On an absolute value creation, deep water is far more lucrative than onshore. Because onshore continually needs that capital investment to drill those wells. Q: But companies are still really struggling. Costs haven’t fallen far enough. A: We’ve got further to go, in regards to further cost deflation, offshore than onshore. I think onshore cost deflation has bottomed, and it’s actually going the other way. Offshore, I think it’s still going down.