Offshore oil is about to surge


Oil executives love to talk about the energy transition. But for all the platitudes about technologies such as hydrogen and carbon capture, most are doubling down on what they know best.

Oil.

Spending on new offshore oil projects over the next two years is projected to soar to levels not seen in a decade.

In Saudi Arabia, the state-owned oil giant is embarking on a series of massive offshore expansion projects designed to boost the kingdom’s crude production. The United Kingdom and Norway are pumping more money into the North Sea in hopes of lifting out more oil. Exxon Mobil Corp., America’s oil giant, is plowing money into projects in waters off Guyana and Brazil.

The offshore revival represents a shift after a decade of focus on onshore shale plays and amounts to a vote of confidence in oil’s long-term future. The move is notable as it follows several years of mounting talk of diversifying oil companies’ business models.

Europe’s oil giants have announced net-zero emission targets and have begun investing in everything from renewables to electric vehicle charging. Even America’s oil titans, which have long maintained that crude will be needed for decades to come, have begun pouring money in areas such as hydrogen and carbon capture.

Yet oil remains their bread and butter.

“People who hoped the oil companies would stop investing in oil are likely to be disappointed,” said Kevin Book, managing director at ClearView Energy Partners.

In some ways, the offshore renaissance is a sign of the emerging energy transition.

The world is still likely to consume large amounts of oil for decades to come, even if energy transition efforts gain steam and global crude demand begins to decline. That means investment in new or expanded fields is needed to offset declining production from existing wells. The result is something of a race, with oil companies seeking to identify fields that can produce at low oil prices and outlast competitors in a shrinking market.

“Whatever transition brings to the oil industry, there is going to be a place for cleaner, cheaper barrels,” Book said.

Rystad Energy, a consulting firm, reckons that offshore spending will eclipse $100 billion in 2023 and 2024. That would mark the first time offshore oil investment eclipses the $100 billion mark in consecutive years since 2012 and 2013, the firm said. Offshore spending will account for 68 percent of spending on newly sanctioned projects over the next two years, compared with 40 percent from 2015 and 2018.

The offshore boom is being led by nationally owned oil companies in the Middle East. Saudi Arabian Oil Co. reported this month it plans to spend $55 billion in the coming year on capital investments — up from its previous plan of $45 billion — as it seeks to ramp up production from a series of fields in the Persian Gulf.

Norwegian spending on North Sea projects is projected to leap to $21.4 billion, a 22 percent increase over 2022 spending levels, while British investments in the region are expected to increase 30 percent to $7 billion. In Brazil, offshore expenditures are expected to reach $23 billion, Rystad said.

“The companies are judging that the time is right to actually sanction these projects,” said Alex Dewar, an analyst who tracks the industry at the Boston Consulting Group. “Some of these projects have been in development for years, decades even.”

Oil majors are spending more on low-carbon ventures. Even Exxon, which has long expressed skepticism that a transition is imminent, is projected to boost spending on technologies such as hydrogen and carbon capture, with the company expected to spend $17 billion on low-carbon ventures by 2027.

Yet those projects remain years away from turning a profit, Dewar noted.

“So the focus turns to where can we deploy the capital, what’s going to meet the rate of return given the oil price environment,” he said.

At first glance, offshore projects appear ill-suited for a world moving away from oil. Offshore development is incredibly expensive and time consuming. Exxon’s Payara development off Guyana, for instance, comes with a $9 billion price tag. Hydraulically fracturing and drilling a shale well, by comparison, is relatively cheap and quick.

Yet shale production is increasingly challenged. Output from shale wells tends to fall quickly, meaning new wells have to be quickly drilled to offset production losses. After more than a decade of intense drilling, many of the most productive locations in the United States have been tapped, analysts say.

Rising interest rates also present a challenge for U.S. shale producers. Many shale companies are relatively small by industry standards and rely on debt to fuel their drilling programs.

Offshore, meanwhile, tends to be the domain of large producers, which are flush with cash after a year of record profits and better able to finance projects from their own balance sheets. Offshore platforms also rely on massive economies of scale, producing vast amounts of oil for decades at a time. Exxon’s Payara project, for example, is projected to deliver 224,000 barrels of oil a day.

“I don’t know if they know what the transition will look like. But what they know, and what we can be pretty confident of, is in the near term we need this stuff,” said Deborah Gordon, a former petroleum engineer who tracks the industry at RMI. “It makes sense that they would be thinking of not exiting anytime soon because they have to make these investments.”

The climate impact will in large part depend on how the oil is produced.

The more flaring is controlled, the less energy required to lift the oil from beneath the sea and the more scrupulous the operator, the less the emissions will be, Gordon said. Those factors can vary widely from region to region. Saudi Arabia’s offshore Safaniyah has an estimated emissions intensity of 528 kilograms of CO2 per barrel, compared with 556 kg of CO2 per barrel of onshore Bakken crude, according to RMI’s Oil Climate Index.

But in the big picture, more oil production is a recipe for more planet-warming emissions at a time the world can ill afford it. Scientists estimate the world has nine years at current emissions rates before global warming exceeds 1.5 degrees Celsius, and 30 years before it breaches 2 C.

While climate policy has accelerated with a bevy of clean energy subsidies in countries such as the United States, America lacks a carbon price that would penalize oil producers for their emissions, said Andrew Waxman, an assistant professor at the University of Texas, Austin, who studies the industry’s greenhouse gas emissions.

“The fundamentals for oil and gas are still there, and in some cases as much as ever with challenges in Europe and impressive growth rates in Asia,” he said. The net impact of new offshore oil developments will be lower energy prices, which will spur consumption and, by extension, more emissions.

“Lower energy prices are more of a challenge for climate policy,” Waxman said.



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