A shift in strategy could spur
the resurgence of offshore in 2018
A key expected strategy for surviving in a low-price environment is portfolio ptimization – shedding assets that do not fit a specific geographic strength, technical capability, or risk profile.
However, growth – and developing a strategy
to produce higher returns over the long term
– is crucial for oil and gas companies. While it
contradicts recent industr y trends, offshore is
poised to play a vital role in that future growth.
Survival or growth
During the recent downturn, many oil com-
panies migrated from cost reduction to portfo-
lio rationalization. Some even optimized to a
single-basin focus in an attempt to consolidate
drilling activity and reduce costs. Frequently,
this meant retreating to the predictable returns available in onshore unconventionals.
Divesting higher-risk assets was a smart
move for many companies – especially highly
leveraged firms – when prices fell quickly. But
history shows us that prices are unpredictable.
If they were to rise over the next 10 years – per-
haps due to geopolitical issues or even an unexpected increase in global demand – it makes
sense to have a broader reserve base available.
Uncertainty around long-term demand for
oil and gas as well as the impact of disruption
and pace of innovation is driving oil and gas
companies to review their portfolios more fre-
quently. According to the latest EY Oil & Gas
Capital Confidence Barometer, 78% of global oil
and gas executives indicated their companies
conduct a review at least every six months.
Even in a downturn, growing reserves are
critical for long-term success. Recent analysis
based on the EY US Oil and Gas Reserves Study
found top-performing oil and gas companies –
those with a return on capital employed between
8% and 22% – grew their reserves by an average
of 16%, over the past five years. Meanwhile,
companies in the bottom tier did not grow their
reserve base at all.
Responding to low oil prices and focusing on
fewer plays in recent years, companies may have
limited the potential option for strong returns
down the road. Keeping inexpensive assets with
strong upsides in the portfolio today for longer-
term development is one way to shorten the
runway for future growth should prices rebound.
Looking toward 2018 and beyond, upstream
portfolios may shift again—this time with an
eye toward optimizing for growth and consis-
tent cash returns.
Renewed interest in offshore is quietly re-
surging among oil and gas companies, even
while shale dominates their current focus.
Driven by the need for baseline production
growth and refining demand for balanced
crude (heavy, medium, and light), companies
will likely move more aggressively to lock down
new offshore plays – especially since offshore
project long-term economics delivers attractive
returns relative to shale over the life of a field.
The rebound will be marked by two primary
signs: ( 1) demand outpacing supply; and ( 2) a
reduction in costs, making offshore projects
Overall, we expect steady offshore development increases over the next two to three
years. Shale will remain a dominant play, but
offshore will become increasingly important
to many company portfolios.
It will not be “business as usual” for a newly
energized offshore industry, however.
Cost curves are down tremendously in deep-
water operations. This is partially driven by
technology and operating method advances de-
rived in other offshore operations, and partially
through company focus on leaner operations.
Ernst & Young LLP