Contents

Introduction

The decline in oil prices from mid-2014 led to investments being slashed in all segments of the global hydrocarbons industry, but the most severe impact was felt in offshore areas. With higher break-even prices than in onshore operations, offshore projects were the first to be postponed. In Latin America, this was first evident in Brazil's pre-salt areas, where oil and gas reserves are located beneath a 2km layer of salt in the Atlantic Ocean.

However, in recent months, the decline in investment has started to show signs of change. The combination of higher crude prices - after hitting a low of US$27 a barrel (/b) in January last year, they are currently around US$55/b - and a reduction in exploration costs is bringing some of the shine back to offshore areas. According to a March report from Wood Mackenzie, costs for deepwater oil and gas projects have fallen more than 20% since 2014 and the most attractive ones are already competing in profitability with US tight sand operations. The research firm said that an oil price of US$50 or even less could sustain deepwater projects with reserves of about 5Bb. In 2014, the break-even price was US$75/b.

That trend is set to continue as there is considerable scope to further reduce the break-even price in deep water through leaner development methods and better well design. Wood Mackenzie estimates that an additional 20% reduction in deepwater costs "would bring 15Bb [billion barrels] of pre-FID [final investment decision] reserves into contention, on par with tight oil."

The trend can already be seen in Latin America. The offshore drilling fleet stood at 35 vessels in May, up from 32 the previous month and 30 in May 2016, according to services and technology provider Baker Hughes. Activity in both deep and shallow waters is picking up in Brazil, Mexico and Guyana, and there are changes that point to greater momentum in the medium term in Colombia, Peru, Uruguay and Argentina.

In this report we analyze the current state of the offshore segment in the main countries of the region, what the potential is and what obstacles still need to be overcome by companies to make offshore projects more attractive.

Figure: Rig Counts

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