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Offshore projects safe from slowdown, for now

While low oil prices are causing rig stacking nationwide, offshore rig counts in the Gulf of Mexico are actually expected to rise this year.

In many ways, the increase in drilling rigs predicted by Wood Mackenzie is no surprise. Offshore projects require extensive planning—a process which takes years—and billions of dollars in investments. These projects also produce much more oil, natural gas and natural gas liquids than onshore projects and are expected to remain operational for decades. As analyst Fadel Gheit for Oppenheimer & Co. told Bloomberg, “You’re going to milk this cow for another 30 years, so you don’t care what the price of milk is today.”

Right now that price is comparatively higher than last month, but Brent crude still sits at about $60 per barrel. While it is marginally better to the industry-gutting $47 a barrel from just weeks earlier, most onshore drilling projects have a breakeven point between $60 and $64 per barrel, according to a recent report by Rystad Energy. The lack of profitability and strain on capital budgets has caused mass-layoffs throughout the industry.

Breakeven oil price points for offshore projects are no better. Shallow water projects require $71 per barrel and deepwater projects need $77 per barrel to cover the cost. According to Bloomberg, drilling platforms can cost as much as $2 billion and each well can run about $300 million just to drill.

Image via Rystad Energy UCube

However, projects which would hit the water in 2015 have already undergone years of planning and will proceed as scheduled. Wood Mackenzie has estimated that the number of oil rigs in the Gulf of Mexico would grow by more than 30 percent compared to 2014’s numbers. With more rigs comes increased production, of course. More than 1.4 million barrels were extracted in the Gulf each day in 2014. By 2016, Wood Mackenzie anticipates that number to reach 1.58 million barrels per day.

Much of the increased production will come from projects set to capitalize on prospects with proven reserves where companies are focusing their efforts, rather than exploratory work. According to Rystad Energy, global offshore discoveries have been in a downward trend. While there have been significant discoveries in the Gulf relatively recently, total discoveries in 2014 were at their lowest point in 10 years.

rystad energy discovery graph

Investments for future offshore projects will take the hardest hit from low oil prices. While companies like BP, Chevron and ConocoPhillips can collaborate to cut down on costs for projects already planned in the Gulf, overall investments began dropping last year. Rystad estimates that investments in offshore drilling will continue to decrease globally by about eight percent in 2015 and 2016.

rystad energy investment graph

Until oil prices—and therefore investments—rise to a breakeven point of about $75, it will be the new rigs and their builders that see the greatest financial risk. Without investments for new projects, there will be fewer contracts to get the rigs into the water.

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