How deepwater producers stay resilient amid fluctuating oil costs | USAEMALL.com

Welcome to Energy Source, coming to you from New York.

The world is still grappling with what Donald Trump’s so-called liberation day will mean for the economy. The US president jolted markets on Wednesday afternoon when he escalated his trade war and announced “reciprocal tariffs” on major trading partners. The measures will have major ramifications for the US energy sector, which relies heavily on imports for clean technologies and grid equipment.

In other news, my colleagues Jamie Smyth and Amanda Chu have reported that Dominion Energy, one of America’s biggest utilities, plans to raise consumer bills by 14 per cent as it contends with the rising cost of labour, materials and grid upgrades amid soaring electricity demand. The rate increases come at a time when Trump’s trade agenda could stoke prices higher.

In today’s newsletter we take at a look at the deepwater oil industry and why the sector’s projects are not as exposed to oil price swings compared with shale. — Alexandra

How deepwater producers remain resilient amid fluctuating oil prices

Weak oil prices have caused shale executives to sound the alarm that any further fall will damage their sector, but analysts say deepwater oil producers are less vulnerable to crude price swings.

Oil prices have fluctuated this year amid uncertainty over Trump’s trade policies and the impact of Russian sanctions on crude exports. Brent crude, the global benchmark, settled at $75.02 a barrel on Wednesday, while the US West Texas Intermediate increased to $71.80 a barrel.

Unlike the shale industry, offshore deepwater drilling projects have longer cycle times and are less vulnerable to fluctuating crude prices and election cycles.

“Even if the [Trump] administration could have an influence short term or medium term on oil price . . . The developments that have the strongest resilience against oil price fluctuation are the big finds in deepwater,” said Øivind Tangen, chief executive of SBM Offshore, a Dutch oil services company that builds and operates floating vessels for deepwater production and counts major players such as Petrobras, ExxonMobil and Woodside as customers.

Deepwater drilling has made a comeback and is one of the biggest sources of growth for large operators with recent discoveries revitalising exploration by major energy companies.

S&P Global estimates that deepwater will grow to roughly 20mn barrels of oil equivalent per day by 2030, representing 20 per cent of global production. In comparison, it estimates that shale is forecast to increase by 14mn barrels per day by 2030, representing only 13 per cent of global production. 

The excitement around deepwater is a stark contrast to shale, where executives are becoming frustrated with low prices, dwindling acreage and the Trump administration’s mercurial trade agenda.

“These are long-cycle projects, so it may take five to 10 years to develop a field from drilling the exploration well to first oil,” said Matt Hale, vice-president of supply chain research at Rystad Energy. “If you took shale as the other extreme end of that spectrum, you can see it adding or dropping rigs as prices go up or down.”

Tangen said SBM Offshore had a backlog of projects that extended to 2051, including 19 different assets. “These are cycles that go way beyond the political cycle. You start drilling something today, you’re not going to see oil until 2032-2033,” he added.

Companies poured nearly $100bn into the sector last year, according to estimates from Rystad, up from about $73bn in 2020 and the highest level since 2016.

Shale executives told a survey by the Federal Reserve Bank of Dallas that any further fall in oil prices would hurt the sector. Trump’s trade adviser Peter Navarro last month suggested that $50-per-barrel oil would help tame inflation. But shale producers said that would hurt their profits and force them to temporarily halt production. 

Rystad Energy estimated that the average break-even price, which is the minimum amount needed to cover costs, for offshore deepwater was $43 per barrel, while North American shale was $45 per barrel. 

“There’s some headroom for both shale and deepwater producers so it would take a substantial price decline to really impact projects,” Rystad’s Hale said.

But shale executives have at least one advantage. While onshore producers can shut in production and wait for better prices, deepwater producers can’t swiftly stop drilling. 

“Offshore, they’re not going to shut in production if the price drops,” said Bob Fryklund, vice-president of upstream energy at S&P Global. He added that lower prices could affect deepwater projects that were awaiting final investment decisions because projects might not get approved until “the price recovers to where that break-even price threshold is met”.

Still, Hale said there were a lot of deepwater fields that had already been discovered. He added that if there were delays, “it’s really about getting all those projects through the pipeline than [whether] the price went up or down”. (Alexandra White)

Job moves

• Bashir Ojulari has been appointed chief executive of the Nigerian National Petroleum Company, after the country’s President Bola Tinubu sacked the entire 11-person board of the company, including former chief executive Mele Kyari. Ojulari previously served as managing director of Shell’s Nigeria deepwater exploration and production unit.

• Thames Water has named Steve Buck as its new chief financial officer, replacing Alastair Cochran, who unexpectedly stepped down last month. Buck is a former finance chief at utilities Pennon Group and Anglian Water and will start his new role on Monday.

• Tennessee Valley Authority has promoted Don Moul to chief executive, replacing Jeff Lyash, who said in January that he would retire.

• Greg Columbus has been appointed non-executive chair of Pilot Energy and will succeed Brad Lingo, who will continue as managing director of the company.

• Livium has appointed Phillip Campbell as independent non-executive chair.

Power Points

• A senior UK Treasury minister said he was confident private financing for Sizewell C nuclear power station would be “teed up” in time for a final investment decision in June, after it delayed the decision last year.

• Commodity traders are using profits earned during the energy crisis to snap up assets, expand into new areas such as metals trading and take big bets on nascent sectors such as biofuels.

• Danish energy traders are developing algorithms to gain an edge in the renewable energy market.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at [email protected] and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.