The deepwater oil industry is not dead, even after the brutal drop in oil prices in recent years, but activity will focus on regions such as Brazil and the Gulf of Mexico where resources are large and costs low, executives said on Tuesday.

Sanctioning of multi-billion dollar projects, that take years to develop and which drove oil supply growth earlier this decade, ground to a near halt since the oil price collapse in mid-2014 as companies dealt with a sharp drop in revenue.

U.S. shale oil production has been able to sharply reduce its development costs in recent years to stay profitable at $50 a barrel in some cases, John Hess, Chief Executive Officer of U.S. independent Hess Corp told the Oil & Money conference.

“You will need prices in excess of $60-$80 a barrel to get the long-cycle projects running,” Hess said. “We are not investing enough today to provide the projects for long-cycle that the world is going to need.”

“Not all deepwater is equal,” Andrew Gould, board member of Saudi Arabia’s state-run oil company, said.

“There are really only three areas that have the critical mass to allow economies of scale. These are the U.S. Gulf of Mexico, the North Sea, particularly the Norwegian area, and Brazil,” he added.

“These areas have the engineering and supply supporting proximity that can mobilize resources in a way that is impossible in remote areas,” Gould, former chairman of BG Group, which Royal Dutch Shell acquired earlier this year, said.

Gould gave the example of Statoil’s Johan Castberg field development in the Norwegian North Sea where costs have been reduced from an original estimate of $16 billion to around $6 billion due to cost deflation and simplification of construction plans.

Similarly, BP’s Mad Dog project in the Gulf of Mexico is expected to be developed at nearly half of its original costs of $20 billion.

BP Chief Executive Officer Bob Dudley told reporters at the conference that a final investment decision (FID) on the Mad Dog project might be made over the next six months.

Dudley said Mad Dog II will “probably” be sanctioned this quarter or in the first quarter of next year, depending on agreement with its partners.

“There will be FIDs. Investments are back but only the best ones,” Dudley told reporters on the sidelines of the conference.

Dudley expected oil prices to remain within a range of $50 to $60 a barrel next year and not exceed $70 a barrel by the end of the decade.

“Good deepwater in areas of critical mass will be developed and it is encouraging to see operators already reacting to reduce developing costs,” Gould said.

The world will require around 40 million barrels per day of new oil production over the next 10 years to meet annual demand growth of around 1 million bpd and a natural field decline of some 30 million bpd, Hess said.

Oil majors such as Chevron are increasingly focusing their smaller budgets production growth on short-cycle plans such as shale and shallow water projects in order to benefit from faster income.

Ali Moshiri, President of Chevron’s Africa and Latin America Exploration and Production said that mega projects such as heavy oil and extra heavy oil developments in Canada and Venezuela, as well as some deepwater production, will be “very difficult” to develop unless prices reach $60 to $80 a barrel.

“From a practical point of view, certain projects will be pushed into the future,” Moshiri said.

Source: www.reuters.com