HOUSTON (Reuters) – Higher investments in offshore oil production are critical to avoiding a supply squeeze by 2020, as expanding shale output will not match projected demand increases in the next few years, U.S. oil producer Hess Corp said on Thursday.
The past four years of low oil prices have major producers pulling back on needed offshore investment, and the gap between supply and demand should help prices rebound, Hess Chief Operating Officer Greg Hill said at an energy conference at Rice University’s Baker Institute.
“The world is going to have to invest in more than shale,” said Hill, whose company has projects in offshore Guyana, Gulf of Mexico, and Gulf of Thailand. Expanded offshore production “will play a critical role in avoiding another supply shock.”
U.S. shale production, which is up 29 percent so far this year benefiting from greater efficiencies and lower service costs, has largely frustrated efforts by the Organization of the Petroleum Exporting Countries (OPEC) to tame a global glut that has halved oil prices since 2014.
Energy producers are focused on investing in shale areas such as Texas’ Permian Basin because of shorter-term payback and lower risk fields, said Bobby Tudor, chairman of investment bank Tudor, Pickering, Holt & Co, who addressed the same conference.
“You don’t drill a dry hole in the Permian,” Tudor said. “You dig lots of dry holes offshore.”
Signs of stronger demand recently have begun to take the pressure off prices.
The International Energy Agency said this month that a global crude surplus was starting to shrink.
Hess in July posted a bigger than expected second quarter loss as its oil production slipped. It recently suffered some production hits from Hurricane Harvey. Hess’s third quarter per share profit is expected to fall 18 percent to $1.33, according to Thomson Reuters data.
While deepwater projects require significantly higher capital expenditures than conventional or shale production, those costs are declining as the industry gains greater efficiencies, Hill said.
There is the potential for deepwater drilling costs to shrink by as much as half from new technologies such as those that anticipate mechanical failures, said Jean-Francois Poupeau, executive vice president at Schlumberger NV, the world’s biggest oilfield services firm by revenue, who also spoke at the conference.