HOUSTON—Amid talk about shale, future oil prices and the United States’ and OPEC’s role in it all, other casualties of the latest downturn entered the conversation.

It seems like deep water, Arctic and Canadian oil sands projects are more harmed in the current environment because U.S. onshore shale is adjusting faster, Pearce Hammond, managing director and co-head of E&P research at Simmons & Co. International, said during Mayer Brown’s Global Energy Conference this week. “We’ve taken share from those projects over the past few years.”

Global E&P capex is predicted to decline by about 25% this year, compared to last year. Unless deepwater, Arctic and oil sands projects—which typically take longer to develop and cost more than shale developments—adjust their cost structure they could lose more of oil and gas companies’ limited dollars.

Players in the offshore industry have been coming together to do just that, according to James West, senior managing director and research analyst for Evercore Group. He noted efforts toward standardization and collaboration that have brought together companies such as the OneSubsea, a Cameron and Schlumberger company; Helix Energy Solutions Group and Schlumberger. The alliance was specifically formed to “develop technologies and deliver services to optimize the cost and efficiency of subsea well intervention systems,” according to Schlumberger.

Such alliances better align the economic interest of all players, he said. Like shale costs, which have fallen about 20-25%, West thinks deepwater costs will also fall within the next couple of years and that structural changes in the deepwater sector may create a more, longer-term competitive environment.

“We don’t think deep water is dead,” West said.

Research by Rystad Energy and Evercore ISI Research show that deepwater projects have a lower average breakeven on the global liquids cost curve. Deepwater has an average breakeven of $53/bbl, compared with North American’s shale $62/bbl average. However, the more expensive oil sands and Arctic projects carry breakevens of $74 and $78, respectively. Onshore the Middle East, the number was $29/bbl.

With lower oil prices, capex is being reduced just about everywhere.

Oil prices have plummeted from highs of more than $100/bbl last summer to below $50/bbl this year. Prices, however, are rebounding, having nearly reached $60/bbl (WTI) and $67/bbl (Brent) just after noon May 15.

Evercore forecasts global capex will drop about 25% this year, compared to last year. But North America spending will be hit harder than international spending, down 35-40% compared to 15-20%. West, however, pointed out that some of the industry’s investors are not focused on international markets. They perhaps should be, considering that “90% of the world’s oil production comes from markets outside of the U.S,” he said.

Lately all of the growth has been from OPEC and North America, John Gerdes, managing director and head of research at KLR, pointed out. OPEC, which will meet June 5, decided in November to maintain its production target at 30 MMbbl/d.

OPEC supply jumped in April to 31.21 MMbbl/d, up by 160,000 bbl/d, as output from Iran and Iraq increased, the International Energy Agency (IEA) said in a May 13 Bloomberg article. Meanwhile, strong first-quarter output from Russia, China, Colombia, Vietnam and Malaysia prompted the IEA to revise non-OPEC 2015 supply growth by 200,000 bbl/d. Non-OPEC producers, Bloomberg reported, will expand output this year by 830,000 bbl/d to 57.8 million a day.

Greater supplies have lowered the forecasted demand for OPEC crude. But even with supply/demand and reductions at play, the U.S. has done well, Gerdes said, noting break-even cost of supply between $60 and $80, excluding OPEC Gulf States.

“Russia is showing to their credit very good volume resilience,” he added. “The rest of the world is going to experience some degradation outside of the OPEC Gulf States.”

What the future holds for oil prices remains to be seen. The three analysts varied on oil prices’ next move.

Gerdes said oil price will be predicated predominately on cost of supply. His prediction: Oil prices will return to an $80/bbl environment next year and possibly $100/bbl (Brent) and $90/bbl (WTI) the following year.

Hammond said E&P cash flows are down 40% year-over-year and capital spending is down about the same amount. “The oil service companies have cut costs so much that the producers right now are talking about going back to work at a lower price at about $65/bbl,” he said. His prediction: WTI will climb to $65/bbl in 2016, with Brent trading higher. In 2017, WTI could rise to about $67/bbl.

“Decidedly bullish on oil prices,” West said U.S. production will roll over significantly and focus should be on international markets. He sees capex falling, but oil prices rising to between $75 and $80/bbl (Brent) by year-end 2015.

Contact the author, Velda Addison, at vaddison@hartenergy.com.

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