Offshore Oil Drilling Set for New Spending Surge

The offshore oil drilling industry is poised for a significant boost in new spending over the next two years, according to research firm Rystad Energy. After a period of slow growth, energy companies are now seeking projects that offer reliable long-term production, fueled by the rising demand for oil and gas following the pandemic.

In total, there are $214 billion worth of new project investments lined up for the next two years, marking the highest level in a decade. This surge in spending signals a departure from the recent past, as it will be the first time since 2012-2013 that such a substantial amount has been invested in the development of offshore projects.

Rystad Energy predicts that offshore activity will account for 68% of all sanctioned conventional hydrocarbons between 2023 and 2024, significantly up from the 40% seen between 2015 and 2018.

While Middle Eastern producers are expected to spearhead much of this growth, there are also projects planned across multiple continents. With Europe seeking new energy sources following its severance of ties with Russia, there is increased interest in offshore growth within the region. Rystad Energy projects a 30% rise in offshore spending in the United Kingdom this year, reaching $7 billion, and a potential 22% increase in spending on Norwegian projects up to $21 billion.

Furthermore, North America, Brazil, and Guyana are also experiencing growth in offshore drilling. Guyana, in particular, has emerged as a hotspot for offshore projects, with major companies such as Exxon Mobil and Hess involved in significant ventures. The country is even planning to auction off more offshore blocks for exploration, attracting interest from companies like Shell, Petróleo Brasileiro, and Chevron, as reported by Reuters.

This anticipated surge in offshore oil drilling spending reflects the industry’s renewed confidence in long-term production and signals a shift towards increased activity after a period of caution.

Offshore Oil Industry Shows Promising Growth Prospects

The offshore oil industry is poised for significant growth, benefiting offshore service and equipment companies. After lagging behind other energy companies during the pandemic, several stocks in this sector have experienced a rapid rise this year. For instance, Transocean (RIG), a Switzerland-based offshore oil services company, recently announced that its backlog reached its highest level since the 2014 oil downturn. With a 60% increase in stock prices this year, Transocean has finally returned to its early 2020 price levels, surpassing oil producers and refiners in their recovery. Valaris (VAL), an offshore oil contractor headquartered in Houston, has also seen an 8.7% increase in stock prices in 2023. Additionally, Diamond Offshore Drilling (DO), another leading offshore oil contractor, has witnessed a substantial 20% climb so far this year.

Notably, some major oil service companies like Schlumberger (SLB) and Baker Hughes (BKR) are actively engaged in offshore projects as well. Despite witnessing certain slowdowns in North America, Baker Hughes has emphasized the acceleration of its offshore work during its latest earnings call.

Initially, oil producers primarily concentrated on drilling in shale formations during the recovery from the pandemic due to their cost-effectiveness and fast production capabilities. However, offshore projects typically take about five years to commence operations on average, even after obtaining approval as per the International Energy Agency’s data.

While shale-drilling projects have contributed significantly to the growth of oil and gas production in the past decade, they tend to exhibit diminishing returns earlier than conventional projects. As global oil demand is expected to continue rising throughout this decade, many producers now seek projects that can sustain long-term production. Consequently, there is a burgeoning interest in offshore opportunities.