Counter-cyclical investment: the industry's silver lining

We have cut US$55 billion from our investment forecast in the North Sea between 2016 and 2020 with over 20 major projects re-scoped, deferred or cancelled. Cost savings are keeping the industry afloat with a raft of project delays and corporate spending cuts providing the means. But when will we start to see a recovery in projects sanctioned? And will this cause a corresponding rise in costs as supply chain demand picks up?

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Malcolm Dickson, Principal Analyst for Upstream Oil and Gas, discusses the future of projects on the Norwegian Continental Shelf at the Offshore North Sea (ONS) Conference in Stavanger, Norway.

In his speaking slot, Malcolm looks at what the oil price drop has done to investment in Norway, what will happen to costs and demand in the supply chain and project optimisation in Norway. So what are the three key takeaways?

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1. We expect the market to bottom out in 2017, before demand for supply chain picks up

Wood Mackenzie conducted an upstream cost survey, and found that there was a marked difference between operators and suppliers in the expectations for a return of demand to the service and supply sectors. The expectation of a recovery in demand for supply chain and services was between mid-2017 to mid-2018 price recovery, but the supply chain clearly expects demand to return sooner, while operators expect costs to remain lower further into the future.

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Further cost reductions are expected across the board, with the biggest expected in the seismic and drilling spaces, where a vessel oversupply has meant expectations of a 20% drop this year. Subsea equipment is expected to fall by a similar amount this year.

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2. FID between now and the end of 2017 is optimal for lower costs

We expect cost inflation to begin to creep into fields from 2018 onwards, as the oil price increases, and demand for equipment and services returns to a decimated supply chain. This suggests that targeting FID in the next year is optimal for capturing lower costs. The push for projects to obtain FID, in order to lock in current low costs will largely be offset by corporate pressures to protect cash flows and shareholder distributions. This means that many FIDs will be pushed back.

So where do we see the best investments in the North Sea? The chart below maps projects by their expected FID - with FID’s taking place after cost inflation marked in the red square.

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But cost deflation isn’t everything – optimising projects by reducing scope or introducing new or more efficient technology can often have a larger impact on breakevens. And reducing costs is vital – of the 21 FIDs in Norway between 2016 and 2020 – only 12% breakeven at less than US$50/bbl on a reserves basis (15% discount rate).

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3. Project optimisation is vital – and is already taking place

We have seen lots of examples of companies reducing costs for green and brownfield projects by optimising the concept. This can be simplifying designs, reducing spec or with new technology. One example is Statoil’s Snorre Expansion project moving from a TLP to a subsea solution meaning that the cost per barrel has come down by around US$10/bbl.

In terms of pushing technology – this can range from cutting edge projects like Åsgard subsea compression, to logistically ambitious projects like Wintershall’s Maria, and finally areas like ‘subsea on a stick’ where companies can opt to go with unmanned platforms rather than subsea, for instance. Another fantastic example of project optimisation can be seen with Statoil's Johan Castberg project, resulting in a 41% cost reduction.

The market is moving in an upward cycle and with that, there will be an increase in projects in the North Sea. The growing gap in perception between suppliers and operators is troubling and suppliers will struggle to keep up with operators expectations of low costs in the longer-term. We expect 2017 to be an active year, with operators and suppliers mitigating the risk of higher costs after 2018. For those looking to invest, FIDs targeting 2017 are ideal.

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For technical services companies interested in capex cuts, project FIDs, breakevens, as well as decommissioning data, click here to find out more.

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New! Global Project Tracker
Focus on the most worthwhile opportunities with complete visibility on the equipment requirements of 200+ pre-FID greenfield projects.  GPT allows you to prioritise tendering activity and increase business development exposure by identifying and screening opportunities in the pre-FID phase, and the projects’ associated service requirements. Register your interest below to receive a demo.

North Sea Project Tracker
Details on nearly 100 projects in the North Sea. We estimate there could be up to 13 FIDs across the North Sea in 2017, but most will be small scale. 

US$55 billion capital expenditure cuts in the North Sea
Over 20 major projects have been re-scoped, deferred or cancelled. Yet, the down-turn has resulted in significant cost savings which should stimulate activity as the oil price starts to recover.

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