In our latest analysis, Mission decommission: The North Sea, we predicted at least 140 fields will cease production over the next 5 years and a total of £55 billion (real terms) will be spent on decommissioning the UK Continental Shelf. The story is far from over and there is an ongoing struggle for access to investment that will provide a reprieve in the near future. So what cuts have been made in the past year to push projects over the line?
North Sea investment reached record levels in 2014 as the industry rode the wave of US$100/bbl plus oil prices. Two years later, investment has fallen to a level not seen since 2010 as companies look to survive following the dramatic oil price drop. 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. Yet, the down-turn has resulted in significant cost savings which should stimulate activity as the oil price starts to recover.
So where does the industry go from here?
The vast majority of cuts have come from pre Final Investment Decision (FID) projects i.e. those that have yet to be sanctioned. In the UK, we have removed over 1 billion barrels worth of these projects from a future pipeline already in decline. Cuts have been even more severe in Norway, though a much larger pipeline offers more discretionary spend to defer.
While we expect investment in Norway to recover towards the end of this decade, this is highly reliant on pre-FID projects being progressed.
In the UK, investment will continue to decline with a focus on cutting opex to maintain critical infrastructure and production from onstream fields.
With many fields in the UK operating at a loss,
15% of production has been cut from our
forecast between 2018 and 2020.
What cost savings have been achieved to push pre-FID projects over the line?
Cost deflation in the service sector has been evident with rig rates falling dramatically and lower subsea costs. But project optimisation has had the biggest impact and greenfield and brownfield pre-FID projects are best placed to take advantage. Generally we are seeing potential cost savings of 10%-40% depending on where they sit within the development cycle.
Boroujerdi explains: "It’s a case of the earlier the better. While all pre-FID projects have the opportunity to take advantage of reduced service sector costs, it's those at a pre-Front End Engineering Design (FEED) that can also be optimised resulting in bigger cost savings." Read more on the latest Upstream projects to achieve FID in our blog: Finding profitable projects at US$40-50/bbl.
Statoil leads the way with leaner Johan Castberg design
A prime example of significant cost savings can be seen in the Arctic Johan Castberg project in the Norwegian Barents Sea. This 500 million barrel Statoil-operated field reached FEED stage in 2013 but was sent back to the drawing board in the hopes of achieving a more robust project in the current price environment. A leaner development scenario and more efficient drilling approach resulted in a cost reduction of US$6.2 billion (or 41%), reducing the breakeven price from US$80/bbl to US$55/bbl.
The development scenario has changed from a semi-submersible platform with a pipeline to shore, to a scaled down FPSO, resulting in US$2 billion in savings. Increased drilling efficiency accounted for large savings with fewer wells, reduced rig rates and a 30% decrease in drilling time. Johan Castberg is close to reaching FID, with operators targeting 2017.
Will the mature North Sea find a reprieve in the near future?
A lower for longer oil price, tighter corporate budgets and a general reluctance to spend still plague the area. Despite the large cost savings we've seen, we expect that most major North Sea projects won't reach FID until 2018 at the earliest, including Johan Castberg.
But there is hope for the North Sea yet
With Johan Castberg leading the charge, we expect 43 pre-FID projects to go ahead over the next 5-10 years. Though the recovery will take longer than expected, there is hope that things will turn around in the somewhat near future.
Find out more
Global upstream investment slashed by US$1 trillion: The impact of the drop in oil prices on global upstream development spend has been enormous. Companies have responded to the fall by deferring or cancelling projects.