Operators believe the current downturn is different to previous crashes with most savings made since 2014 here to stay; our analysis points to a less clear-cut picture. Although undoubtedly some savings will stick, what conclusions can we draw before cyclical drivers weaken, revealing a reshaped industry and supply chain?
It's clear that operators are trying to make the most of cyclical supply chain deflation (for example, significantly lower day rates for deepwater rigs and cheaper subsea kit), but the global service sector has no more capacity for margin cuts, and its costs will rebound as demand strengthens.
Looking at the US onshore industry, we see how quickly savings can erode when the market picks up and overall our Global Upstream Cost Survey shows that savings in 2018 will be materially lower than in 2016-17.
Almost US$1 trillion of upstream capex spending slashed from our 2015-2020 estimates
It's been three years since the oil price collapse and its ramifications are still being felt across the upstream sector and supply chain. Since Q4 2014, we have removed US$910 billion of upstream capital expenditure from our 2015-2020 estimates, a consequence of operators deploying project deferrals as a first line of defence, alongside cost deflation and optimisation.
In our commercial base case, capital investment will stabilise at around US$400 billion per year to 2020, with US Lower 48 producers ramping up annual activity from US$64 billion in 2017 to US$90 billion in 2020 (in contrast, conventional outlay will fall by 7%).
Conventional pre-FID projects continue to get cheaper, albeit mainly for cyclical reasons – operators are taking advantage of low costs or downsizing projects. And we're noticing a shift in the FID mix too as we move into 2018 - almost 80% of expected FIDs are greenfield.
For conventional pre-FID projects, we expect most cyclical and operational cost savings to be sustainable until the end of the decade, but not much further. This stands in contrast to the US Lower 48, where producers have recovered much faster than the global conventional industry. During 2017, capex in the region rose almost 50% compared with 2016 levels and we expect this investment to increase year-on-year to 2021. The tension going forward will be between productivity gains (in our view, the greatest perhaps already realised) and resurgent cost inflation (still playing out).
Operating costs: can producers manage the recovery?
Following the vigorous cuts to operating costs amid the oil price downturn, our view of 2017 US$/boe lifting costs shows progress across all regions, when compared to our 2014 outlook.
The biggest impact in reducing opex has been from:
- Labour and service cuts
- Streamlining of operations and maintenance costs
- Lower logistics charges
- And, in some hydrocarbon-dependent economies, currency depreciation has also been critical.
We're already starting to see unit opex rise in some countries, as falling production outpaces the savings from 2014-2016. Europe has reduced its US$/boe costs by 25%, driven by lower labour and service costs, efficiency gains and higher production. Globally we expect US$/boe opex inflation to return from 2018, but in the short term most regions will retain part of the savings achieved since 2014.
A structural revolution?
It's clear that operators are capitalising on cyclical savings, but the upstream industry needs structural cost changes for a sustainable long-term future. Structural savings rely on a change in typical behaviour patterns, so what will drive this?
The 2017 Global Cost Insight identifies three factors which will be crucial for any structural evolution in upstream costs: Lean thinking; Supply chain consolidation and collaboration; and Digitalisation (we'll be following this key topic further in 2018).
Comparing the observed and expected cost reductions we can see how last year's reality is influencing this years planning. In a bid to make decisions that will produce sustainable savings, we're seeing a shift towards more strategic cost reductions.
What will the industry look like in 2020? Will there have been a switch from short-term tactical cost savings, to more sustainable structural changes? If not, will the industry once again find itself embracing higher costs?
We believe the industry has more to do in balancing the burden between operators and supply chain. Structural cost savings still seem more of an aspiration than a reality, but the industry's growing confidence that these long-term savings can be delivered is in itself transformational.