How are cost savings pushing North Sea projects over the line?

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US$55 billion capex cuts in the North Sea

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 weakened 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 downturn 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.

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.

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.

What cost saving techniques have we seen in other regions?

US Lower 48 alone sustains $150B in capex cuts to 2017

Unconventional development in the US Lower 48 has also been extremely reactive to the oil price collapse, with operators nimbly halting drilling plans and scaling back activity to balance the books. When you look out to 2017, the US Lower 48 will have slashed more capital spend than any other singular country based on our latest projections. So what does that mean for current inventories, future production volumes and well economics in that region? Our latest US upstream analysis examines how these cuts are affecting key US tight oil plays, and why rig count no longer indicates future production.