This, despite buffeting headwinds – notably rampant cost inflation. Such are the compelling economics of the Wolfcamp and Bone Spring where breakevens can be under US$35/bbl NPV,15, we expect investment in the US L48 to continue to rise each year to 2020 and exceed US$100 bn thereafter.
In contrast, conventional spend, over 80% of the global total in any year, is still in decline.
We expect investment of US$340 bn this year, US$10 bn below 2016, and 40% below the 2014 peak. Operators do get more bang for their buck in 2017 than pre-crash, but the bald statistics run counter to the efforts of an industry striving to make things happen. Yet scratch below the surface, and signs of a sustained recovery may be emerging.
First, FIDs have jumped sharply in 2017.
The low point of the cycle was 2015 when operators took Final Investment Decision on just eight projects with reserves over 50 mmboe, down from the typical 40 or so project sanctions in the prior few years. Nine months into 2017, we’re on 18 FIDs and counting, well up on the 12 in 2016. We expect to achieve our forecast of 20-25 for the year, projects holding a total of 10 bnboe of reserves.
Second, the present crop of FIDs shows the industry adapting to the new reality.
Tight finances and capital discipline dictate an austere approach to investment. Sanctioned projects are typically low risk, low capital intensity, and fast pay back; they are smaller, and have break evens competitive with tight oil. Most are tied back to existing infrastructure.
Standalone developments of giant discoveries like Liza (Guyana oil) and Leviathan (Israel gas) have attractive returns but are being phased for early cash flow and to minimise the compound risks in large-scale project execution.
A shift in project scope favouring cheaper subsea tie backs over platforms may sacrifice reserves, but has helped drive down costs and improve returns.
Development costs for 2017 FIDs average just US$11/boe versus US$12/boe last year and US$15/boe in 2015.
The 18 projects sanctioned in 2017 are the best the industry can muster, but not all in the garden is rosy – far from it. A third of the projects in the hopper are out-of-the-money, some by a long way.
Of the 28 bnboe of pre-FID liquids projects we model, 10 bn boe need oil prices in excess of US$60/bbl to achieve a hurdle rate of 15%. More re-scoping and re-engineering is needed if these projects are to make it over the line.