Oil Industry Operators to Sign Upstream FIDs at Lower Costs

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A new report by Wood Mackenzie showed that the cost reduction efforts by the oil and gas industry have largely been successful as the Final Investment Decisions (FIDs) for upstream projects are set to witness new low cost cycle,

While noting that the projects that did get the greenlight are notably smaller, the report disclosed that the average capital expenditure to develop major projects with commercial reserves of over 50 million barrels of oil equivalent (mmboe) sanctioned in 2017 fell to only $2.7 billion, the lowest in a decade.

To put this into context, Wood Mackenzie said the average project Capex for those sanctioned over the last decade was $5.5 billion.

 The report added that 2017 saw a significant recovery in upstream FIDs, with the number of project sanctions more than doubled compared to 2016.

The report predicts a similar total in 2018 – circa 30 major project FIDs – supported by continued prudence in industry spending.

Wood Mackenzie noted that the primary focus of the oil and gas industry operators has been to reduce project footprints through fewer wells, smaller facilities, and the greater use of subsea tie-backs and existing infrastructure.

According to the reports, lower costs, lower breakevens, higher prices and improved corporate finances all contributed to an upgrade in industry sentiment and more projects getting sanctioned in 2017.

“We are seeing significantly smaller projects, alongside a greater appetite for brownfield and expansion projects, and more subsea tie-backs,” said a principal analyst at Wood Mackenzie, Jessica Brewer.

“Brownfield developments are popular in the current capital-constrained environment, with less spend and execution risk than a greenfield project, and a faster route to first production. Both investors and operators want to see faster cycle times and quicker returns on upstream projects,” Brewer added.

“We should continue to see operators favouring a ‘leaner and meaner’ path in 2018. At the beginning of the year we selected 30 projects we thought were most likely to make FID, and they follow many of the trends we saw emerge in 2017. Average capex continues to fall – averaging only $2.2 billion – while capex/barrels of oil equivalent (boe) is now only $4.9/boe, versus $11.3/boe back in 2011,” Brewer said.

 Wood Mackenzie also forecasts a 15 per cent decline in average breakeven cost to $44/boe, applying a 15 per cent discount rate, with the most competitive projects in shallow-water Norway, UK and Mexico.

According to the report, gas projects will take centre-stage, aided by big expansion projects in Norway, Iran and Oman.

 “While it is good news that operators have found ways to grow in tough business conditions, the big question is whether the industry is actually spending enough,” said research director, Wood Mackenzie, Angus Rodger,

“We cannot rely on smaller projects forever, and when we look at LNG in particular, we see a lot of big projects on the horizon,” Rodger added

 “Can the industry apply the leaner lessons it has learnt through the downturn to these giant projects, or will we return to the boom and bust cost cycles of the past?. Companies know they don’t want to be all rushing through that door at the same time and then see costs blow-out. So it will be interesting to see if any of these LNG projects push for a late-2018 sanction, thereby locking-in lower costs and pipping the competition,” Rodger said.

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