The analysts claim the project could achieve an internal rate of return (IRR) of 15.9% and break-even at less than $60/bbl via a combination of an FPSO solution, instead of the proposed 280-km (174-mi) pipeline to a new onshore terminal, and Norwegian government tax incentives.
Ross Cassidy, head of North West Europe Upstream research, said: “The original development concept is under review following poor exploration results from the latest drilling campaign, an increase in tax, and rising costs. As it stands, the estimated IRR of the original concept – the construction of a pipeline and onshore terminal – is 10.4% which is considered extremely marginal for the operator, with 15% considered the standard industry benchmark for a robust project…
“An inability to commercialize Johan Castberg’s estimated 580 MMbbl of oil could be detrimental to future activity [in the Norwegian Barents Sea]. This is why we believe the Norwegian government – Statoil’s largest shareholder – is likely to favor the construction of a pipeline as it is expected to create much needed infrastructure and could be instrumental in enabling the development of smaller fields in the area.”
The high cost means that tax breaks will be needed to incentivize the partners to adopt this concept, Wood Mackenzie adds.
James Webb, North West Europe upstream analyst, said: “We estimate the cost of the pipeline to shore and onshore terminal at over $2.1 billion...we believe the current project economics could cause the field partners to consider farming down to reduce exposure.”
Statoil is due to announce the preferred development concept later this month.