EDINBURGH, UK – To ensure new field development is economically viable at current oil prices, operators will need to focus more on project optimization and changing their approach to the service sector, according to analyst Wood Mackenzie.
James Webb, Upstream research manager, said: “As the upstream industry responds to the low oil price, investment is down $220 billion in 2015 and 2016 compared with our pre-oil price crash projections.
“In addition to reduced activity onshore North America, a total of 46 projects have been deferred as a result of the oil price fall. We estimate that as much as $1.5 trillion of investment spend destined for new (pre-sanctioned) and US tight oil projects is now out of the money, or in starker terms, uneconomic at a $50 oil price. This spend is very much at risk.”
Obo Idornigie, principal Upstream research analyst, added: “The implications of this level of reduced investment is huge for the industry’s service sector which is of a size to comfortably accommodate an average of 40-50 new projects globally a year. We expect just six new projects to go ahead in 2015 and around 10 in 2016.”
The slowdown in new activity is leading to very competitive bidding from the service sector as E&P companies take an increasingly tough negotiating stance on pre-sanction projects, Idornigie said. “We believe that pre-sanction offshore projects could benefit from 10-15% cost reductions through supply chain savings alone.
“However, the industry needs to strike a balance between near- and long-term drivers. Pushing the service sector too hard now is only likely to shore up problems once more attractive fundamentals return. Increasingly severe job cuts mean that the industry is losing skilled resources that will take time to attract back when prices recover.”
To bring costs down by 20-30%, operators need to focus on re-working their field development plans, optimizing project design and taking more innovative approaches to project management, Webb suggested.
A prolonged period of low oil prices over a number of years is needed to bring about profound, structural changes to industry costs, he said, although this looks unlikely if, as Wood Mackenzie believes, the oil price starts recovering in 2017, with the consequent risk of cost inflation pressures returning.
“Stronger collaboration between operators and service companies will be key in driving efficient practices,” Webb concluded. “The winners therefore are likely to be operators with a strong pipeline of near-term projects close to sanction which are able to take advantage of the trough in costs through 2015/16.”
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