LONDON – Reducing drilling and development spend has largely been the focus of service and equipment providers in the Gulf of Mexico, with the aim of lowering costs at the most capital-intensive period of asset lifecycles.
In its latest “DW Monday” note, consulting firm Douglas-Westwood (DW) says that opex costs have grown in line with other upstream costs, from 7% CAGR (compound annual growth rate) from 2010 to 2014 in the Gulf of Mexico.
In its analysis, DW finds that the North American offshore market has some of the highest overall MMO (maintenance and modification offshore) costs per barrel – more than twice the global average.
“Historically, offshore opex has been largely ignored as a critical driver of deepwater project economics, yet this is beginning to change,” the firm says. The current rate of growth combined with the overall operational cost in the Gulf of Mexico is “not sustainable,” Douglas-Westwood contends. “Operators are deferring and cancelling many historically routine operational objectives as long as they stay within safety and regulatory guidelines.”
Budgets for maintenance and modification projects are now being revisited and contractors will feel the impact, says Douglas-Westwood. “Within our offshore support sector clients, many firms typically point to the large proportion of revenue that is production-linked, implying that this insulates from the effect of oil price cycles,” says the DW note. “While this may be true up to a point, the effect of the current prolonged downturn clearly reaches further than exploration and development activities.”
Mergers and acquisitions are likely to be a result of this operational spending compression, but there are still many efficiencies to be shaken out, the firm says. Practices such as consolidating projects and optimizing contracting processes are already producing results in many cases. With breakeven economics at $70/bbl or higher for some Gulf of Mexico prospects, recognition of operational costs and streamlining the value chain can no longer be overlooked.
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