Last week we covered the OPEC announcement on production cuts, a strategy to reduce over-supply in the market and give a much needed boost to oil prices.
Without higher oil prices, many new projects are thought to be uneconomic. Or are they? Douglas-Westwood has recently reviewed over 250 upstream capital projects sanctioned in the last four years to assess how industry costs are moving. The results are remarkable.
Oil & Gas Exploration & Production (E&P) companies have been under pressure in the downturn. Faced with much lower free cash flow from producing fields, the focus for many has been on managing costs so that dividends can be maintained through the downturn.
The sanctioning of many new projects has been deferred during this period as E&P firms instead focus on becoming leaner. However, three specific trends are driving a remarkable reduction in upstream capital costs, and bringing some uneconomic fields over the threshold of viability.
- The immediate impact of the downturn was a squeeze on the supply chain by the E&P companies. Demands of 10-15% price reductions to service and equipment companies were common. This trend was more or less immediate at the start of the downturn, and will most likely be eroded as soon as the market recovers.
- With reduced activity levels came massive over-supply of some asset classes. Rig utilization, vessel utilization, (amongst many other asset classes) has plummeted and day-rates have fallen in some cases over 60%. Over-supply will take some time to work its way out of the system as older units are scrapped.
- Re-engineering of existing projects, returning to conceptual or FEED studies to re-work the development scheme has also yielded substantial cost savings. Further gains are yet to be had from standardisation of engineering approaches, equipment, and even people. These savings should be far more permanent in nature.
Our analysis of global upstream projects (onshore and offshore, including unconventional) shows that on average the spend per barrel recovered for newly-sanctioned projects has fallen an incredible 40% over the 2012 to 2016 period. In some locations, the cost reductions have been much greater than this average.
The DW upstream capital projects study covering the 250 project previously mentioned will detail key drivers and initiatives that have led to this outcome.