Tuesday, March 19, 2024
spot_img
HomeNewsE&P industry can’t live on small projects alone – Analyst

E&P industry can’t live on small projects alone – Analyst

“Necessity they say is the mother of invention” is one old expression that seemed to have gained so much grounds in the global oil and gas industry especially lately. In the African traditional setting also there is the belief that the tougher the masquerade the harder the drumming that heralds it into the public arena. Operators of the industry are learning and adjusting faster says Wood Mackenzie, but there’s a lot to it, they explained.

Hear what Angus Rodger, research director, Wood Mackenzie said: “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. 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.”

For Wood Mackenzie also expects a total – circa 30 major project FIDs – supported by continued prudence in industry spending taking place in 2018, almost something similar to 2017 that saw a significant recovery in upstream FIDs, and more than double the number of project sanctions as recorded in 2016.

According to Woods, cost reduction efforts by the industry have largely been successful, but the primary focus they say, has been to reduce project footprints through fewer wells, smaller facilities, and the greater use of subsea tie-backs and existing infrastructure. Lower costs, lower breakevens, higher prices and improved corporate finances all contributing to an upgrade in industry sentiment and more projects getting sanctioned in 2017.

The team however said the projects that did get the greenlight were notably smaller, with the average capital expenditure to develop ‘major’ projects (commercial reserves over 50 mmboe) sanctioned in 2017 falling to only US$2.7 billion, said to be the lowest in a decade. Putting it into context, they stated that the average project capex for those sanctioned over the last decade was US$5.5 billion.

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

“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,” added Brewer. “Both investors and operators want to see faster cycle times and quicker returns on upstream projects.”

“We should continue to see operators favouring a ‘leaner and meaner’ path in 2018,” continued Brewer. “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 US$2.2 billion – while capex/boe is now only US$4.9/boe, versus US$11.3/boe back in 2011.”

Wood Mackenzie also forecasts a 15% decline in average breakeven* cost to US$44/boe (*applying a 15% discount rate), with the most competitive projects in shallow-water Norway, UK and Mexico. Gas projects will take centre-stage, aided by big expansion projects in Norway, Iran and Oman.

From Wood Mackenzie’s list of about 30 major projects awaiting sanctioning, which among others include UK, Norway, Israel, the Netherlands, Malaysia and China, six out of this number had already been sanctioned in the first quarter of this year. The latter being the Lingshui development, operated by state-owned CNOOC Ltd, and of course China’s first wholly-owned and -operated deepwater gas project.

Wood’s team added that the FID story could shift again in 2019, with multi-billion boe developments such as Mozambique LNG, Canada LNG, and expansions in Qatar and Papua New Guinea all eyeing final investment decisions.

“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?” continued Rodger. “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.”

 

 

RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Most Popular