Offshore market restructuring under way

Jan. 13, 2016
A fundamental restructuring in the offshore market, particularly in the oilfield services sector, is taking shape.

A fundamental restructuring in the offshore market, particularly in the oilfield services sector, is taking shape. This change was long overdue, with the average capital cost per barrel quadrupling over the past 12 years. Meanwhile, offshore project economics are improving to a level that could spur a new round a greenfield sanctioning.

Rystad Energy estimates average offshore greenfield project costs have fallen by 10-30% and as much as 50% during the past year. Some of the savings come from downsizing and re-engineering. One example is Shell’s Appomattox, which was sanctioned in mid-2015. The operator reached FID by cutting total project costs by 20% through supply chain savings, design improvements, and by reducing the number of wells required for the development.

Another example is the BP-operated Mad Dog Phase 2, which could reach FID this year. Through re-engineering and other cost-cutting measures, the operator aims to reduce the total project costs by more than 50%. Shifting to a proven semisubmersible production platform from previous plans for a new spar design is helping to bring down the project costs.

Meanwhile, Ophir Energy sanctioned itsBlock R (Fortuna) FLNG project in Equatorial Guinea, accelerating FID on Nov. 1 versus the previously stated 2016 timeframe. Ophir recently revised its estimate of capex required to first gas from $800 million to $600 million, based on results from the current upstream FEED, which is about 50% complete. The project is benefiting from the deflationary cost environment and has been redesigned to increase standardization of components.

Rystad also estimates savings of more than $1 million on lower unit prices alone for theJohan Sverdrup development.

Indeed, lower services pricing is also contributing to lower overall project costs. Drilling rig day rates have fallen by about 50% and spread costs are down 20%, while SPS, SURF, and production platform costs are off by about 15%. The average breakeven price for the “typical” offshore project is now closer to $55/bbl, down from $70/bbl in 2014.

As such, Rystad expects a large step-up in new greenfield project spending in 2016 and 2017. The firm forecasts expenditure to double from $75 billion in 2015 to $150 billion in 2017. The spending increase in 2016 is attributed to new project starts in Africa (offshore Nigeria and Egypt) Asia, Australia and the Middle East, which more than offset a slowdown in Russia, Europe, and South America. Projects in North America (Gulf of Mexico) will lead the spending growth into 2017, while Africa and Middle East expenditure slows but remains above 2014 levels.

However, a lot of these cost reductions are cyclical in nature: when the upcycle for offshore returns, inflation will creep back into the system. This is why a restructuring of the commercial and business models in the offshore market is under way - to drive costs out structurally, explains James West, senior managing director & partner,Evercore ISI.

New models

OneSubsea and Forsys Subsea have set the precedent in the oilfield services sector, but it requires a willingness by the oil companies to adopt these new models, says West. The underlying approach is leveraging the resources and expertise of the partner companies as a means of improving production and lowering costs. West’s exclusive analysis for this month’s global offshore market outlook begins on page 28. Another opportunity for correction involves the steep increase in project complexity and the manner in which owners have responded to that increase, suggests Ed Merrow, CEO of Independent Project Analysis. Project complexity increased in at least two dimensions: technology and organization, he explains. Merrow outlines the steps to promote project cost readjustment beginning on page 31.

David Paganie