Market-driven, structural changes improve project economics

July 12, 2017
The pace of deepwater final investment decisions (FIDs) is picking up, driven by market-driven and structural changes that have cut average breakeven costs by more than one-third since 2014.

The pace of deepwater final investment decisions (FIDs) is picking up, driven by market-driven and structural changes that have cut average breakeven costs by more than one-third since 2014. The number of FIDs this year at the time of this writing (Noble Energy’s Leviathan, Shell’s Kaikias, Eni’s Coral South, Reliance’s R-Series, and ExxonMobil’s Liza) has already exceeded the total count from 2016 (Eni’s Zohr, ONGC’s KG-DWN-98/2, and BP’s Mad Dog Phase 2).

A period of aggressive cost compression has brought average breakeven costs for projects down from $70/bbl in 2014 to approximately $40-50/bbl in 1Q 2017, according to McKinsey & Company analysis. This breakeven analysis reflects full life-cycle economics that includes government take, development drilling, facilities, equipment, subsea, and operating expenditure with a 10% allowance for return on capital.

While commercial gains primarily drove 2015 breakeven estimates to $55/bbl, engineering re-designs and efficiency improvements are driving the additional $10-15/bbl impact on breakeven projections for 2017 estimates, McKinsey suggests.

Seehere for a comprehensive review by Granherne (a KBR company) and McKinsey & Company of the market-driven and structural changes that are impacting deepwater breakeven costs.

The authors of the aforementioned article point to a number of levers that are enabling operators to bring projects to FID. One is project optimization. A recent example, the authors suggest, is BP’s approach in designing the second phase of the Mad Dog field by using their past design experience with the Atlantis project. The operator worked with co-owners and contractors to simplify and standardize the platform’s design and leveraged cost reductions across the supply chain, thereby reducing the overall project cost by about 60% from the $20 billion estimated in 2012. The solution for Mad Dog Phase 2 is now a 140-Mb/d semisubmersible facility rather than the original giant production spar. BP reduced costs in part by using a new project phasing approach and a simpler, standardized design.

Shell’s Kaikias is also using a phased development approach that leverages nearby infrastructure, in this case the Ursa production hub, to reduce the project cost by 50%. Shell says the go-forward breakeven price is below $40/bbl.

Similarly, ExxonMobil sanctioned an optimized, phased development approach for its Liza deepwater project off Guyana. The Liza Phase 1 development includes a subsea production system and an FPSO that has been designed to process up to 120 Mb/d of oil. First production is expected by 2020, less than five years after discovery of the field. The Liza Phase 1 is expected to cost about $4.4 billion. This includes $1.2 billion for leasing the FPSO, which will develop approximately 450 MMbbl of oil.

The short time from discovery to FID signals the competitiveness of the project, both within ExxonMobil’s portfolio and globally, according to Pablo Medina, Wood Mackenzie’s senior analyst, Upstream, Latin America. “The Liza-Payara area has a breakeven of $46/bbl (Brent; using a 15% discount rate), which puts it in a very attractive position compared to other leading investment opportunities such as tight oil or deepwater Brazil,” he said. “Very few deepwater projects have been pushed through FID during the oil price downturn. Only the very best projects have been sanctioned and this speaks volumes of Liza’s potential. However, the full development solution will need to address the challenge of gas monetization, given the field’s remoteness from the coast and the lack of a gas market in Guyana.”

Wood Mackenze estimates that the full development of the Liza and Payara fields, both in the Stabroek block, will produce over 330 Mb/d of oil at peak, with reserves of over 1.5 Bboe. ExxonMobil estimates the gross recoverable resources for the Stabroek block are now at 2-2.5 Bboe, including Liza, Liza Deep, Payara, and Snoek.

Jessica Tippee, Assistant Editor, Offshore, offers the latest on Liza and other developments offshore Guyana, beginning here.

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