By March 13, 2017 Read More →

Are North Sea cost reductions here to stay?

North Sea

Brent North Sea Shell photo.

More front-end supplier involvement would help to stimulate the next wave of investment

Much has been achieved in the past year, as we see prices and costs slowly turning around. But there is more work to be done. Wood Mackenzie’s 2016-2017 Global Upstream Cost Survey showcases the North Sea cost evolution from 2014 to 2020.

The oil price drop in 2014 was a major reality check for the North Sea. But by some measures at least, the industry has reacted remarkably well.

Country level opex per barrel has dropped 40 per cent in the UK and 30 per cent in Norway. This was particularly crucial in the UK.

As for new developments, only 35 per cent of pre-FID reserves in the combined UK/Norway portfolio had NPV10 breakevens below US$60 in 2014.

That figure now sits at 76 per cent of reserves – albeit with a different set of projects. Much has been achieved in the past year, but it is clear the work doesn’t stop here.

Operators have achieved savings through a combination of supply chain deflation, project optimisation and efficiencies. Only around one third in the reduction in opex per barrel is due to supply chain deflation, according to Wood Mackenzie.

The rest is due to scaling back operations and other efficiencies. Capex per barrel has reduced by up to 50 per cent in Norwegian pre-FID projects – and the majority of that reduction (70 per cent) is down to project optimization.

Reductions at UK development projects have been more deflation- based so far, but Wood Mackenzie expects that to change from 2017 onwards.

2017 will be a difficult year for North Sea suppliers – particularly the drilling and subsea sectors – but it will be the bottom.

By the end of the year, activity will be picking up, and at the same time, suppliers have no more concessions to give.

However, Wood Mackenzie expects the pace of inflation to be slow, with the majority of rate reductions from the supply chain still in place by 2020.

As supply chain costs slowly rise, the ‘self-help’ measures of project optimization, standardization and execution efficiencies are key to ensuring reductions remain sustainable.

Wood Mackenzie thinks around 55 per cent of the reductions in overall opex per barrel will be sustained by 2020.

For capex, sustaining reductions looks more achievable. In Norway, we expect around 70 per cent will be sustained.

While UK pre-FID developments could even extend reductions as optimisation takes hold. This will need a shift in mindset from both operators and suppliers though.

More front-end supplier involvement would help to stimulate the next wave of investment.

Based on findings from our 2016 Global Upstream Cost Survey, we’ve compiled a forward-looking view supplemented by in-depth interviews with a range of North Sea industry participants, including operators and suppliers.

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