Offshore projects sanctioned between 2010 and 2014 struggling to create value, Rystad says

Rystad’s evaluation of offshore developments sanctioned since 2010 shows that international oil and gas E&P companies are struggling to make money from offshore investments made between 2010 and 2014 when oil prices were high.

Rystad said on Wednesday that the sanctioning activity was record-high during the strong investment cycle from 2010 to 2014 when energy companies reached final investment decisions on offshore oil fields collectively representing close to 40 billion boe of total resources.

The Norwegian energy intelligence firm added that the amount of sanctioned volumes peaked at 13.2 million boe in 2011 at the height of $100-plus oil prices, before nose-diving to an all-time low of just 0.6 million boe sanctioned from offshore oil fields in 2016.

It is worth noting that the trend of sanction volumes has ticked up over the last two years.

During the evaluation, Rystad found that entire vintages of offshore field development projects would fail to offer a return on investment in today’s oil price environment.

Offshore projects sanctioned between 2010 and 2012 have barely been able to generate any value for E&P companies, while projects sanctioned between 2013 and 2014 are expected to have no value creation.

Namely, offshore projects sanctioned between 2010 and 2012 have barely been able to generate any value for E&P companies, while projects sanctioned between 2013 and 2014 are expected to have no value creation.

As for upstream companies to come out those investment years without massive losses, the oil price will need to increase to around $70 per barrel. Rystad also claimed that the value creation was positive for sanctioning between 2015 and 2018, even when applying a future oil price of only $40 per barrel.

Espen Erlingsen, head of upstream research at Rystad Energy, said: “Looking back at the offshore projects sanctioned between 2010 and 2014 with the knowledge we have today, we see that the last offshore investment cycle is struggling to create value.

“From 2010 through 2014, around 3,000 new oil fields were sanctioned, and we estimate that around 800 of them did not create value.

“With the pivot in development costs from 2015 onwards, the projects sanctioned over the last four years are in a much better position. This illustrates how companies that invested during the down cycle have been able to create value even in a lower oil price environment.”

Rystad claimed that the reason why the projects sanctioned between 2010 and 2014 were struggling to create value related primarily to the cost structure.

The key driver for the 2015 paradigm shift related to cost levels for the offshore industry. The main reasons for the cost reductions are lower unit prices within the industry – like rig rates, redesign, and simplification of new projects, a weaker local currency for some key offshore regions like the UK, Norway, and Brazil, as well as efficiency gains.

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