Wood Mac: Cost savings advanced deepwater projects in 2015
Wood Mackenzie’s mid-year prediction that only ‘a handful’ of major projects would make financial investment decision (FID) approval in 2015 proved close enough – only a few large upstream developments achieved the green light during the year, Wood Mackenzie, a global energy consultancy provider, said on Monday.
The impact of the continued low crude price has taken its toll with the total deferred oil volumes up to 27 billion barrels of oil equivalent (boe). So there is a lack of surprise associated with the lack of upstream projects greenlit last year, but it is significant to note why these select few progressed, Wood Mackenzie said.
Deepwater projects that made FID
Wood Mackenzie has already highlighted that deepwater was hit the hardest in 2015. Very few deepwater projects were given the go-ahead, the significant ones being: BP’s West Nile Delta in Egypt and Shell’s Appomattox in the deepwater Gulf of Mexico.
One theme shared by all the projects that moved into full commerciality was significant cost saving, Wood Mackenzie noted. For example, Shell cited an overall cost reduction of 20% for Appomattox, driven by design optimization and supply chain savings.
BP cut less than 10% from its original budget for the Egyptian West Nile Delta project at FID, which seems low in comparison. But closer analysis shows they have opted to re-phase spend significantly, reducing the upfront scope and cost. In addition, the project has a contracted gas price floor, thus providing some protection from further market deterioration.
Shallow-water upstream projects
The remaining projects are all in shallow-water: Statoil’s Johan Sverdrup and Wintershall’s Maria fields in Norway, Maersk’ Culzean HP/HT development in the UK North Sea and Golar/Perenco’s GoFLNG in Cameroon.
Maria and Culzean noted similar-sized capital reductions to Shell, although Culzean is unique in that it also cited benefits from a new (HP/HT) UK tax allowance as a key driver, a rare sign of fiscal terms moving to help operators.
According to the energy consultancy group, Johan Sverdrup progressed primarily because it is a world-class, high-return oil field, but it is notable Statoil has already reported significant budget savings post-FID due to market conditions. GoFLNG is slightly different in that it is the first small-scale FLNG development to reach FID, and is based on a more innovative and nimble financing and contracting model than traditional LNG.
Delayed project breakevens
Wood Mackenzie estimates that Shell’s Appomattox has a NPV10 breakeven of $50/bbl, which sets a new benchmark for deepwater FIDs. However, it is one that still remains out of reach for most – Wood Mackenzie’s pre-FID deepwater projects have an average NPV10 breakeven of $65/bbl. This means significantly more work and cost deflation is required – at least another 15-20% reduction – before the pack hits stricter investment hurdle rates.