International E&P companies are struggling to make money from offshore investments made during the latest investment upturn, according to a new study by Rystad Energy, Kallanish Energy reports.
The independent research company has evaluated all offshore oilfields sanctioned since 2010 and ranked them by estimated value per barrel of oil under various oil-price scenarios.
The sanctioning activity was record-high during the strong investment cycle from 2010 to 2014, when energy companies reached final investment decisions on offshore oilfields collectively representing nearly 40 billion barrels of oil-equivalent (BBoe) of total resources.
Nose dive in 2016
The amount of sanctioned volumes peaked at 13.2 million Boe (Mmboe) in 2011, at the height of $100-plus oil prices, before nose-diving to just 0.6 Mmboe sanctioned from offshore oilfields in 2016.
Over the last two years, the trend of sanction volumes has risen.
Breaking down these numbers, Rystad found entire groups of offshore field development projects will 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
* Projects sanctioned between 2013 and 2014 are expected to have no value creation. For upstream companies to come out of those investment years without massive losses, the oil price will need to increase to roughly $70/Bbl.
Value creation positive
At the same time, Rystad sees value creation is positive for sanctioning between 2015 and 2018, even when applying a future oil price of only $40/Bbl.
“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. High development costs combined with low oil prices have severely undermined the profitability of these assets. From 2010 through 2014, around 3,000 new oilfields were sanctioned, and we estimate that around 800 of them did not create value,” says Espen Erlingsen, head of Upstream Research at Rystad.
“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.”
Cost structure hurts projects
The reason why projects sanctioned between 2010 and 2014 are struggling to create value relates primarily to the cost structure. These fields were approved when oil prices were above $100/Bbl, and sanctioning activity was at a record high.
These two elements led to an increase in costs within the E&P industry, which drove up the development cost per Boe, according to Erlingsen.
The key driver for the 2015 paradigm shift relates 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 (such as the UK, Norway, and Brazil), and efficiency gains.
This post appeared first on Kallanish Energy News.