London: The average spent on developing major upstream oil and gas projects, which were sanctioned in 2017, fell to the lowest in a decade at $2.7 billion (SR10.12 billion), according to a report by the consultancy Wood Mackenzie on Thursday.
To put the latest data into context, the average project capital expenditure (capex) over the last decade was $5.5 billion a year, said the report.
WoodMac defines “major” projects as those with commercial reserves of more than 50 million barrels of oil equivalent.
But the report predicted a surge in investment in large projects in 2019, with gas developments taking center stage, due to sizeable expansion schemes being planned in Oman, Iran and Norway.
WoodMac said the first quarter of 2018 ended with six projects already sanctioned, for fields in the UK, Norway, Israel, the Netherlands, Malaysia and China. The latter is the Lingshui development, operated by state-owned CNOOC, and is China’s first wholly-owned and wholly-operated deepwater gas project.
As previously forecast by WoodMac, 2017 saw a significant recovery in upstream final investment decisions (FIDs), with the number of project sanctions more than double those in 2016. WoodMac expects a similar total this year.
The consultancy’s research analyst Angus Rodger said last year’s trend was for smaller projects, which he described as “low-hanging fruit.”
He predicted a return to large projects next year, but warned that boom usually turns to bust. He wondered if some large projects would “sneak under the wire” in late 2018 to gain competitive advantage.
Rodger said three factors drove FIDs in 2017: A rise in the oil price, an improvement in company balance sheets and reduced costs. All boosted confidence and greater “sanctioning” of upstream developments.
He said: “Cost reduction efforts by the industry have largely been successful. The primary focus has been to reduce project footprints through fewer wells, smaller facilities, and the greater use of subsea tiebacks (connection between a new discovery and existing facility) and existing infrastructure.”
The current trend was for brownfield projects and expansion of existing operations in order to cap costs.
“While it is good that operators have found ways to grow in tough business conditions, the question is whether the industry is actually spending enough,” said Rodger.
“We cannot rely on smaller projects forever, and when we look at LNG in particular, we see a lot of big projects on the horizon.” He said Qatar, Mozambique, Canada, and Papua New Guinea were all eyeing final investment decisions.
“Can the industry apply the leaner lessons it has learnt through the downturn to these giant projects, or will we return to the boom and bust cost cycles of the past?” he asked. “Companies know they don’t want to be all rushing through that door at the same time and see costs blow-out. So it will be interesting to see if any of these LNG projects push for a late-2018 sanction, locking-in lower costs and pipping the competition.
“Both investors and operators want to see faster cycle times and quicker returns on upstream projects,” he added.
The report said average capex continues to fall — averaging only $2.2 billion — while the ratio of capex to barrel of oil equivalent (boe) is only $4.9/boe, against $11.3/boe in 2011.
WoodMac forecasts a 15 percent decline in average breakeven cost (applying a 15 percent discount rate) to $44/boe, with the most competitive projects in the shallow waters of Norway, UK and Mexico.