Article:More delayed projects sanctioned H1 2017 than the entirety of 2016
Article: Ensco’s Acquisition of Atwood Oceanics is first merger among offshore drillers
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As the oil price downturn enters its third year, E&P operators continue to hold significant pricing power over service companies. As a natural result of the drop in the number of projects receiving a final investment decision (FID) and smaller project scopes, service companies have less bargaining power. Thus, E&P companies see significant cost savings while service companies continue to struggle with lower margins. During the record year of 2012, more than 650 greenfield projects (both on- and offshore) were sanctioned. Since the downturn, this number dropped by one-third and reached the bottom in 2016 with less than 200 projects receiving a final investment decision. Unsurprisingly, the number of operators sanctioning projects dropped by 50%. What is more interesting is that the top 10 operators sanctioning projects increased combined share of projects from 20% to 30%. This translates to fewer E&P companies controlling a larger flow of service contracts up for award.
Pricing power is evident as operators have been able to reduce costs from 2012 to 2017. One dimension to consider is the total greenfield cost to develop a field, normalized by reserves developed. Projects that were sanctioned in 2012-2014 had an average greenfield cost of US $11/boe for deepwater, US $7/boe for shelf and as low as US $4/boe for onshore developments. Increasing pricing power coupled with downsizing development scope, E&P companies were able to take greenfield costs down by 42%, 31% and 26% for deepwater, shelf and onshore projects respectively. Engineering companies, platform fabricators, equipment manufacturers and rig operators continue to feel the effects of downward pricing pressure. Deepwater projects exhibited significantly larger cost cuts due to higher margins and greater potential for downsizing without a significant reduction to the amount of reserves developed. Another consideration is how the lifting costs have improved during the same period. Brownfield expenditures divided by barrels produced has declined significantly, as operators also put pressure on providers of supply vessels, logistical, maintenance and modification services. In 2014, lifting costs were almost $17/boe for deepwater, $11/boe for shelf and $4/boe for onshore projects. In 2017, these costs are approximately 30% lower for deepwater and 20% lower for shelf and onshore fields. Offshore projects have the biggest potential for lower lifting costs. However, all segments of the market are experiencing pressure on unit prices.
Service companies have tried to reduce their capacity to balance supply and demand and in that way gain some more pricing power. They have stacked rigs and vessels and let 35% of their workforce go. Unfortunately, this has not been enough and we need to see improvements on the demand side. Now, in 2017, the operators are likely to sanction 40% more projects with 50 more operators being active. However, in addition we have to see increased diversity and a reduction in the market concentration of the dominating operators for the pricing power hegemony to diminish further.