• DCube (Demand Database): Historical and forecasted opex and capex for global oil and gas fields, split on supplier segment and geography
In the latest DCube version (November 2015) the 2016 budgets of E&P companies have been updated. The short term oilfield service purchases are now expected at -13% CAGR for 2014-2016. An 8% average growth is expected from 2016-2020
• SCube(Supplier Database): Reported revenue from oil service companies split on the same supplier segments and geographies as DCube
The Q3 2015 version of SCube shows that revenues is continuing to contract as lower activity and prices hits their topline. Second quarter is down with -8% compared to first quarter of 2015
• RigCube (Rig Demand & Supply Database): Global, offshore rig demand (rig count) and supply based on bottom-up, field-by-field activity analysis
Cuts in activity also hits the offshore drillers. The Q3 2015 RigCube version shows that the demand for floaters in 2015 decreases with 13% compared to 2014. The demand will barely recover to 2014 levels in 2020 and additional scrapping is expected to recover the market.
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An intense focus on cost cutting among E&P companies resulted in several development projects being put on hold in late 2014 and into this summer. Cost optimization and a reduction of prices in the service industry have led to several projects turning economical even in the current low oil price environment, and being resurrected. Rystad Energy observes offshore projects to come in at an average of 10-30% lower costs than before the oil price crash.
In 2014 several planned offshore projects were put on hold as a heated oil service market had led to rising costs and the oil price started to show weakness. Projects such as Rosebank/Lochnagar and Mad Dog phase 2 were some of the projects that got hit as companies could not prioritize new large cost commitments. Not all projects were scrapped, as they represented potentially large and important production additions to a portfolio of falling offshore production. The projects were brought back to the drawing board to see if the development could be downsized or re-engineered to cut costs. While this happened, the oil price was falling towards and below the 50-dollar mark. As a consequence, investments were cut to a minimum, which in the end led to decreasing pricing power among service companies and unit prices started to trend downwards. This has led to a large cost saving potential for the previously shelved projects.
Figure 1 shows selected offshore greenfield projects that have been recycled or obtained new greenfield cost estimates based on either re-engineering, downsizing or lower service unit prices. What can be observed is that E&P companies have accomplished large cost savings of up to 50%. This includes also the Mad Dog phase 2 due to simplification of design and project phasing. As another example the giant Johan Sverdrup development has been able to cut more than 1 USD billion on lower unit prices alone. This has had a dramatic effect on breakeven prices. Prior to the oil price drop, un-developed offshore projects had an average breakeven price around 70 USD/bbl. Assuming that a “typical” offshore project’s costs can be reduced by 20% due to cost savings yields a new breakeven price closer to 55 USD/bbl, just enough for E&P companies to increase their faith in feasible offshore developments.
The projects mentioned in Figure 1 demonstrated the first signs of improved project economics, totaling 65 USD billion of investments. Looking ahead at the next offshore projects to be sanctioned and committed to, we expect a large step-up in 2016 and 2017. Figure 2 depicts these projects. In 2015 we foresee ending up with around 75 USD billion worth of projects; this is expected to double by the end of 2017. The key driver for this growth is a rising oil price due to an expected undersupply of oil in the second half of 2016, which materializes into increased project sanctioning in a time window with still low unit prices. More of the recycled projects will first react to this market movement, and projects in Africa (offshore Egypt, Nigeria) and North America (Gulf of Mexico) are expected to lead this increase.
Improved offshore project economics is not the only factor to take into account looking ahead. Cash flow situation and debt are as important to understand how companies can increase their investments. However, with the revived hope for the offshore industry on cost savings potential, investments will come back with offshore being everything but a dead industry!