Oil production from shale formations and increased uncertainty around future demand for oil has created less visibility around the viability of long cycle offshore oil production and exploration projects. Northwest Europe, as a predominantly offshore region, will also be impacted by these large macro trends. Three lenses can be used to examine how we can think, observe and assess the different supply segments of oil and how they compete for available capital and resources.
The first lens looks at how decision criteria has evolved from volume based metrics such as production targets and reserve replacement in the 100 USD/bbl oil era to profitability indices, dividend protection and cash preservation in the downturn. Downturn behavior will penalize long cycle offshore projects, while upturn behavior will enhance emphasis on long cycle friendly decision criteria. It is predominantly the frontier regions in Northwest Europe, the Barents Sea and West of Shetland, that will be penalized the most. The remaining areas in the North and Norwegian Seas are covered by infrastructure, which is a key enabler for short-term projects offshore such as infill drilling and tiebacks
The second lens is resource availability, as not every company can access all available resources. The most profitable resources are locked behind national oil companies and shale resources require a vastly different business model than conventional oil. It is possible to observe how transaction multiples have increased for shale resources and decreased for Northwest Europe resources. This essentially implies an overly high entry price to the North American shale world, locking out any offshore focused players without an established shale activity. These companies have a limited investment arena and Northwest Europe offers one of the few conventional OECD production sources, which the Total-Maersk transaction illustrated, is considered attractive.
The third lens is transaction and portfolio opportunities. Only a subset of companies has the possibility to allocate capital to a wide array of projects in all oil supply segments. By observing transaction history for Majors and big international oil companies, there are no clear indications that offshore is divested in favor of other segments. This indicates that offshore is still considered attractive despite the often superior characteristics of shale oil, from a short cycle and payback time perspective. From a full cycle perspective, offshore projects are able to compete with equal or better breakeven levels. The clear indication that the transaction history can reveal is the divestment in oil sands.
The three lenses teach us that understanding capital allocations and its implications on offshore supply, transactions, field developments etc., is a complicated picture. Only a small number of companies have the ability to choose between an array of different projects across all oil supply segments. Observations made around these companies do not support any widespread move away from long cycle conventional offshore projects.
Northwest Europe, as one of the leading offshore regions globally and with OECD exposure, should therefore expect to see continued capital and resource allocation as along as the projects are competitive. Given the wide array of commercially very robust projects in the region, the expectations are towards a new development boom. However, poor exploration results over the last four years have not filled the project portfolio, potentially creating declining activity past 2020.
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David White, Marketing Manager
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Simon Sjøthun, Senior Project Manager
Phone: +47 24 00 42 00