September 2, 2015
Author: Audun M. Martinsen, Senior Analyst, Rystad Energy
Publisher: OE Digital - September 2015
The development of the offshore oil and gas reserves in Europe is losing relevance in the battle with shale resources in North America and conventional oil in the Middle East. The ongoing fight over market shares has flooded the market with cheap oil and has resulted in a lowering of the oil price to a level that makes the resources in mature offshore basins more challenging to develop. Offshore producing countries in Europe are fighting escalating costs and operational inefficiencies to become more competitive in the new world order of oil.
In 2014 we saw more than USD 100 billion being directed to the development and production in NW Offshore Europe for the first time ever. This equates to an average 9% annual growth from 2009-2014 and was caused by more activity and higher unit costs in both Norway and the United Kingdom. Even with rising demand of oil and oil prices we do not expect the spending to grow to these levels for the rest of the years in this decade. Companies will conserve cash, focus on completion of existing projects and await the business outlook.
The Norwegian Continental Shelf
In Norway, E&P companies spent about USD 51 billion in 2014, a 6% growth from 2013. The Norwegian oil and gas sector is far from sheltered and is expected to decline in 2015 by about 9%. Most of the decline is driven by capex cuts which will drop by 11%. The drop is an effect of a normalization of extraordinary activities from the 33 greenfield developments committed to between 2010 and 2013, such as Gudrun, Goliat, Eldfisk II. In addition, it is also the effect of cost cuttings and efficiency programs by Statoil. Statoil aims to reduce their MMO budget and increase the drilling efficiencies substantially.
Looking towards 2020 there are a lot of uncertainties in investment estimates, specifically regarding the sanctioning of new projects and exploration levels. For example, Statoil has pushed the final investment decision (FID) on both Johan Castberg and Snorre 2040 – both expected to be multi-billion dollar projects with new platforms (floaters); FID’s are now expected by H2 2017, with start-up around 2022-2023. With this current timeline, these projects are important to meet the forecasted 2020 expenditures of about USD 55 billion. Other key projects are Johan Sverdrup phase 1 and 2 and potential developments of the Skarfjell, Alta/Gohta and Pil discoveries. In the current forecast a relatively flat exploration capex at around USD 5-6 billion has been assumed from 2016 onwards after peaking at USD 7 billion in 2014.
UK Continental Shelf
The UK Continental Shelf (UKCS) was surpassed by the NCS to be the largest O&G market in 2006. In 2014 UK almost closed the gap with USD 46 billion expenditures on upstream activities. 2015 on the other hand will be much more dramatic for the UK than for Norway. The money spent will drop by more than 20%, and we will see the spend contract even more in 2016 before stabilizing at around BUSD 35 at the end of the decade. The reason for this immense drop is an extreme case of what we observed in Norway - record high oil prices and inflation led to massive investments and rejuvenation programs in old discoveries and fields. 58 greenfield investments started between 2010 and 2013 such as Clair Ridge, QUAD204 and Mariner. So when completion simultaneously occurs and investments stop, there are only a few new discoveries to be developed. The current field development boom observed at the NCS includes a healthy mixture of old discoveries having matured into economical projects and discoveries made over the last decade. Comparing discovered volumes at the NCS with the UKCS, pinpoints one of the key issues for the UKCS has been that exploration results have been persistently poor and on decline since activity peaked in 2007/08. In 2008, 121 wildcat and appraisal wells were drilled at the UKCS and 444 million boe of oil and gas were discovered. Since then the exploration activity has decreased and in 2014 only 38 exploration wells were drilled and only 98 million boe of oil and gas were discovered.
Glancing ahead towards 2020, the portfolio of stand-alone candidates that could spur UK greenfield investments is limited to a handful of candidates. The Culzean is the first runner up. Operated by Maersk Oil, it could see a final investment decision in August 2015 with start-up in 2020/2021. The field is to be developed with bridge linked platforms including a central processing facility, a wellhead platform, and combined utility-living quarters. The total investment for the project is expected to be in excess of USD 4.7 billion. Chevron has not given up on its challenging Rosebank development west of Shetlands and Statoil is expected to decide on a concept for the Bressay heavy oil field in 2015. The British Government have taken upon different measures for tax reduction supporting investments in maturing offshore prospects and exploration to improve the dark outlook. There is still potential to maximize the recovery from the UKCS, and hopefully fiscal changes and the current cost cutting schemes, there could be a significant upside.
Other NW Europe
Outside Norway and the UK, the market has been declining since 2008. From USD 9 billion in 2008, 2014 clocked in at USD 6.5 Billion. Netherlands and Denmark have been the key driver of this decline. In general, the Other NW European market is mainly driven by brownfield spend at existing producing fields. There is limited exploration and new developments, but some basins show positive signs. In Ireland there is good progression around the Barryroe development, and smaller undeveloped discoveries can become commercial with new developed infrastructure. In Iceland there is still an unrealized potential at the awarded Dreki region and future license rounds in the North East. Although some growth is expected from 2016, the offshore European market will still be dominated by the markets in Norway and the United Kingdom, and both will see a new wave of importance at end of this decade.
Contact: Audun M. Martinsen, Senior Analyst
Phone: +47 24 00 42 00
Mobile: +47 48 07 76 11
Contact: Julia Weiss, VP Marketing
Phone: +47 24 00 42 90
Mobile: +47 48 29 87 61
About Rystad Energy
Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), South Amercia (Rio de Janeiro), Africa as well as South East Asia.