Author: Henrik Poulsen and Bimbola Kolawole, Rystad Energy
Publisher: Africa Oil & Gas Report
In recent years, the fall in the oil price has put a huge challenge upon the E&P industry. Times are still challenging, with the oil price now seeming to have stabilized on a much lower level than expected. In order to survive and deliver healthy economic results, the industry initiated methods to improving their operations. The oil and gas industry are about to develop a new standard on how we look upon cost levels, development concepts and efficiency.
By comparing operating cost levels, investments and future production’s robustness to low prices in 4 different regions, we have been able to track a pattern on how the industry is evolving globally. West Africa, together with 3 other regions (South East Asia, South America & Western Europe), have been scrutinized how operating costs per barrel and investments (Capex) have changed since the oil price crash. In addition, we have looked at the impact on how the latter changes have influenced the breakeven price distribution of the production. In other terms, how robust future production will effect low oil prices. A region is a coarse geographical entity and may not reflect differences at a country level. However, a region comprises so many projects and fields that the statistics becomes significant and reliable.
Has the industry been able to improve their efficiency - Operating expenses per barrel (Opex/bbl)
Opex/bbl is a measurement on how cost efficient the actual oil production is. Until 2014, such expenses were by far the highest in Western Europe (among the four regions compared). The price downturn has made operators in Western Europe work more efficiently, and the cost level has lowered by more than 30% to come down to the same level as in the peers’ regions. In the same period, South America lowered their Opex/bbl by about 20%, while West Africa and South East Asia have only been able to lower their Opex/bbl by 10% each. South East Asia has a declining production, which explains much of the low reduction, while West Africa is falling behind in terms of reducing their operating costs.
The oil price crash has of course had a great impact on the investment level. Previous projects with a robust economy at 100 USD/bbl are not sustainable at 50 USD/bbl. Many projects have been deferred, re-designed or simply abandoned, which has caused a dramatic drop in investment levels since 2014. Regions that have been able to re-design their projects have seen a lower drop in investment levels. Among the peers, the drop have been most dramatic in West Africa and South East Asia, with an almost 60% decline in investments from 2014 to 2017. The drop in Western Europe and South America has respectively been 45 and 30%. South America stands out as positive in this respect due to the development of its many great discoveries done some years before the oil price crash. Future production will be harmed most where projects have been deferred or abandoned, while re-design will have less impact on future production, apart from the fact that redesign also cause a delay, but only by some few years.
Future robustness to low oil prices
There is no doubt that how the E&P industry is handling the current uncertain market conditions will greatly impact future performance. Decisions and achievements completed in recent years will influence how the different regions will be able to attract and develop the industry into the future. As we have seen, has the efficiency in operations and investment levels developed significantly different from region to region? The issues discussed can also help us to understand how robust the future production in the different regions will be if low oil prices will remain for a longer period. Rystad Energy believes the prices to be positioned upwards of 60 USD/bbl when we reach the 20’s. However, oil prices have never been precisely predictable. Therefore we have looked at how big of a portion of future production (in 2020 and in 2025) will need a breakeven price higher than 60 USD/bbl. Production with breakeven prices higher than 60 USD/bbl might be at risk, if the world remains as oversupplied as it is today. Among the four regions, West Africa has the second highest portion of vulnerable production if prices remain lower than 60 USD/bbl. Only South East Asia has a higher portion of production at risk. 13% of West Africa’s predicted production in 2020 is at risk, while this increases to 27% in 2025. This shows how the importance to constantly work on cost reductions and efficiency gains in order to remain competitive and economically sound. However, we still forecast a small increase in oil (Crude & Condensate) production from West Africa from 2020 to 2025, while South East Asia is expected to continue its decline.
As shown, the West African E&P industry has room for improvement on how they run their daily operations. What has been achieved in other parts of the world should be possible, to a certain degree, for West Africa to copy. Efficiency gains will often require a collaborative and open environment between the E&P and OFS industry together with the authorities. We assume there is room for improvement for at least another 10% on the operating costs in West Africa.
Low oil prices have made the industry even more cautious to invest in high politically at-risk and unstable countries and there is no doubt that some regions are hurt more than others by this fact. It is important to understand that doing investments, which will pay off the next two or three decades, requires a stable and predictable investment climate.
In a high-risk environment with low oil prices, we would expect that West Africa is one of the regions in the world that would be harmed most – close to 60% drop in investments the last 3 years. This is partly due increasing maturity, deeper water, more complex reservoirs, but also difficult political conditions in some countries. We would encourage the industry, together with the authorities, to uncover simpler development concepts instead of deferring or abandoning projects to make future production more robust to accommodate lower prices. We see room for improvements on the latter.
Lower operating costs per barrel and increased focus on improved and more efficient development concepts may arrest our prognosis, that West Africa may face a doubling of their production at risk with oil prices lower than 60 USD/bbl.
Whatever the future oil price will be is it evident that both Governments and the industry would profit by working smarter and more cost efficient in a joint collaborative environment.
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Contact: Henrik Poulsen, SVP Government Relations
Phone: +47 24 00 42 00
Contact: Bimbola Kolawole, BD Manager - Africa
Phone: +47 24 00 42 00
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. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), as well as Singapore and Dubai.