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Upstream industry seeks 30% cost reductions

By BusinessNews Staff on September 30, 2015

In a new report focusing on an analysis of the impact of cost deflation on the global upstream oil and gas sector, Wood Mackenzie has stated that the upstream operators are seeking an average cost reduction of about 20 or 30 per cent on projects.

But Wood Mackenzie’s analysis estimates that supply chain savings through squeezing the service sector will only achieve a cost reduction of around 10 or 15 per cent on average.

The new report noted that $1.5 trillion of uncommitted spend on new conventional projects will be uneconomic, adding that in order to ensure projects are economically viable, operators will also need to focus on project optimisation and adopt smarter ways of working with the service sector.

Upstream Research Manager for Wood Mackenzie, Mr. James Webb noted in the report that as the upstream industry responds to the low oil price, investment is down $220 billion in 2015 and 2016 compared with our pre-oil price crash projections.

“In addition to reduced activity onshore North America, a total of 46 projects have been deferred as a result of the oil price fall. We estimate that as much as $1.5 trillion of investment spend destined for new (pre-sanctioned) and US tight oil projects is now out of the money, or in starker terms, uneconomic at a $50 oil price. This spend is very much at risk.”

Elaborating on the analysis, Principal Upstream Research Analyst, Mr. Obo Idornigie said: “the implications of this level of reduced investment is huge for the industry’s service sector which is of a size to comfortably accommodate an average of 40-50 new projects globally a year. We expect just six new projects to go ahead in 2015 and around ten in 2016.”

“The weak pipeline of new projects is resulting in very competitive bidding from the service sector as E&P companies negotiate hard on pre-sanction projects. We believe that pre-sanction offshore projects could benefit from 10-15 per cent cost reductions through supply chain savings alone. However, the industry needs to strike a balance between near and long term drivers. Pushing the service sector too hard now is only likely to shore up problems once more attractive fundamentals return: Increasingly severe job cuts means that the industry is losing skilled resources that will take time to attract back when prices recover,” Idornigie explained.

Webb said for the industry to achieve cost savings of 20-30 per cent, additional measures are needed to manage costs.

He identified the measures to include: re-working field development plans; and optimising project design, adding that more innovative approaches to project management will all play important parts.

“A prolonged period of low oil prices over a number of years is likely needed to bring about profound, structural changes to industry costs. This is unlikely – in our view oil prices will begin to recover from 2017, and there is a real risk that cost inflation pressures then return. Stronger collaboration between operators and service companies will be the key in driving efficient practices. The winners therefore are likely to be operators with a strong pipeline of near-term projects close to sanction which are able to take advantage of the trough in costs through 2015/16,” Webb concluded.

[ThisDay]

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