Investment and cost forecasts
15/01/2015 The high cost level in the petroleum industry has gradually become a major challenge. The decline in oil and gas prices in recent months has further emphasised the sector’s profitability challenges.
Significant remaining petroleum resources on the Norwegian shelf provide a basis for continued high value creation and high activity level for many years to come. This value creation assumes a price and cost level which makes it possible to define new profitable projects - both on operating fields as well as new field developments.
The petroleum industry is in a consolidation phase following a decade of strong growth. Lower oil and gas prices may contribute to the initiation of necessary readjustments to ensure profitability over the longer term. Although this may translate into reduced profitability and lower activity in the short term, the price decline could contribute to a long-term and profitable Norwegian petroleum sector. If the considerable price decline should be more prolonged without a reduction in cost level, this could have a significant negative impact on the activity level in the petroleum sector over time.
Investments are projected to drop around 15 per cent from 2014 to 2015 and by an additional eight per cent to 2017, and will then plateau with a moderate increase from 2018. Total investments will decline by 21 per cent from 2014 to 2017. Exploration costs are expected to experience a similar development. Overall, this forecast indicates that investments including exploration costs will decline by around 23 per cent from 2014 to 2017.
These forecasts have been prepared under the prevailing assumptions for the autumn of 2014. It is assumed that the projects that have been placed on hold will be implemented at a later date. If the oil price should remain at USD 50-60 per barrel over time, this will result in additional reductions in investments and exploration costs.
Two key factors - oil price and cost level
The development in oil and gas prices in recent months, combined with a high cost level, has created considerable uncertainty surrounding developments in the petroleum industry. In addition to having a direct impact on current income, the reduction in oil and gas prices also have several indirect effects on value creation in the sector. Reduced oil and gas prices affect decisions in the exploration, development and operational phases. Reduced oil and gas prices will a result in lower demand in supplier markets and contribute toward reducing the sector's cost level. This will alleviate the effects of lower oil and gas prices on profitability. The strength of these various effects, and how quickly they will materialise, is too early to say.
Figure 1: Development in investments including exploration costs and oil price
Many investment decisions that will come into force in 2015 have already been made, and the potential for further reduction is therefore moderate. The uncertainty in these forecasts naturally increases over time, but if the oil price over time remains at USD 50-60 and the companies use this low price for investment decisions, the investment level could decline even further, starting in 2016.
The developments in oil and gas prices and cost level in the industry are closely linked. The investment estimates the operating companies have reported to the Norwegian Petroleum Directorate, which also form the basis for the investment forecast, include a stable to slowly rising cost level over the next few years. Reduced costs will therefore directly affect the investment forecast through a lower cost level at the project level, but also indirectly in that more projects will be profitable at a given product price. In addition to a lower cost level as a result of lower prices in different supplier markets, a low oil price over time may also contribute toward streamlining and technological development and thus reduced costs. This forecast has only marginally included these effects.
Total investment estimates
Investments in 2015 have been estimated at NOK 147 billion, NOK 25 billion lower than the preliminary figures for 2014 (see figure 2). They are presumed decline further to about NOK 135 billion in 2017, and will then gradually rise in subsequent years (see figure 2).
Figure 2: Investments excluding exploration - historic figures for the 2009-2013 period and forecast for 2014-2019
Investments in existing fields amount to a substantial share of total investments and are estimated at between NOK 70 and 80 billion over the next few years. Following a peak in 2013, there has been a substantial reduction in investments in producing fields. This is due to major projects such as Ekofisk Sør, Eldfisk II, new compressors on Troll and Åsgard subsea compression having reached the completion phase without equivalent new major projects having been initiated.
At the end of last year, 11 fields were under development, three with floating facilities and five with facilities resting on the seabed. The other three are subsea developments. This is a record-high number and leads to considerable investments. Investment figures for 2015 for these fields are estimated at approx. NOK 60 billion, and will then decline rapidly as these fields come on stream.
The forecast presumes that there will be relatively few new field development decisions over the next few years. The majority of these investments are linked to the development of Johan Sverdrup.
Compared with the forecast published on the shelf in 2013, these investments are considerably lower. Investment estimates for the 2015-2019 period have been reduced by NOK 175 billion compared to last year's forecast. This is due in part to lower investments in producing fields than was presumed last year and in part to project postponements for new field developments.
Figure 3 shows the investment forecast divided by different main investment categories. The reduction in investments from 2014 to 2015 is primarily within operational investments/modifications on producing fields. The resource consequences of this over time are uncertain. There is also a reduction in well investments. This is linked to the fact that many major field projects are in the completion phase, without new projects being initiated.
The investment estimates in figure 3 show considerable investments in mobile facilities and facilities resting on the seabed. These are linked to ongoing field developments and the development of Johan Sverdrup.
Figure 3: Historical investment figures for the 2009-2013 period and forecast for 2014-2019
Effects of lower oil and gas prices
If the oil price should remain around USD 50-60 per barrel over time, this will result in an additional reduction in investments. In figure 4, the forecast is split between investments in field developments, including Johan Sverdrup. These are investments we presume with a reasonable degree of certainty will be made. The figure also distinguishes between investments in producing fields and discoveries (excluding Johan Sverdrup). Any further reduction in investments will be within the two latter categories.
Figure 4: Investment forecast specified by ongoing field developments including Sverdrup, producing fields and discoveries
Investment estimates for producing fields are shown in figure 5. Development wells are estimated to account for 55 per cent of investments in producing fields. This is in addition to operational investments/modifications on the facilities and new facilities, such as subsea facilities.
The potential for further reduction in field investments is found in reduction and/or postponement of modification investments. This could also mean that improved recovery projects become more difficult to implement. The production of reserves could also be affected, as decided measures may be reconsidered. The drilling of new development wells is key for many of these projects.
Figure 5: Investment forecast for producing fields
There are significant variations in the profitability of development wells; from wells that are profitable at a very low oil price to wells that require an oil price of up to USD 70 per barrel. If an oil price as low as USD 50 per barrel is used as a basis for drilling decisions, a substantial number of wells will be deemed unprofitable. The effects of a lower oil price for the drilling of new wells are complicated by existing rig contracts and the length of contract periods.
Exploration costs consist mainly of costs for seismic data and drilling of exploration wells. 2014 saw the spudding of 56 exploration wells, 41 wildcat wells and 15 appraisal wells with overall exploration costs estimated at NOK 36 billion. For 2015 it has been presumed that the number of wells will be reduced to 40 exploration wells and overall exploration costs to NOK 30 billion. A further negative adjustment in exploration activity has been presumed, with overall exploration costs of NOK 24 billion for the 2016-2018 period. Exploration activity is then assumed to rise moderately.
Figure 6: Estimate of exploration costs. Historical figures for 2011-2014, followed by a forecast.
Going forward, exploration activity is surrounded by considerable uncertainty. The activity will, among other factors, depend on the oil price development, how many discoveries are made and their size.
At the end of 2014, 78 fields were in production. Operating costs are expected to remain relatively stable around NOK 65 billion over the next few years (see figure 7). The ordinary operating costs, maintaining facilities and well maintenance amount to the majority of operating costs.
Figure 7: Operating costs (excluding gas purchases and preparations for operation)
OVERALL COST DEVELOPMENT ESTIMATE
Figure 8 shows an overall prognosis for investments, licence-related exploration costs, concept studies, as well as shutdown and disposal.
The change from 2014 to 2015 amounts to about 13 per cent. The reduction for the 2014 to 2017 period amounts to approx. 21 per cent. If concept studies and costs linked to shutdown and disposal are excluded, the equivalent figures are 15 per cent for 2014 to 2015 and 23 per cent for the 2014 to 2017 period.
Figure 8: Forecasted investments, licence-related exploration costs, concept studies, as well as shutdown and disposal costs
Figure 9 also includes operating costs and company-related exploration costs.
Figure 9: Overall costs; historical figures for 2009-2013 and forecast for 2014-2018.