Text size adjustment
Hold down the Ctrl key (PC) or Cmd key (MAC) and press "+" to enlarge or "-" to reduce the text size.
14/01/2016 From a historically high activity level in 2013 and 2014, the falling oil price has caused substantial challenges for the petroleum industry, and projects on operating fields and new developments are being postponed.
At the same time, the foundation for future profitability can be laid now through cost-reducing measures and by utilising new technical solutions. Presuming a higher oil price and improved profitability, remaining resources can be realised at a later date and at a lower cost.
From a record investment level of nearly NOK 180 billion in 2013 and 2014, investments dropped to just under NOK 150 billion in 2015, according to a new estimate. This was a 16 per cent reduction from 2014 to 2015. Investments are expected to decline even further over the next few years, and then show a moderate increase from 2019. A considerable drop in exploration costs from 2015 to 2016 is expected, as low oil prices have a sobering effect on exploration activity.
In light of the fact that 2013 and 2014 were historical peak years for investments, operating and exploration costs, activity will still remain high despite the significant decline since 2014. Overall costs are expected to be at a higher level than a few years ago because of many facilities in operation, considerable development activity, fields in operation and exploration.
The combination of a high cost level and the drop in oil price has provided both oil companies and the supplier industry with significant challenges, with reduced activity and downsizing as consequences. At the same time, major remaining petroleum resources on the Norwegian shelf provide a basis for continued high value creation and a high activity level going forward. This presumes a price and cost level that makes it possible to identify solutions that can realise new profitable projects – both on current operating fields and new field developments.
A number of activities have been initiated as a result of the high cost level and oil price drop, with the aim of improving efficiency in the industry and reducing the cost level, which will help to increase profitability. The Norwegian Petroleum Directorate sees that the industry is doing considerable work to improve efficiency, and to reduce investments, operating and exploration costs. The results of this work are starting to materialise, for example in the form of lower drilling costs.
Declining oil prices create considerable uncertainty related to future investment levels. These current investment forecasts presume that the oil price will increase from today’s level in the near future. If this presumption proves wrong, and oil prices remain at the current level for a longer period, this could entail further postponement of activities, resulting in even lower investments and exploration costs.
The Norwegian Petroleum Directorate presumes lower costs as a result of reduced market prices and efficiency gains in the industry. This leads to a lower cost level for individual projects, and contributes to making more projects profitable.
Figure 1: Development in investments including exploration costs and oil price.
From a record investment level of nearly NOK 180 billion in 2013 and 2014, investments in 2015 dropped to just under NOK 150 billion. This represents a reduction of about 16 per cent from 2014 to 2015. Investments for 2016 are estimated at about NOK 135 billion (see Figure 2).
Figure 2: Investments excluding exploration, forecast for 2015-2020
A historically high number of projects, both on operating fields and new field developments, resulted in record investments in 2013 and 2014. However, new projects will not replace activities that have been or will be finalised in upcoming years. Various efficiency measures and declining prices for goods and services also contribute to reduced investments, and increase profitability at the same time. Presuming an increase in the oil price and improved profitability, remaining resources will be realised at a later date and at a lower cost.
Investments on existing fields constitute a substantial share of overall investments. Following a peak in 2013, investments on operating fields have dropped significantly. Major projects have been finalised or are in a final phase, without a corresponding influx of major new projects.
Nine fields are under development, two with a floating platform and four with a platform resting on the seabed. The other three are subsea developments. This entails substantial investments. For 2016, investments in these fields are estimated at about NOK 60 billion, which will decline as the fields come on stream.
Investments are significantly lower, compared with the forecast presented for the Shelf in 2014. Given the presumption of higher oil prices and improved profitability, these are resources that are still expected to be realised, but at a later date and at a lower cost.
Figure 3 shows the investment forecast broken down by main categories of investment. From 2014 to 2015, the biggest reduction was in investments in operations and in new subsea facilities, nearly 40 per cent. Investments will drop within most categories. One exception is operations investments, which are expected to remain stable and increase towards the end of the period due to several major modification projects on existing facilities.
The investment estimates in Figure 3 show considerable investments in facilities resting on the seabed and floating facilities. These are related to ongoing field developments, including Johan Sverdrup.
Figure 3: Historical investment, forecast for 2015-2020
As described above, the investment forecast is based on a number of assumptions regarding oil price development, cost level development and company behaviour/decisions. With regard to investments on the shelf in 2016, many of these investment decisions have already been made. Uncertainty will, however, increase with time. The development in oil price and the effect of ongoing cost-reducing measures will be important for investments up to 2020 and beyond.
The number of exploration wells in 2015, 56 wells, was considerably higher than assumed in the forecast one year ago (40 wells), and virtually the same as in 2014, 57 wells. However, there has been a clear decline in exploration costs. The main cause of the higher number of wells in 2015 was the drilling of sidetracks. These wells are much cheaper than “initial” exploration wells.
Exploration costs mainly comprise costs for seismic and drilling of exploration wells. In 2015, 56 exploration wells were spudded – 41 wildcat wells and 15 appraisal wells – with overall exploration costs estimated at NOK 33 billion. For 2016, it is expected that the number will drop to about 30 exploration wells with total exploration costs of NOK 22 billion. This assumes a smaller drop in exploration costs from 2016 to 2017, followed by a gradual increase. While 30 wells is a significantly lower number compared with recent years, it is still substantial in a historical perspective.
The reduction in exploration costs is primarily a consequence of the estimated reduction in the number of exploration wells, but increased drilling efficiency and lower market prices, primarily regarding rigs, also contribute to a reduced cost estimate.
Figure 4: Estimate of exploration costs, forecast 2015-2020.
Eighty-two fields were producing at the end of 2015. Ordinary operating expenses and maintenance of facilities and wells constitute the majority of operating costs. A reduction in operating costs is expected over the next few years (see Figure 7).
Figure 5: Operating costs (excluding gas purchases and preparation for operations). Forecast 2015-2020
The decline in operating costs is mainly due to a reduction in operating fields, cf. Figure 6. An important cause of the decline is targeted work by operators to reduce operating costs on the fields through various efficiency measures. As measures are implemented, they are included in the cost forecasts for the fields. Reduction in well maintenance also contributes to reduced operating costs on operating fields. New fields will gradually start producing and contribute to increased operating costs at the end of the period.
Figure 6: Operating costs forecast specified by field status. Forecast 2015-2020
Figure 7 shows an overall forecast for investments, operating costs, exploration costs, concept studies and shutdown and disposal on the Norwegian shelf. The decline from 2015 to 2016 is about ten per cent. Costs are expected to remain relatively stable from 2016.
It is important to view the development in light of the fact that 2013 and 2014 were historic peak years regarding operating costs, investments and exploration costs. Despite the estimated decline in total costs since 2014, activity on the Norwegian shelf will still remain high with many operating facilities and substantial activity related to development, fields in operation and exploration. The total future costs are expected to remain at a higher level than a few years ago.
Figure 7: Total costs, forecast 2015-2020.