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Restoring Economic Health to the North Sea DEVEX 2015
Underpinning the future: Discovery, Development, Recovery
Aberdeen
21 May 2015
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
McKinsey & Company | McKinsey & Company 1 1 | McKinsey & Company SOURCE: Source
GBP 2.69
McKinsey & Company | McKinsey & Company 2 2 | McKinsey & Company
The cost challenge in the UKCS
2.5
Percent
Annual inflation rates, 2000–14
Big Mac
SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys
1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average
McKinsey & Company | McKinsey & Company 3 3 | McKinsey & Company
The cost challenge in the UKCS
2.5
12
Percent
Annual inflation rates, 2000–14
Big Mac
North Sea platform
lifting costs1
SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys
1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average
McKinsey & Company | McKinsey & Company 4 4 | McKinsey & Company
The cost challenge in the UKCS
2.5
18
12
Percent
Annual inflation rates, 2000–14
Big Mac
North Sea platform
lifting costs1
UK lifting cost per
barrel of oil equivalent
(2004–14)2
SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys
1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average
McKinsey & Company | McKinsey & Company 5 5 | McKinsey & Company
The cost challenge in the UKCS
21
18
12
2.5
Percent
Annual inflation rates, 2000–14
Big Mac
North Sea platform
lifting costs1
UK lifting cost per
barrel of oil equivalent
(2004–14)2
UK development cost per
barrel of oil equivalent
(2004–13)2
SOURCE: McKinsey’s Energy Insight Offshore Operations Benchmarking Database; Oil & Gas UK Activity Surveys
1 Unweighted average of total lifting cost for 17 UKCS North Sea platforms (total cost, not cost per barrel) 2 Weighted average
McKinsey & Company | McKinsey & Company 6 6 | McKinsey & Company SOURCE: Source
GBP 13!
McKinsey & Company | McKinsey & Company 7 7 | McKinsey & Company
The increase was largely unforeseen
SOURCE: Oil & Gas UK 2012 Economic Reports and 2015 Activity Survey
Growth in operating cost forecast from UKCS operators GBP billions
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2013 actual (8.9)
2014 actual (9.6)
01 2003 2005 2007 2009 2011 2013 2015 2017 2019
McKinsey & Company | McKinsey & Company 8 8 | McKinsey & Company
The fall in oil price has made the North Sea a lot less profitable
USD 99 bbl 88
SOURCE: WoodMac GEM (2015); McKinsey analysis
1 Price below which NPV of the remaining reserves of the field will be zero based on end 2014 cost and production forecast.
Share of UKCS production
that breaks even1 Oil price
McKinsey & Company | McKinsey & Company 9 9 | McKinsey & Company
The fall in oil price has made the North Sea a lot less profitable
USD 99 bbl 88
54 USD 55 bbl
SOURCE: WoodMac GEM (2015); McKinsey analysis
1 Price below which NPV of the remaining reserves of the field will be zero based on end 2014 cost and production forecast.
Share of UKCS production
that breaks even1 Oil price
McKinsey & Company | McKinsey & Company 10 10 | McKinsey & Company
The number of UKCS wells plugged and abandoned per year now exceeds
those drilled for exploration and appraisal
SOURCE: DECC; Oil & Gas UK, Annual Activity Surveys and Decommissioning Insights
Plugged and
abandoned wells
Exploration and
appraisal wells
10 2015F 14 13 12 11 09 2008
Well activity in the UKCS
Number of wells drilled
0
25
50
75
100
125
McKinsey & Company | McKinsey & Company 11 11 | McKinsey & Company
Cost increase not due to increased activity …
+1.5%
SOURCE: McKinsey Energy Insights
Deck cargo
shipped Tonnes
McKinsey & Company | McKinsey & Company 12 12 | McKinsey & Company
- 4.0%
Cost increase not due to increased activity …
Helicopter
hours Hours
Wells drilled Number
+1.5%
SOURCE: McKinsey Energy Insights
Deck cargo
shipped Tonnes
+2.0%
McKinsey & Company | McKinsey & Company 13 13 | McKinsey & Company
… or higher supplier margins
1 Margin as announced - adjusted for different accounting/disclosure policy. Sample includes 18 equipment, 13 EPC, 38 assets and 9 services companies
SOURCE: McKinsey Energy Insights
EBITDA margin1 of OFSE companies Percent
10
19
23
39
8
18
22
36
Assets EPC Services Equipment
2012-2014
2009-2011
McKinsey & Company | McKinsey & Company 14 14 | McKinsey & Company
So what has been behind the large cost increase?
SOURCE: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article
Increased activity 20%
McKinsey & Company | McKinsey & Company 15 15 | McKinsey & Company
So what has been behind the large cost increase?
Increased unit cost
Increased activity 20%
40-50%
SOURCE: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article
McKinsey & Company | McKinsey & Company 16 16 | McKinsey & Company
So what has been behind the large cost increase?
Increased unit cost
Increased activity
Greater inefficiency
20%
40-50%
30-40%
SOURCE: McKinsey Energy Insights; “Meeting the challenge of increasing North Sea costs” McKinsey article
McKinsey & Company | McKinsey & Company 17 17 | McKinsey & Company
Opex example: integrity inspections cost
SOURCE: Sanitised client example
Comparison of topsides integrity inspection costs per asset GBP thousands per installation, gross
McKinsey & Company | McKinsey & Company 18 18 | McKinsey & Company
Capex example: new greenfield developments
SOURCE: Sanitised client example
Development cost index; 100 equal to full cost in year 2000
McKinsey & Company | McKinsey & Company 19 19 | McKinsey & Company
This is something other highly technical industries appear to have avoided
Nominal price inflation for a new
commercial airliner
Nominal price inflation for a new
5-door hatchback in Western Europe
+ 0.2 – 1.5% + 1.0%
SOURCE: A2Mac1; manufacturer’s public data; Airline Monitor: McKinsey analysis
McKinsey & Company | McKinsey & Company 20 20 | McKinsey & Company SOURCE: Energy Insights Well Intervention Benchmark
Step up activity where it makes sense: e.g., well interventions
2Operator A
Operator B 9-10
Incremental production from well interventions % of total production
▪ Intervene every 15th well
▪ Range of intervention types = 1-2
▪ Intervene every 3rd well
▪ sRange of intervention types = 7-8
McKinsey & Company | McKinsey & Company 21 21 | McKinsey & Company
2010-2014 McKinsey offshore reliability survey results
▪ Asset bottleneck
management
▪ Equipment operations
▪ Optimise care regime
▪ Repair in appropriate
timeframe
▪ Performance management
▪ Reliability organisation
▪ Continuous improvement
▪ Equipment history
▪ Operator mindsets
▪ Organisational capability
Practices covered
North Sea
Offshore Operators
Get core practices and approaches in place: e.g., offshore reliability
SOURCE: McKinsey’s Global Offshore Asset Efficiency Database
Good Common Best
Reliability practices score
Production efficiency % of MPP
30
40
50
60
70
80
90
100
McKinsey & Company | McKinsey & Company 22 22 | McKinsey & Company
Address gaps in capability and expertise: e.g., operating standards
SOURCE: McKinsey Upstream Operations Service Line
McKinsey & Company | McKinsey & Company 23 23 | McKinsey & Company
Tackle inefficiency: e.g., well delivery
SOURCE: McKinsey Upstream Operations Service Line
Well delivery process
Drive learning
curves across
the well delivery
process
Standardize and
simplify
specifications,
designs and
processes
Lean drilling
execution
Procurement
and supply
chain
optimizaton
Rigorous
performance
management
Improvement levers
1
2
3
4
5
Portfolio and rig
strategy
Prospect
maturation and
high-grading
Wells
engineering
Logistics and
supply chain
management
Drilling and
completion
execution
Hook-up and
post-mortem
learning
McKinsey & Company | McKinsey & Company 24 24 | McKinsey & Company
Tackle inefficiency: e.g., well delivery
SOURCE: McKinsey Upstream Operations Service Line
Well delivery process
10-15% 50%
Drive learning
curves across
the well delivery
process
Rigs to work on
long series of
similar jobs
Long range plans
with strategic
suppliers
20-25%
Standardize and
simplify
specifications,
designs and
processes
10-15%
Lean drilling
execution 5-10%
Procurement
and supply
chain
optimizaton
Contracts
incentivize real
productivity
improvements
Use down-turn to
reduce unit costs
10-15%
Rigorous
performance
management
5-10%
Improvement levers Potentials
% of total well cost
1
2
3
4
5
Portfolio and rig
strategy
5-10%
“Perfect well” planning and estimation approach
Use of std wells as basis for 80% of portfolio
Prospect
maturation and
high-grading
5-10%
Planning teams to
specialize on type
of jobs
Defined std well
and options,
based on drivers
of costs
Active monitoring
and target setting
for engineering
productivity
Wells
engineering
10-15%
Capitalize on std
specs to drive
down unit costs of
procured services
and equipments
Logistics and
supply chain
management
20-25%
Rig teams work
on long series of
similar jobs
Minimize rotation
of crews
Lean execution
principles to drive
down NPT
Drive actively
operational
efficiency
Execution daily
monitored against
‘Perfect well’
Drilling and
completion
execution
3-5%
Active planning
and debottle-
necking of hook-
up towards asset
Hook-up and
post-mortem
learning
McKinsey & Company | McKinsey & Company 25 25 | McKinsey & Company
The impact can be enormous; e.g., SWN in the Fayetteville Shale
SOURCE: Source SOURCE: Southwestern Energy Investor Presentation 2015
76
7
8
1112
14
18
08 09 2007 11 2014 10 12 13
5,4405,356
4,8194,836
4,528
4,100
3,619
2,657
12 09 11 2014 13 10 08 2007
Days to drill Lateral length
McKinsey & Company | McKinsey & Company 26 26 | McKinsey & Company
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