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How does the North Sea figure in the global upstream recovery?
Malcolm Dickson, Research Director28 March 2017EY Rotterdam
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Agenda
1. Macro picture – global investment trends
2. Corporate overview – the start of a recovery?
3. North Sea – how does it fit in?
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A recovery is expected in 2017, but mainly driven by US tight oil
Global development spend by region
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But crucially, elsewhere, the FID slump is coming to an end
Conventional FIDs per year, with 2017 estimate (>50 mmboe)
Source: Wood Mackenzie
But only 20 or so projects will make the cut, as costs are still too high for half of the potential developments
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Major upstream project FIDs in 2016 signal those expected in 2017
Australia
Indonesia
Egypt
Kazakhstan
Atoll (BP) US$1.2 bn,
16% IRR
Greater Enfield (Woodside) US$1.9 bn12% IRR
Tangguh Ph.2 (BP)
US$8 bn 20% IRR
Tengiz Exp. (Chevron)
US$36.8 bn 9% IRR
KG-DWN-98/2 (ONGC)
US$5.2bn 18% IRR
Zohr (Eni) US$14bn, 15% IRR
Onshore
Shallow-water
Deepwater
India
Numbers represent associated capital spend for projects (real, 2016 terms), and IRR (NPV10)
Utgard(Statoil)
US$0.5 bn 22% IRR
Norway
Kazakhstan
2016 FIDs so far (>50 mmboe)
Domestic drivers
Portfolio drivers
FID
A company strategy ‘in action’
Low costs
Rationale for FIDs during the downturn
Source: Wood Mackenzie
Dvalin (DEA) US$1.3 bn13% IRR
Trestakk (Statoil)
US$5.5 bn 20% IRR
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Project FIDs expected to pick up in 2017: focus of greenfield developments in Brazil, East Africa and Russia
Norway
Johan Castberg 2023
Nigeria
Bonga SW 2023
Iraq
Shaikan (Phase 2) 2021
Kazakhstan
Karachaganak Exp. 2022
Kenya
Block 10BB 2022
UK
Rosebank 2024
Russia
Urengoiskoye Achimov IV/V 2018
Ob-Taz Bay fields 2025
Angola
Orca 2023
Major projects (>250 mmboe) expected to achieve FID through 2019
250-500
500-1,000
Recoverable mmbboe
Expected FID year2016 2017
2018 2019
US GoM
Tiber 2022
Shenandoah 2021
North Platte 2022
Vito 2022
North Platte 2022
Brazil
Iara Entorno 2018
Sepia 2020
Libra 2021
Carcara 2023Mozambique
Coral 2022
Golfinho 2022
Mamba 2024
Egypt
W Med DW 2023
Eq. Guinea
Block R FLNG
2021
Indonesia
IDD LNG 2026
Israel
Leviathan 2022
Azerbaijan
Absheron DW PI 2023
Algeria
Ahnet 2023
Romania
Domino 2022
Tanzania
Block 1 2024
Bock 4 2029
Vietnam
52/97, etc 2026
>1,000
PNG
P’nyang 2022
PLNG 2023
Uganda
Block 2 2022
Block 1 2022
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The high grading effect – the pre-FID deepwater cost-curve
The high grading effect – the pre-FID deepwater cost-curve
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Where to go next – the Q4 2016 greenfield deepwater project cost-curve now, and minus 20% capex
Q4 2016 greenfield deepwater project cost-curve now, and minus 20% capex
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Agenda
1. Macro picture – global investment trends
2. Corporate overview – the start of a recovery?
3. North Sea – how does it fit in?
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Breakdown of the Brent price needed for cash flow neutrality between 2017 and 2019 (Q4 2016 data)
Cash flow breakevens down by 40% since the crisis beganPrice needed to achieve cash flow neutrality has fallen from US$91/bbl to US$54/bbl. Signs of the investment cycle turning; but dividends and spend still vulnerable to retreating prices
Source: Wood Mackenzie Corporate Benchmarking Tool Q4 2016. Base-case estimate of Brent price required to remain cash flow neutral (accumulate no additional debt) between 2017 and 2019. Includes full corporate costs and distributions and downstream cash flow for BP, Cenovus Energy, Chevron, Eni, ExxonMobil, Husky Energy, OMV, Petrobras, Repsol, Shell, Suncor Energy and Total. For all other companies we apportion announced dividend and buyback programmes to the upstream business on a pro-rata basis.
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Recovery in spend after two years of severe contractionTight oil leads the way, meeting strict hurdle rates and growing rapidly; conventional spend on new projects doesn’t really get going until 2019/20 and delays still a real risk
Breakdown of development spend (CS companies)
Source: For 60 companies covered in Wood Mackenzie’s Corporate Benchmarking Tool.
North American YTD
Probables
Development spend by IRR tranches
More work needed to improve the economics of pre-FID conventional projects
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Pre-FID and US L48 future drilling cumulative production by breakeven in 2025 – by resource theme
Repositioning at the low end of the cost curve the dominant themeUS tight oil, Brazil and low cost Middle East oil opportunities in demand
$60/bbl
Source: Wood Mackenzie onshore breakevens at 10% discount rate, offshore at 15%
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Agenda
1. Macro picture – global investment trends
2. Corporate overview – the start of a recovery?
3. North Sea – how does it fit in?
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Only Norway will see investment growth again
Development capex by North Sea country (US$ nominal)
But the project hopper will need to be re-filled there too if investment is to stay strong
In the UK, Culzean is the only earlier phase development of any scale
Sverdrup underpins Norwegian spend, but plenty in the pipeline medium term
Danish spend is dependent on new projects – such as Tyra and Hejre in the short term.
2/3 pre-FID
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Tolmount (Premier) Cheviot (Alpha)Lancaster (Hurricane)Eagle (EnQuest)Arran (Dana)Finlaggan (Zennor)Breagh P2 (INEOS)
FIDs will edge up in the region, but there is a lot of uncertainty Up to 13 could take place, but only a handful are more likely with brownfield to the fore
Njord Future (Statoil)
Johan Castberg (Statoil)
Skarfjell (Wintershall)
Snadd (Aker BP)
Snorre Expansion (Statoil)
Brasse (Faroe)
Concept selection in 2016. A repair of the semi-sub (3-4 years). Will be integrated with nearby Bauge.
Concept selection in 2016. A repair of the semi-sub (3-4 years). Will be integrated with nearby Bauge.
May slip to 2018, in order to cut costs further.May slip to 2018, in order to cut costs further.Tie-back to Skarv FPSO and
recover 150 mmboe. FID originally scheduled for 2017 but change in ownership could delay to 2018.
Tie-back to Skarv FPSO and recover 150 mmboe. FID originally scheduled for 2017 but change in ownership could delay to 2018.
FID expected end of 2017. Changed concept has improved economics. Expect further reductions.
FID expected end of 2017. Changed concept has improved economics. Expect further reductions.
Negotiations on tieback to Gjøa still ongoing. Access to capital for the partners could be an issue. Expect this to slip into 2018.
Negotiations on tieback to Gjøa still ongoing. Access to capital for the partners could be an issue. Expect this to slip into 2018.
Could reach FID in 2017 but may be appraised further. Likely to require a farm-in given current partnership.
Could reach FID in 2017 but may be appraised further. Likely to require a farm-in given current partnership.
Unmanned platform gas development – could slip into 2018 as Premier and Dana are cash-constrained. (62 mmboe)
Unmanned platform gas development – could slip into 2018 as Premier and Dana are cash-constrained. (62 mmboe)
Oil & gas re-development with leased FPSO proposal. 63 mmboe
Oil & gas re-development with leased FPSO proposal. 63 mmboe
Tyrare-dev(Maersk)
Originally a decision was set for late 2016. Options are decom, light re-dev or full re-dev.
Originally a decision was set for late 2016. Options are decom, light re-dev or full re-dev.Fractured basement project
becoming more likely as volumes are proved up. EPS phased approach expected. 46 mmboe
Fractured basement project becoming more likely as volumes are proved up. EPS phased approach expected. 46 mmboe
Eagle – tie-into GKA (6mmboe) Arran – tie-back to Sheawater(31 mmboe); Breagh – NUI and six wells (24 mmboe); Finlaggan– gas tie-back
Eagle – tie-into GKA (6mmboe) Arran – tie-back to Sheawater(31 mmboe); Breagh – NUI and six wells (24 mmboe); Finlaggan– gas tie-back
Pil & Bue (VNG)
Possible tie-back to NjordPossible tie-back to Njord
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Companies have been successful in bringing costs down – mainly for FID
Movement in unit costs from the supply chain, by category
Capex is down 30-40%, UK opex down from US$30/bbl to US$16/bbl; Nor US$11/boe to US$8/boe
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2017 will see more rate reductions but will stable out after that We expect cost inflation to be slow and steady from 2018 onwards. Some Opex categories will be more buoyant
Movement in unit costs from the supply chain, by category (Jan. 15 base)
Unit cost movements from the supply chain
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Costs: As supply chain costs increase, the onus is on operators to sustain efficiencies Further cost reduction through optimisation and efficiency more achievable for capex than opex
Breakdown of savings on development spend* Breakdown of savings on opex per barrel*
*reductions compared with 2014 peak
US$16/boe
US$22/boe
US$8/boe
For the UK, we think the majority - around 70% - of the supply chain reductions achieved will still be in place by 2020 – compared to around half globally.
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Innovative deal structuring is enabling deals in the UKCS
Source: Wood Mackenzie
Packaging of deals to attract buyers is crucial and differs between asset types
Pre-FID deals in the offing?
Company Project Valuation (post tax)US$M
Lancaster 420
Seagull 685
Finlaggan 125
Tolmount 275
CheviotArea
322
Source: Wood Mackenzie GEM Q1 2017
Recent UKCS deal consideration comparison
US$50 m + US$165m contingent on FID.
US$85 m + US$300m all from cashflow
US$750 m + US$125m contingent on FID.
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UK decommissioning spend will increase, as spend on the mega projects ramps up
2014- 2017 Decommissioning spend
The Majors will account for over 40% of 2017 spend in UK decom
2016-2030 field economic cut-off
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Conclusions
Su
mm
ary
US tight oil is leading the recovery
Companies still require around US$55/bbl
M&A/exploration and more radical portfolio change is on the agenda
Investment in the North Sea is dropping in all bar Norway
Project costs will bottom out in 2017 but will not recover fast
Decommissioning is a vast opportunity for the service sector
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Malcolm Dickson
Malcolm is a Research Director for the European Upstream sector. He has over ten years of experience in covering the UK and Norway’s upstream sectors. As well as valuing fields and companies for upstream reports, Malcolm regularly carries out consulting projects, writes topical reports and presents at conferences. His key areas of focus also include global development costs, the supply chain, M&A and exploration.
He has covered countries companies throughout Europe as an analyst. Prior to this, Malcolm was as Senior Data Analyst in the Europe Upstream Research Team. He has been with Wood Mackenzie for over ten years.
Before joining Wood Mackenzie, Malcolm worked for the Scottish Government, in the Justice Department. He moved there from a position at Barclays Stockbrokers. Malcolm graduated with the Masters degree in Politics from Glasgow University.
Research Director, Europe Upstream Research
T +44 131 243 4652
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Disclaimer
This report has been prepared for the EY conference in Rotterdam, on 28 March 2017 by Wood Mackenzie Limited. The report is intended solely for the benefit of clients and its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie’s prior written permission.
The information upon which this report is based has either been supplied to us or comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them.
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