Cost Overruns Threaten Offshore Development
https://www.rigzone.com/news/cost_overruns_threaten_offshore_development-01-jul-2019-159178-article/...Matthew Fitzsimmons, VP, Cost Analysis at Rystad Energy, notes that “even if oil prices stay above $60 per barrel over the next five years, final investment decisions could take longer to reach†to allow for sufficient time to mature the engineering definition and “ this will lower the uncertainty that their funding estimates will carry.†He warns that “failure to do so will not only have an adverse impact on the operator’s ability to control cost overruns but also the minority share owners of the field.â€
Recent well-publicized cost overruns are a wake-up call and signal the vital importance of proper project planning and implementation. For example, the cost estimate for Shell’s huge Prelude FLNG project was $11 billion back in 2011. Nonetheless, due to the unforeseen mega engineering and fabrication challenges posed by this pioneering venture, development costs ballooned to around $15 billion – an increase of more than 36 percent. The scale of this cost overrun caused the major to cancel its order for another three FLNG units worth around $4.6 billion from Samsung Heavy Industries.
Impact on oilfield support companies
Since the oil price debacle of summer 2014, oil producers have become even more cost conscious and have imposed strict controls over their capital expenditures. This has been achieved largely in-house, with many operators opting for fewer, but better drilled wells, alongside more phases per development, whilst employing the latest technology, modularization and standardization of equipment and parts. The drive to reduce costs has inevitably had a knock-on effect on the profitability of major oilfield service companies including Schlumberger, Halliburton, Transocean and Norway’s Aker solutions, which competed for work in the downturn and temporarily reduced their fees. Indeed, the major oil companies have been remarkably successful in driving the average pre-final investment decision break-even point down to US$49 per barrel of oil equivalent compared with a pre-crisis $78 in 2014, according to a Wood Mackenzie report released November 2018.
While break-even costs of deep-water projects have fallen and industry profits and confidence are up, the supply chain and oilfield service companies will once again try to raise fees as demand for their services rises with increased activity. Simultaneously, industry insiders doubt whether the oil majors have fully factored in Rystad Energy’s findings on likely cost inflation in forthcoming projects.
