Challenging times

Audun Martinsen

September 1, 2015

Europe is facing a tough downturn, but it will not last forever. Rystad’s Audun Martinsen takes a look.

Clair Ridge modules onboard Dockwise’s Mighty Servant transport vessel earlier this year. Photo from BP. 

The development of offshore oil and gas reserves in Europe is losing relevance in the battle with shale resources in North America and conventional oil in the Middle East.

The ongoing fight over market share has flooded the market with cheap oil and resulted in a lowering of the oil price to a level that makes the resources in mature offshore basins more challenging to develop.

Offshore producing countries in Europe are fighting escalating costs and operational inefficiencies to become more competitive in the new world order of oil.

In 2014, we saw more than US$100 billion being directed to the development and production in Northwest Europe for the first time ever. This equates to an average 9% annual growth from 2009-2014 and was caused by more activity and higher unit costs in both Norway and the UK.

Even with rising demand of oil and oil prices, we do not expect the spending to grow to these levels again for the rest this decade. Companies will conserve cash, focus on completion of existing projects and await the business outlook.

The Norwegian Continental Shelf

In Norway, exploration and production companies spent about $51 billion in 2014, a 6% growth from 2013. The Norwegian oil and gas sector is far from sheltered and is expected to decline in 2015 by about 9%.

Most of the decline is driven by capex cuts, estimated at about 11%. The drop is an effect of a normalization of extraordinary activities from the 33 greenfield developments committed to between 2010 and 2013, such as Gudrun, Goliat, Eldfisk II. In addition, it is also the effect of cost cuttings and efficiency programs by Statoil. Statoil aims to reduce their maintenance, modification and operations budget and increase the drilling efficiencies substantially.

Looking towards 2020, there are a lot of uncertainties in investment estimates, specifically regarding the sanctioning of new projects and exploration levels. For example, Statoil has pushed back the final investment decision (FID) on both Johan Castberg and Snorre 2040 – both expected to be multi-billion dollar projects with new platforms (floaters); FID’s are now expected by 2H 2017, with startup around 2022-2023.

With this current timeline, these projects are important to meet the forecasted 2020 expenditures of about $55 billion. Other key projects are Johan Sverdrup phase 1 and 2 and potential developments of the Skarfjell, Alta/Gohta and Pil discoveries. In the current forecast, a relatively flat exploration capex at around $5-6 billion has been assumed from 2016 onwards after peaking at $7 billion in 2014.

UK Continental Shelf

The UK Continental Shelf (UKCS) was surpassed by the NCS to be the largest oil and gas market in 2006. In 2014, the UK almost closed the gap with $46 billion expenditure on upstream activities.

2015, on the other hand, will be much more dramatic for the UK than for Norway. The money spent will drop by more than 20%, and we will see the spend contract even more in 2016, before stabilizing at around $35 billion at the end of the decade.

The reason for this immense drop is an extreme case of what we observed in Norway – record high oil prices and inflation, which led to massive investments and rejuvenation programs in old discoveries and fields.

Some 58 greenfield investments started between 2010 and 2013, such as Clair Ridge, Quad 204 and Mariner. So when completion simultaneously occurs and investments stop, there are only a few new discoveries to be developed.

The current field development boom observed on the NCS includes a healthy mixture of old discoveries having matured into economical projects and discoveries made over the last decade. Comparing discovered volumes at the NCS with the UKCS, pinpoints one of the key issues for the UKCS – that exploration results have been persistently poor and on decline since activity peaked in 2007-08.

In 2008, 121 wildcat and appraisal wells were drilled at the UKCS and 444 MMboe of oil and gas were discovered. Since then the exploration activity has decreased and in 2014 only 38 exploration wells were drilled and only 98 MMboe of oil and gas were discovered.

Glancing ahead towards 2020, the portfolio of stand-alone candidates that could spur UK greenfield investments is limited to a handful. The Culzean field is the first runner up. Operated by Maersk Oil, it could see a final investment decision in August 2015 with startup in 2020-2021.

The field is to be developed with bridge linked platforms including a central processing facility, a wellhead platform, and combined utility-living quarters. The total investment for the project is expected to be in excess of $4.7 billion.

Chevron has not given up on its challenging Rosebank development west of Shetlands and Statoil is expected to decide on a concept for the Bressay heavy oil field in 2015. The British government has introduced different measures for tax reduction, supporting investments in maturing offshore prospects and exploration, to improve the dark outlook. There is still potential to maximize the recovery from the UKCS, and hopefully, through the fiscal changes and the current cost cutting schemes, there could be a significant upside.

Other Northwest Europe

Outside Norway and the UK, the market has been declining since 2008. From $9 billion in 2008, 2014 clocked in at $6.5 billion. The Netherlands and Denmark have been the key drivers of this decline. In general, these markets are mainly driven by brownfield spend at existing producing fields. There is limited exploration and new developments, but some other basins show positive signs. In Ireland, there is good progression around the Barryroe development, and smaller undeveloped discoveries can become commercial with new developed infrastructure.

In Iceland there is still an unrealized potential at the awarded Dreki region and future license rounds in the North East. Although some growth is expected from 2016, the offshore European market will still be dominated by the markets in Norway and the UK, and both will see a new wave of importance at end of this decade.

Audun M. Martinsen is the product manager and lead analyst of oilfield services at Rystad Energy. His fields of expertise include the global offshore and onshore oil service market, E&P cost analysis and supply and demand studies. He holds a MS in marine engineering from the Norwegian University of Science and Technology (NTNU) and University of Berkeley, California. He previously worked at Coriolis, Shell and BW Offshore where he has worked as a lead engineer, product developer, system consultant and analyst.