Cut price optimism

Cost cutting could help push more final investments decisions through this year, giving industry sight of some much-needed work. Steve Hamlen reports.

Wood Mackenzie’s Malcolm Dickson.

Northeast England has a long tradition in the engineering and manufacturing industries dating back to the Industrial Revolution. From those days until now, the region has produced a steady stream of skilled workers. The flexible nature of this workforce is now being geared towards the growing subsea sector.

With oil prices remaining low, many challenges still face the industry. Some challenges have been met head on by a wave of collaboration and optimization. Now, with talk of an upturn coming in 2018, the subsea sector could be described as cautiously optimistic about the near future, delegates were told at a Subsea North East Conference & Exhibition in Newcastle, England, held in June.

“Towards the end of the decade [Wood Mackenzie] sees oil prices rising, but until then, we see prices at around $50-53/bbl for the next couple of years,” Malcolm Dickson, research director, Europe Upstream at Wood Mackenzie, told delegates at the NOF Energy-organized event.

Even though this is still a tough price, the work done by operators and contractors following the price crash of mid 2014 has seen many processes streamlined, projects reengineered and overall project costs reduced by up to 40% in some cases.

Indeed, some projects are now starting to reach the sanction stage – with final investment decisions (FIDs) on the rise this year compared to last, Dickson added.

“An uptick is coming for the subsea industry,” Dickson noted, with FIDs following suit.

BP eyes UK projects

Heerema Marine Contractor’s Thialf semisubmersible crane vessel installs Clair Ridge’s quarters and utilities topside module in 2015. Photo from BP.

With an eye on the predicted upturn and buoyed by the success of collaboration and optimization, BP still sees potential in the mature North Sea.

On BP’s part, this confidence has been helped by its strategy of supplier-led solutions, said Calum Hayton, Hardware Delivery Lead, Global Subsea Systems at BP.

This involves clearly defining the equipment that is needed for a given project, careful selection of this equipment after suppliers propose using a standard product and how its design will meet the system’s needs, the supplier managing how the equipment is built and the supplier being performance managed.

He said that in one North Sea project, this approach led to 25% cost reduction in Xmas tree delivery. “We need to keep competitive and we need to develop the reserves that we could not produce before,” Hayton said.

Hayton said that BP was looking at developing four fields off the UK: Alligin, Clair South, Foinaven South West (all West of Shetland), and Vorlich (central North Sea). “This is happening now; we are looking at manifolds, jumpers, wells,” Hayton said, adding that the next step is to call for competitive bids.

Foinaven South West is due onstream in 2019-2020 – “2019 if possible” – via three wells: two producers and one water injection well. Subsea trees are required, along with wells to be drilled and associated work.

Clair South is due onstream in 2023 and will require up to 25 new wells. The main solution is a subsea tieback to the existing Clair topsides, Hayton noted.

Alligin is expected to produce around 130,000 boe/d (up to 85,000-90,000 boe/d net to BP).

Rise in FIDs

In terms of FIDs, Dickson said that before the price collapse of 2014 there were around 40 FIDs a year, this dropped to less than 10 a year between mid-2014 and the end of 2016. However, 2017 is looking much more positive, with 20-25 expected by year-end following a total of 15 FIDs so far this year on projects of more than 50,000 boe.

“Now is the time to make FIDs because we are at the bottom of the market,” Dickson said.

The optimization push has seen operators using fewer wells and preferring subsea concepts to platforms, as well as planning phased developments instead of more expensive fully integrated options, he noted.

Dickson said a 4% increase in spending is expected this year in the industry, mostly due to investment in US shale, especially the Permian Basin. This hike is needed because the downturn has resulted in “more than $1 trillion being taken out of the industry between 2015-2020.”

All of this means breakevens need to keep coming down – but progress is being made and the lower cost environment helps a great deal, meaning “we are at the low end of the cost curve now,” Dickson noted.

In 2014, breakevens were around $95/bbl, “pretty crazy” according to Dickson. Now the breakevens are $54/bbl.

“The ripple effect of optimization will see breakevens dropping further. Conventional projects can compete [with shale], it will just take a bit of time for the ripple effect to bring down breakevens more,” he said.

New normal for Xmas trees

The industry is also seeing fewer Xmas trees used on developments, with the result being longer subsea tiebacks. With projects costs “just about halved” from pre-2014 levels, more projects will get the green light.

In terms of 2018 subsea FIDs, Dickson said the average project would use eight trees.

“Between 200 and 250 Xmas trees a year is the new industry normal,” he said, although he said the global demand for trees is set to grow up until 2021: around 200 will be needed in 2018; 300 in 2019, 350 in 2020; and 360 in 2021.