NCS development costs cut by 40%

The price tag for developing a field on the Norwegian shelf has declined by an average of more than 40% since the autumn of 2014, according to the Norwegian Petroleum Directorate’s (NPD) analysis of eight planned developments that are approaching start-up.

Johan Sverdrup. Image from Statoil.

The decline is a result of a combination of simpler development concepts and more efficient drilling. Lower prices for work and equipment are also a contributing factor.

The investment estimates for the Utgard, Oda, Zidane, Trestakk, Snilehorn, Johan Castberg, Snorre expansion and Johan Sverdrup Phase 2 projects have fallen from about US$32.5 billion (NOK 270 billion) to $18 billion (NOK 150 billion), according to the operating companies' own calculations. The downward adjustments have been made in connection with various decision phases in project implementation.

"This is a significant and very welcome reduction," Ingrid Sølvberg, NPD director of development and operations said. "The oil companies and the supplier industry have made a tremendous effort in streamlining the activities, and now we can see that these measures are working."

The biggest savings on these eight projects are a result of altered development solutions. The second largest reduction is within drilling and wells, which on average accounts for around 30% of the overall field development costs. This is due to the decline in rental rates for drilling rigs, and also that the companies are planning wells that can be drilled faster. The actual drilling operation has also become more efficient, so that the price per meter of well will be much lower than before.

Investments in pipelines and cables are also expected to decline significantly. This is a result of falling prices for materials, and choosing different routes. Simplified development solutions and less costly materials will yield more reasonably priced modifications and adaptations of facilities where the oil and gas from new developments will be taken in and processed.

Despite the positive development in the cost scenario, Sølvberg cautions against short-term savings at the expense of long-term value creation on the shelf. She also warns against cutting staff in important technical environments, as it could impair the capacity for innovation and the ability to find smart solutions.

The NPD has noted tendencies where companies prioritize minimum investment in the development phase, but that could limit subsequent upgrades of the facilities, or make them more expensive.

"We must not put ourselves in a situation where cost cuts reduce the future flexibility on the fields, or have a detrimental impact on our ability and willingness to use technology that can provide better and more efficient resource management," Sølvberg said.