Analyst offers Johan Castberg solution

The firm undertook an analysis of the project, assessing alternative development concepts, including dropping a proposed 280km pipeline, and potential tax-incentives that could help boost its economics.

The project has been cast in doubt following tax changes and poor results from an exploration campaign in the area, the results of which it was hoped would help boost the project's economics. Read more: Johan Castberg still in doubt

Wood Mackenzie says the Norwegian project could achieve an internal rate of return (IRR) of 15.9% and break-even of less than US$60/barrel.

Ross Cassidy, head of north west Europe upstream research for Wood Mackenzie says: "We have modelled three scenarios for the development of the Johan Castberg area, the original concept, announced in early 2014; a reduced cost concept; and a FPSO solution with no pipeline or terminal. The analysis shows that the Johan Castberg area could achieve a post-tax IRR of 15% and break-even of $60/barrel, by discarding the 280km pipeline and onshore terminal, in favor of an FPSO development. In addition we found applying the same tax-incentive introduced for the Barents' Snohvit LNG project further increases the project's IRR to 15.9%."

Cassidy says the original development concept is under review following poor exploration results from the latest drilling campaign, an increase in tax, and rising costs. "As it stands the estimated IRR of the original concept – the construction of a pipeline and onshore terminal - is 10.4% which is considered extremely marginal for the operator, with 15% considered the standard industry benchmark for a robust project," he says.

"Exploration activity has been increasing in the frontier Barents Sea in recent years, but an inability to commercialize Johan Castberg's estimated 580 million barrels of oil could be detrimental to future activity. This is why we believe the Norwegian Government – Statoil's largest shareholder – is likely to favor the construction of a pipeline as it is expected to create much needed infrastructure and could be instrumental in enabling the development of smaller fields in the area," Cassidy continues.

Wood Mackenzie says while the development will provide both Statoil and partner Eni with a strategic hub for future exploration in the prospective acreage, it comes at a higher cost and tax breaks will need to be introduced to incentivize the operators to select this concept over an FPSO.

James Webb, north west Europe upstream analyst for Wood Mackenzie says: "We estimate the cost of the pipeline to shore and onshore terminal at over NOK12.5 Billion ($2.1 Billion), so the FPSO option coupled with government tax incentives really is the best case scenario in terms of reducing overall costs. However, even at 15.9% the project would still remain below average in terms of IRR for both Statoil and Eni – who typically average a rate of 17% and 16% for probable developments respectively. As a result, tax-incentives, beyond those received by the Snøhvit development, could be required to incentivize the field partners to select a development concept incorporating the pipeline and terminal. We believe the current project economics could cause the field partners to consider farming down to reduce exposure." 

Wood Mackenzie says the Johan Castberg area is widely regarded as the next major development in the Norwegian Barents sea, although so far, marginal economics have stalled project sanction - which was due mid-2014.

Statoil is due to announce the preferred development concept in June 2014.