Over a Barrel
The Oil Industry's Latest Project Approach: Cost Consciousness
Panic coursed through the oil industry in 2015 when prices plunged below US$40 per barrel. Oil exploration projects ground to a halt, companies were bleeding money, and global oil industry leaders became skittish about investing in any project that wasn’t a sure bet. As the industry bounces back with oil prices around US$60 per barrel today, post-crash lessons learned regarding cost consciousness remain at the forefront.
“Oil companies today are being careful to sanction only projects with clear economic potential,” says Andrew Meyers, oil and gas director, IDC Energy Insights, Houston, Texas, USA.
—Andrew Meyers, IDC Energy Insights, Houston, Texas, USA
That’s for good reason: The 15 biggest oil and gas projects completed before prices crashed went a collective US$80 billion over budget. Even more modest projects were hurting companies’ bottom lines with the lower per-barrel prices.
But lower price points are no longer a boogeyman haunting the industry. In fact, big oil companies are targeting much lower breakeven points. Last September, Total pitched its break-even price for projects at US$50 a barrel. Royal Dutch Shell, meanwhile, has sanctioned projects in the Gulf of Mexico targeting a break-even point below US$40 a barrel. Last May, its Kaikias project came online a full year ahead of schedule. Reducing the development costs by 30 percent allowed Shell to hit a break-even point of US$30 a barrel for the site.
“We’ve never seen these kinds of innovation-based, cost-saving efforts before,” says Daniel Zweidler, president, Daniel Zweidler and Associates, an exploration and production advisory firm, Philadelphia, Pennsylvania, USA. The average budget for new upstream projects of US$2.7 billion last year, for instance, was the lowest point in more than a decade. “It’s a completely different mindset than a few years ago.”
Shell achieved cost savings through more efficient project planning, simplified infrastructure, better vendor collaboration, and optimization of time, talent and equipment. It is applying this approach for future efforts, too. For the Vito development project, which is also in the Gulf of Mexico and expected to come online in 2021, Shell slashed the original budget by 70 percent. It was initially supposed to come online in 2014, but the schedule had to be retooled following the price crash. Shell trimmed costs through cutting waste, simplifying the design and buying standardized equipment instead of custom-made offerings. The company now expects the site to break even at US$35 a barrel.
Big Oil Goes Small
Smaller projects are also the new normal. “There is less focus on the big projects, and more focus on small technology and the use of predictive analytics to gain greater visibility,” says Kevin Prouty, group vice president, IDC Energy Insights, Boston, Massachusetts, USA. That includes efforts such as using data to identify the most promising drill sites and implementing better project forecasting and risk management.
These steps, which he expects organizations to continue to take over the next couple of years, can help oil and gas companies weather future price fluctuations. Mr. Prouty says, “While there are no assurances in oil prices, if you can build a project based on US$45 a barrel, everything on top of that should be gravy.” —Sarah Fister Gale
PHOTO COURTESY OF EQUINOR
Equinor’s oil field in the Gullfaks, off the coast of Norway
Can Big Work?
Even though many oil companies are banking on safe projects, some are slowly ramping up megaprojects again. A lot is riding on these efforts: If successful, they could provide companies their best returns in a decade, according to Wood Mackenzie.
What’s in store? ExxonMobil plans to drill 19 new wells to increase production by 25 percent in the deep water off Guyana. In Luanda, Angola, the oil firm Total is planning a new US$16 billion offshore oil project. And Equinor is expanding its operations in the Gullfaks field in the North Sea by investing US$269.5 million to drill seven new wells, increasing production by 17 million barrels.
“The big question is whether the industry is actually spending enough,” Angus Rodger, research director, Wood Mackenzie, told the Financial Times. “We cannot rely on small projects forever.”