How does the North Sea figure in the global upstream recovery?€¦ · How does the North Sea...

How does the North Sea figure in the global upstream recovery?

Malcolm Dickson, Research Director28 March 2017EY Rotterdam

Trusted commercial intelligencewww.woodmac.com

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Agenda

1. Macro picture – global investment trends

2. Corporate overview – the start of a recovery?

3. North Sea – how does it fit in?


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A recovery is expected in 2017, but mainly driven by US tight oil

Global development spend by region


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But crucially, elsewhere, the FID slump is coming to an end

Conventional FIDs per year, with 2017 estimate (>50 mmboe)

Source: Wood Mackenzie

But only 20 or so projects will make the cut, as costs are still too high for half of the potential developments


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Major upstream project FIDs in 2016 signal those expected in 2017

Australia

Indonesia

Egypt

Kazakhstan

Atoll (BP) US$1.2 bn,

16% IRR

Greater Enfield (Woodside) US$1.9 bn12% IRR

Tangguh Ph.2 (BP)

US$8 bn 20% IRR

Tengiz Exp. (Chevron)

US$36.8 bn 9% IRR

KG-DWN-98/2 (ONGC)

US$5.2bn 18% IRR

Zohr (Eni) US$14bn, 15% IRR

Onshore

Shallow-water

Deepwater

India

Numbers represent associated capital spend for projects (real, 2016 terms), and IRR (NPV10)

Utgard(Statoil)

US$0.5 bn 22% IRR

Norway

Kazakhstan

2016 FIDs so far (>50 mmboe)

Domestic drivers

Portfolio drivers

FID

A company strategy ‘in action’

Low costs

Rationale for FIDs during the downturn


Dvalin (DEA) US$1.3 bn13% IRR

Trestakk (Statoil)

US$5.5 bn 20% IRR


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Project FIDs expected to pick up in 2017: focus of greenfield developments in Brazil, East Africa and Russia

Norway

Johan Castberg 2023

Nigeria

Bonga SW 2023

Iraq

Shaikan (Phase 2) 2021

Kazakhstan

Karachaganak Exp. 2022

Kenya

Block 10BB 2022

UK

Rosebank 2024

Russia

Urengoiskoye Achimov IV/V 2018

Ob-Taz Bay fields 2025

Angola

Orca 2023

Major projects (>250 mmboe) expected to achieve FID through 2019

250-500

500-1,000

Recoverable mmbboe

Expected FID year2016 2017

2018 2019

US GoM

Tiber 2022

Shenandoah 2021

North Platte 2022

Vito 2022

North Platte 2022

Brazil

Iara Entorno 2018

Sepia 2020

Libra 2021

Carcara 2023Mozambique

Coral 2022

Golfinho 2022

Mamba 2024

Egypt

W Med DW 2023

Eq. Guinea

Block R FLNG

2021

Indonesia

IDD LNG 2026

Israel

Leviathan 2022

Azerbaijan

Absheron DW PI 2023

Algeria

Ahnet 2023

Romania

Domino 2022

Tanzania

Block 1 2024

Bock 4 2029

Vietnam

52/97, etc 2026

>1,000

PNG

P’nyang 2022

PLNG 2023

Uganda

Block 2 2022

Block 1 2022


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The high grading effect – the pre-FID deepwater cost-curve

The high grading effect – the pre-FID deepwater cost-curve


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Where to go next – the Q4 2016 greenfield deepwater project cost-curve now, and minus 20% capex

Q4 2016 greenfield deepwater project cost-curve now, and minus 20% capex


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Agenda





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Breakdown of the Brent price needed for cash flow neutrality between 2017 and 2019 (Q4 2016 data)

Cash flow breakevens down by 40% since the crisis beganPrice needed to achieve cash flow neutrality has fallen from US$91/bbl to US$54/bbl. Signs of the investment cycle turning; but dividends and spend still vulnerable to retreating prices

Source: Wood Mackenzie Corporate Benchmarking Tool Q4 2016. Base-case estimate of Brent price required to remain cash flow neutral (accumulate no additional debt) between 2017 and 2019. Includes full corporate costs and distributions and downstream cash flow for BP, Cenovus Energy, Chevron, Eni, ExxonMobil, Husky Energy, OMV, Petrobras, Repsol, Shell, Suncor Energy and Total. For all other companies we apportion announced dividend and buyback programmes to the upstream business on a pro-rata basis.


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Recovery in spend after two years of severe contractionTight oil leads the way, meeting strict hurdle rates and growing rapidly; conventional spend on new projects doesn’t really get going until 2019/20 and delays still a real risk

Breakdown of development spend (CS companies)

Source: For 60 companies covered in Wood Mackenzie’s Corporate Benchmarking Tool.

North American YTD

Probables

Development spend by IRR tranches

More work needed to improve the economics of pre-FID conventional projects


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Pre-FID and US L48 future drilling cumulative production by breakeven in 2025 – by resource theme

Repositioning at the low end of the cost curve the dominant themeUS tight oil, Brazil and low cost Middle East oil opportunities in demand

$60/bbl

Source: Wood Mackenzie onshore breakevens at 10% discount rate, offshore at 15%


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Agenda





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Only Norway will see investment growth again

Development capex by North Sea country (US$ nominal)

But the project hopper will need to be re-filled there too if investment is to stay strong

In the UK, Culzean is the only earlier phase development of any scale

Sverdrup underpins Norwegian spend, but plenty in the pipeline medium term

Danish spend is dependent on new projects – such as Tyra and Hejre in the short term.

2/3 pre-FID


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Tolmount (Premier) Cheviot (Alpha)Lancaster (Hurricane)Eagle (EnQuest)Arran (Dana)Finlaggan (Zennor)Breagh P2 (INEOS)

FIDs will edge up in the region, but there is a lot of uncertainty Up to 13 could take place, but only a handful are more likely with brownfield to the fore

Njord Future (Statoil)

Johan Castberg (Statoil)

Skarfjell (Wintershall)

Snadd (Aker BP)

Snorre Expansion (Statoil)

Brasse (Faroe)

Concept selection in 2016. A repair of the semi-sub (3-4 years). Will be integrated with nearby Bauge.

Concept selection in 2016. A repair of the semi-sub (3-4 years). Will be integrated with nearby Bauge.

May slip to 2018, in order to cut costs further.May slip to 2018, in order to cut costs further.Tie-back to Skarv FPSO and

recover 150 mmboe. FID originally scheduled for 2017 but change in ownership could delay to 2018.

Tie-back to Skarv FPSO and recover 150 mmboe. FID originally scheduled for 2017 but change in ownership could delay to 2018.

FID expected end of 2017. Changed concept has improved economics. Expect further reductions.

FID expected end of 2017. Changed concept has improved economics. Expect further reductions.

Negotiations on tieback to Gjøa still ongoing. Access to capital for the partners could be an issue. Expect this to slip into 2018.

Negotiations on tieback to Gjøa still ongoing. Access to capital for the partners could be an issue. Expect this to slip into 2018.

Could reach FID in 2017 but may be appraised further. Likely to require a farm-in given current partnership.

Could reach FID in 2017 but may be appraised further. Likely to require a farm-in given current partnership.

Unmanned platform gas development – could slip into 2018 as Premier and Dana are cash-constrained. (62 mmboe)

Unmanned platform gas development – could slip into 2018 as Premier and Dana are cash-constrained. (62 mmboe)

Oil & gas re-development with leased FPSO proposal. 63 mmboe

Oil & gas re-development with leased FPSO proposal. 63 mmboe

Tyrare-dev(Maersk)

Originally a decision was set for late 2016. Options are decom, light re-dev or full re-dev.

Originally a decision was set for late 2016. Options are decom, light re-dev or full re-dev.Fractured basement project

becoming more likely as volumes are proved up. EPS phased approach expected. 46 mmboe

Fractured basement project becoming more likely as volumes are proved up. EPS phased approach expected. 46 mmboe

Eagle – tie-into GKA (6mmboe) Arran – tie-back to Sheawater(31 mmboe); Breagh – NUI and six wells (24 mmboe); Finlaggan– gas tie-back

Eagle – tie-into GKA (6mmboe) Arran – tie-back to Sheawater(31 mmboe); Breagh – NUI and six wells (24 mmboe); Finlaggan– gas tie-back

Pil & Bue (VNG)

Possible tie-back to NjordPossible tie-back to Njord


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Companies have been successful in bringing costs down – mainly for FID

Movement in unit costs from the supply chain, by category

Capex is down 30-40%, UK opex down from US$30/bbl to US$16/bbl; Nor US$11/boe to US$8/boe


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2017 will see more rate reductions but will stable out after that We expect cost inflation to be slow and steady from 2018 onwards. Some Opex categories will be more buoyant

Movement in unit costs from the supply chain, by category (Jan. 15 base)

Unit cost movements from the supply chain


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Costs: As supply chain costs increase, the onus is on operators to sustain efficiencies Further cost reduction through optimisation and efficiency more achievable for capex than opex

Breakdown of savings on development spend* Breakdown of savings on opex per barrel*

*reductions compared with 2014 peak

US$16/boe

US$22/boe

US$8/boe

For the UK, we think the majority - around 70% - of the supply chain reductions achieved will still be in place by 2020 – compared to around half globally.


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Innovative deal structuring is enabling deals in the UKCS


Packaging of deals to attract buyers is crucial and differs between asset types

Pre-FID deals in the offing?

Company Project Valuation (post tax)US$M

Lancaster 420

Seagull 685

Finlaggan 125

Tolmount 275

CheviotArea

322

Source: Wood Mackenzie GEM Q1 2017

Recent UKCS deal consideration comparison

US$50 m + US$165m contingent on FID.

US$85 m + US$300m all from cashflow

US$750 m + US$125m contingent on FID.


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UK decommissioning spend will increase, as spend on the mega projects ramps up

2014- 2017 Decommissioning spend

The Majors will account for over 40% of 2017 spend in UK decom

2016-2030 field economic cut-off


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Conclusions

Su

mm

ary

US tight oil is leading the recovery

Companies still require around US$55/bbl

M&A/exploration and more radical portfolio change is on the agenda

Investment in the North Sea is dropping in all bar Norway

Project costs will bottom out in 2017 but will not recover fast

Decommissioning is a vast opportunity for the service sector


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Malcolm Dickson

Malcolm is a Research Director for the European Upstream sector. He has over ten years of experience in covering the UK and Norway’s upstream sectors. As well as valuing fields and companies for upstream reports, Malcolm regularly carries out consulting projects, writes topical reports and presents at conferences. His key areas of focus also include global development costs, the supply chain, M&A and exploration.

He has covered countries companies throughout Europe as an analyst. Prior to this, Malcolm was as Senior Data Analyst in the Europe Upstream Research Team. He has been with Wood Mackenzie for over ten years.

Before joining Wood Mackenzie, Malcolm worked for the Scottish Government, in the Justice Department. He moved there from a position at Barclays Stockbrokers. Malcolm graduated with the Masters degree in Politics from Glasgow University.

Research Director, Europe Upstream Research

E [email protected]

T +44 131 243 4652


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Disclaimer

This report has been prepared for the EY conference in Rotterdam, on 28 March 2017 by Wood Mackenzie Limited. The report is intended solely for the benefit of clients and its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie’s prior written permission.

The information upon which this report is based has either been supplied to us or comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them.

Strictly Private & Confidential


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