Up to 200 oil and gas projects worldwide could be approved by year’s end, lifted by a resurgence in offshore activity and better execution, analyst teams said this week.
Forty-five offshore projects already have been sanctioned year-to-date, surpassing the number for all of 2016 and on path to beat last year’s approvals, according to Rystad Energy.
“In addition to beating 2016’s activity, 2018’s offshore project sanctioning is on track to eclipse 2017’s sanctioning levels by 50%,” analysts with the Norwegian-based energy firm said. “Collectively, $127 billion of offshore and onshore projects could be approved by year-end.”
This year also looks to see around $34 billion of onshore projects given the green light.
“Despite a steady stream of onshore projects being sanctioned during 2018, the size of these projects varies significantly,” analysts said. “This has caused a mere $3 billion increase in onshore commitments from May through September. In addition, the fourth quarter will see $15.1 billion of onshore projects approved.”
Most favored by offshore operators this year are subsea tiebacks, which require less costly infrastructure as the new wells are tied in to existing platforms.
“Collectively, nearly $26 billion in subsea tieback projects have been approved, with an additional $7 billion forecasted by year-end,” Rystad’s team noted. “This will give subsea contractors a potential $7.4 billion in greenfield contract opportunities over the next few years.”
For example, ExxonMobil Corp.’s Neptun Deep project offshore Romania is poised to approve a subsea tieback to the Domino field later this year. The development would provide $1.5 billion in contract opportunities to oilfield service companies, including more than $420 million in engineering, procurement, construction and installation, i.e. EPCI, contracts. Project start-up is scheduled for early 2022.
The rest of the year should see more fixed facilities and floater projects approved than subsea tiebacks, according to Rystad. The Marjan Expansion project in Saudi Arabia, expected to soon be sanctioned, would be the largest fixed facility project in the queue.
“While there is a risk that some projects could be deferred until project teams achieve more favorable economics, the high level of sanctioning activity are very encouraging for the oilfield services industry,” Rystad analysts said. “This is especially true for offshore projects, as their approvals look poised to reach their best heights since 2013.”
Meanwhile, signs are emerging of improved oil and natural gas project execution worldwide, suggesting operators are getting it right after a period of dismal performance on project returns, according to Wood Mackenzie. The firm in April had said several big final investment decisions (FID) were in the queue this year as costs fall and efficiencies improve.
The successful execution of capital projects has become paramount to an upstream industry adapting to sustained lower commodity prices, said the consultancy in a report issued this week.
The downturn that wreaked havoc beginning in late 2014 through the better part of 2016 forced companies to evaluate and improve how major capital investments were managed, “and it is clear why,” said the Wood Mackenzie team.
The top 15 project blowouts of the last decade led to a cumulative $80 billion of projects that were over budget.
"The scale of underperformance was staggering," said Wood Mackenzie research director Angus Rodger. "Surveying the last decade of project delivery, the average development started-up six months later than planned and $700 million over budget. That is a huge amount of value destruction."
By comparison, a growing list of mid- to mega-projects were delivered on target in the past year. Included on the delivery list were areas that had been “notorious for cost blowouts,” such as the Arctic and Caspian regions.
According to Wood Mackenzie, an improvement in project execution was reported in deepwater, shallow water and at cost-heavy liquefied natural gas (LNG) developments, including several overseas projects by BP plc, including the deepwater West Nile Delta and Atoll, as well as the shallow water Shah Deniz Phase 2 project. Costs improved also at Novatek’s Yamal LNG export facility and via subsea tiebacks at Woodside’s Persephone and Wintershall’s Maria.
Most recently, Royal Dutch Shell plc brought onstream the Kaikias field in the deepwater Gulf of Mexico (GOM) almost one year ahead of schedule.
“Not only a quick turnaround, it epitomizes how the deepwater sector has -- for now -- transitioned to a simpler, lower-cost business model,” said researchers.
Starting up fields on time and on budget “has long been an evergreen issue in the oil and gas industry.” Key factors were identified by Wood Mackenzie, which it said in most recent cases combined to create better project execution.
No. 1, spare capacity through the supply chain is leading to better performance and lower costs, where in some basins including the GOM and pre-salt Brazil, drilling efficiency has improved dramatically. There also is more oilfield service sector collaboration and contract alignment, particularly in northern Europe.
In addition, project management has improved as “companies have more people looking at fewer things, while under-utilized service companies can offer their 'A-team' for each major contract.”
More corporate discipline was also cited as a factor, with “tougher” pre-FID screening and more stringent hurdle rates increasing attention on execution and cost control.
No. 5, more pre-FID planning is underway, with more contracts signed and sealed before a project is sanctioned, “often with preferred partners versus putting everything out to bid.” Finally, projects now have a reduced scope, with more tiebacks and brownfields versus greenfield projects, which allows the use of existing infrastructure.
“Improved project delivery in recent years has in part been supported by Big Oil's de-emphasis of mega-projects in the current environment,” Wood Mackenzie’s team noted. “But this is not sustainable longer term in an industry underpinned by large, cash-generative assets.”
Few large-scale oil developments have been sanctioned in recent years, but “it is in the LNG space where there are clear signs companies are re-engaging with giant, capital-intensive projects” with developments in Australia, Canada, Mozambique, Papua New Guinea, Qatar and Russia.
"There is a looming wave of big pre-FID LNG developments building on the horizon, all aiming for sanction between 2018 and 2020,” Rodger said. “After a fallow period in new LNG project sanctions, and mega-projects in general, the next 18 months will likely see a step change. This will be the real test of whether the industry has addressed the issue of poor delivery.”