Operators, partners, and contractors must work together to lower costs in an increasingly expensive offshore exploration and production environment further complicated by low crude oil prices, agreed a panel of three major offshore players on Feb. 24 at IHS CERAWeek in Houston.
The trio convened to discuss their observations and respective firm’s strategies in the current distressed environment.
Susan Cunningham, Noble Energy Corp. executive vice-president, exploration, EHSR, new frontiers, and business exploration, pointed out that the offshore industry made progress from the mid-1980s to mid-2000s when oil prices were below their current levels.
“We adapt to the commodity price,” she said. “We’ve done it before and we’ll do it again.” The industry has moved to deeper offshore areas over time regardless of price because of persistent innovation.
Cunningham also noted the relationship between oil prices and government take, which ballooned in many countries amid $100/bbl oil. “For offshore to grow government take must go down.”
Rethinking costs
Michel Hourcard, Total E&P Americas LLC president and chief executive officer, said operators and contractors “absolutely have to work together on cost to make sure we can launch future developments.” Breakeven prices must come down.
“We have to abandon a lot of the complexity and return to simplicity,” he stated, explaining that projects must be simplified during the early stages of design.
Cunningham asserted that “the so-called breakeven price is a moment in time.” She noted that onshore US the industry focused on costs and innovated to make expensive development possible.
Cindy Yeilding, BP PLC vice-president, technology and assurance, said the industry should constantly challenge and question longstanding assumptions. Her firm constantly asks “Why? Why? Why?” on every aspect its portfolio and costs.
One place where BP has utilized that method is at its operated Mad Dog field in the Gulf of Mexico. When the firm began work on Phase 2 a few years back when oil was at $100/bbl, the project looked viable at a cost of $20 billion.
After BP reevaluated Phase 2 in 2013, the firm determined that the project is “now very likely to cost less than $10 billion,” Yeilding said.
More recently, BP has reduced its upstream budget largely by cutting third-party spend, working with partners where the firm isn’t operator, and trimming its upstream workforce by 20% (OGJ Online, Jan. 13, 2016).
“While these times are undoubtedly painful and tough, they do improve us all—they make us all harder, leaner, sharper, and more focused,” she said.
Exploration suffers
The firm also is seeking to defer some exploration projects with the expectation that the cost to test will fall. BP intends to target infrastructure-led prospects in existing basins.
E&P companies are naturally leery of the risk associated with exploration when commodity prices are depressed. Cunningham attributes the lack of recent exploration success to an “unprecedented land grab as more capital poured into the sector.”
She explained that private equity needs operators and acquirers to get their returns “and these white knights didn’t always show up.” The land grab caused a push to more frontier plays where access costs weren’t as high and returns were more favorable.
An essential means of risk-sharing in offshore exploration has long been partnerships. Cunningham noted that, in the past, companies would explore acreage and then leverage to bring in a partner, but now companies are first partnering up.
Hourcard cited as an example Total’s long-term strategic alliance with Cobalt International Energy Inc., formed in 2009, to jointly explore in the gulf. The firms in November 2015 reported “encouraging” results from the North Platte 3 appraisal well in the deepwater gulf (OGJ Online, Nov. 3, 2015).
Elsewhere in the deepwater, Total in the first half will drill Uruguay’s first offshore exploration well to 3,400 m on Block 14. “We don’t have to abandon everything deep offshore,” Hourcard said. “That play will open new horizons if we are successful.”
It’s about the long-term value for a lot of deepwater opportunities, Yeilding said. “The day we hit the Thunder Horse reservoirs I think oil dropped to [$9/bbl], and we were sort of sitting there and going ‘Oh, wow,’ and ‘Oh, dear.’ Will this ever make money?”
Yeilding noted that “different companies have different prioritizations and different budget constraints,” which has forced even more collaboration.
“Good projects find good partners,” Hourcard added.
Contact Matt Zborowski at [email protected].