UPSTREAM NEWS

Chevron to sell Indonesian, Philippines geothermal operations

Chevron Corp. subsidiaries have entered into a sales and purchase agreement with Star Energy Consortium to sell Chevron's Indonesian and Philippines Geothermal assets.

In Indonesia, Chevron subsidiaries operate the Darajat and Salak geothermal fields in West Java. In the Philippines, company subsidiaries have a 40% equity interest in the Philippine Geothermal Production Co. Inc., which operates the Tiwi and Mak-Ban geothermal power plants in Southern Luzon.

WoodMac: New projects in the upstream industry to double in 2017

Wood Mackenzie forecasts the investment cycle will show the first signs of growth in 2017 since 2014 and final investment decisions (FIDs) will double, compared with 2016.

Malcolm Dickson, a principal analyst for Upstream Oil and Gas for Wood Mackenzie, said: "2017 will demonstrate how efficient the oil and gas industry has become; showing projects in better shape all round."

According to Wood Mackenzie's global upstream outlook for 2017, confidence will start to return to the sector, with exploration and production spend set to rise by 3% to US$450 billion. Though a corner is being turned, this is still 40% below the heady days of 2014. At the forefront of the revival will be US tight oil. Costs will continue to fall in 2017, though only marginally. But for all the pain of the downturn, a leaner industry is starting to emerge.

Capex deflation has averaged 20% over the past two years. With service sector margins wafer thin, Wood Mackenzie believes there's now only room for small reductions and capital costs are expected to fall by an average of 3% to 7%.

According to Wood Mackenzie, the five things to look for in 2017 are:

Global investment will rise, reversing two years of severe decline.
FIDs will double and deep water is back on the agenda.
Costs will bottom out as an efficiency boom takes hold, but more work is required.
Fiscal rules need to improve to attract scarce investment.
Rise in global investment in 2017 after two years of severe decline

"The global investment cycle will show the first signs of growth in 2017, bringing the crushing two-year investment slump to a close," said Dickson.

US tight oil, and the Permian basin in particular, will lead the way, distinguished by low breakevens, scale and flexibility. US Lower 48 spend is set to grow by 23%, to US$61 billion, with upside if oil prices rise strongly and US Independents are emboldened by a Trump presidency.

Number of project FIDs to double

Wood Mackenzie predicts the number of FIDs will rise to more than 20 in 2017, compared with nine in 2016. This is still well short of the 2010-2014 average of 40 a year. But these are generally smaller, more efficient projects, and capex per barrel of oil equivalent (boe) averages just US$7 per barrel, down from US$17 per barrel for the 2014 projects.

"Companies will get more bang for their buck as development incremental internal rates of return (IRR) will jump from 9% to 16%, comparing 2014 to 2017," said Dickson. "This is in part a result of a shift in capital allocation away from complex mega projects towards smaller, incremental projects in the Canadian oil sands and deep water."

A leaner industry has emerged from the downturn

"Nowhere is the mantra 'doing more with less' more evident than onshore US. There has been a dramatic increase in efficiency in the sector, exemplified by the drillers, who are managing to complete wells up to 30% quicker," he added.

Wood Mackenzie says as the tight oil sector heats up further, the spectre of cost inflation looms in 2017. But any increase in costs may well be offset by further efficiency gains in earlier-life plays. For example, there's still potential for a further improvement in drilling speed of 20% to 30% in some early-life tight oil plays.

Deepwater will spring back to life in 2017, but more cost cutting is needed in long run

Deepwater FIDs will be a leading indicator the tide is turning. The best development assets will hold their own against tight oil, especially as more risk-averse tight oil operators start to screen opportunities under higher discount rates.

According to Wood Mackenzie's global upstream outlook, projects slated for FID in 2017 are largely looking good, but the longer-term deepwater pipeline is more challenged. Of the 40 larger pre-FID deepwater projects, around half fail to hit 15% IRR at US$60 a barrel.

"The industry has selected the best projects to optimize and take forward. In 2017 it will have to turn its attention towards optimizing the next wave of developments to get them sanction-ready," said Dickson.

Fiscal terms will need to improve to attract scarce investment

Graham Kellas, senior vice president of global fiscal research at Wood Mackenzie, said: "Some governments will be tempted to increase tax rates, but those with uncompetitive fiscal regimes will have to make changes to ensure they can attract still-scarce new capital. Getting the risk-reward balance right will be a critical factor in attracting scarce investment capture in 2017, even for resource-rich hotspots such as Iran and Mexico."

2016 offshore-discovered liquids 90% lower than in 2010

Rystad Energy concludes that the 2016 total offshore-discovered liquids resources reached only slightly below 2.3 billion bbl, 90% lower than in 2010. This drop is most significant to the overall decline in discovered volumes; in fact, total global discovered volumes (oil & gas combined) are at an all-time low since the 1940s.

In 2016, the average liquid content in the discovered resources was merely ~40%. Even more tellingly, the replacement ratio* for liquids in 2016 was below 10%. For comparison, the replacement ratio for liquids in 2013 was as high as ~30%.

There are a few key countries that influenced offshore discovered liquids development:

Brazil – The country experienced a new 'golden age' thanks to multi-billion bbl discoveries made in the beginning of this decade. Among the largest discoveries Lula (formerly known as Tupi), Libra and Buzios stand out. Combined, these discoveries hold ~20 billion barrels of liquids. All of the large discoveries made in Brazil in the past decade are located in the large pre-salt basins, especially Santos and Campos. However, the success story from 2010 did not repeat itself as 2016 approached. This is due to a combination of factors such as limited capital to develop projects that were previously discovered or local content regulations, among others.
Norway – The offshore exploration on the NCS showed disappointing results in 2015 and 2016, with no discovery surpassing 100 million bbl of discovered resources. In fact, since the discovery of Johan Sverdrup in 2011, there has not been another sizeable discovery made on the NCS. Exploration results were particularly discouraging given the number of exploration wells in the region, which remained relatively stable within the range of 45 to 65 exploration wells per year, since 2010.
US – In GoM, the discovered volumes have remained relatively stable compared to the development in other offshore regions.
Russia – In Russia, the largest discovery in the past years was Universitetskaya, discovered in 2014. This discovery could potentially hold over 2.3 billion barrels of resources, of which ~1 billion bbl are liquids alone. Russia continues to be dependent on foreign technologies to be able to develop its offshore discoveries, especially in the arctic areas. At the same time, exploration activities in offshore arctic regions are currently on hold due to sanctions and generally less interest in the investment-heavy exploration due to low oil price.
Angola – The past five years have been positive for Angola in terms of exploration results. In 2016, there were three significant discoveries made: Golfinho (operated by Sonangol), being the only large oil discovery; and Katambi and Zalophus (operated by BP and Sonangol, respectively), being the largest gas discoveries.
Guyana – Exploration results in Guyana were particularly encouraging in 2015, with the 1 billion bbl discovery – Liza. Liza was the largest oil offshore discovery made in that year, representing ~30% of the total offshore discovered liquids in 2015.

Rystad Energy expects the exploration activity to slowly pick up from 2018, allowing for more discoveries towards the end of this decade and beyond. At the same time, some of the recent license awards could open new prospective exploration regions, e.g. the deepwater license award in Mexico.

*The replacement ratio measures the amount of discovered resources during the year relative to the amount of liquids product in the same year globally. It disregards the production start-up date for the discoveries.

Cobalt notes Preliminary Appraisal Well Results at North Platte

Cobalt International Energy Inc. has completed drilling operations on the North Platte #4 appraisal well. Preliminary results indicate that the well encountered approximately 650 feet of net oil pay, which is greater than the approximately 550 feet of net pay found in the North Platte #3 appraisal well. The North Platte #4 initial appraisal results also indicate high quality Inboard Lower Tertiary Wilcox reservoirs on the eastern flank of the North Platte field.

Cobalt is currently evaluating log data, fluid samples and pressure information and is preparing for a geologic sidetrack to further analyze the extent of the eastern flank. Cobalt, as operator, owns a 60% working interest in North Platte. TOTAL E&P USA Inc. owns the remaining 40%.

ExxonMobil makes Discoveries Offshore Guyana

ExxonMobil has encountered positive results from its Payara-1 well offshore Guyana. Payara is ExxonMobil's second oil discovery on the Stabroek Block and was drilled in a new reservoir.

The well was drilled by ExxonMobil affiliate Esso Exploration and Production Guyana Ltd., and encountered more than 95 feet of oil-bearing sandstone reservoirs. It was drilled to 18,080 feet in 6,660 feet of water. The Payara field discovery is about 10 miles northwest of the 2015 Liza discovery.

In addition to the Payara discovery, appraisal drilling at Liza-3 has identified an additional, deeper reservoir directly below the Liza field, which is estimated to contain between 100-150 million oil equivalent barrels.The Stabroek Block is 6.6 million acres. Esso Exploration and Production Guyana Ltd. is operator and holds 45% interest in the Stabroek Block. Hess Guyana Exploration Ltd. holds 30% interest and CNOOC Nexen Petroleum Guyana Ltd. holds 25% interest.