Archives for posts with tag: CAPEX

Now that half the year has passed, a review of offshore project sanctioning might be timely. Activity has picked up in 2017, especially for larger projects with CAPEX allocations of at least $500m. The uptick in FIDs has coincided with improved E&P budget guidance from many IOCs. So oil price volatility notwithstanding, could this be an sign of generally improving prospects for larger offshore projects?

Large Projects On The Rise

Offshore field project sanctioning reached a peak of 120 FIDs in 2012. Since then, sanctioning activity has been under pressure from a range of factors, most notably the weaker energy price environment that has prevailed since 2H 2014. Indeed, oil company E&P spending cuts induced by the falling oil price in 2015 precipitated a 33% decline in FIDs that year. Larger projects (with an estimated CAPEX of at least $500m) have been hit the worse, with the number of such developments in 2016 to receive an FID down by 60% on 2012. In comparison, the number of smaller projects sanctioned in 2016 was down by a less severe 32% on 2012.

However, 2017 is (so far) looking rather more promising: 31 offshore field projects received FIDs in 1H 2017, of which 48% were larger projects. Among these were Coral FLNG Ph.1 ($7bn), Leviathan Ph.1 ($3.75bn), Liza Ph.1 ($3.2bn) and Njord A Upgrade ($1.6bn). FIDs have been stimulated by the higher (albeit volatile) oil price, as well as by successes in reducing offshore project costs (by around 30-40% on start 2014, on average).

Small Runs Rule

That being said, while it is true that sanctioning of larger projects seems to be on the rise, it is important to note that many such projects (including all those named above bar Liza Ph.1) were conceived pre-downturn and were on the verge of obtaining an FID in 2014. This implies that the recent uptick in large-project activity may not be sustainable, especially as the backlog of such projects continues to fall. Indeed, the history of start-up delays and cost over-runs at mega-projects such as Kashagan Ph.1 ($48bn) and Greater Gorgon Ph.1 ($55bn) had already prompted operators to rethink the viability of larger offshore projects even before the oil price downturn. Onshore US basins are also potentially problematic for offshore projects, insofar as they compete (quite effectively) for scarce investment dollars.

Efficiency Matters

As a result of these considerations, operators have been downsizing many of the other large-scale projects planned prior to the fall in the oil price. Browse is set to use two FPSOs instead of three FLNGs, for example, while Bonga SW “Lite” now entails an FPSO with a processing capacity 33% smaller than before. Many operators are also placing more emphasis on subsea tiebacks to existing facilities, instead of major new offshore hubs (even if this means lower production volumes). Adapting to the potential “lower for longer” oil price outlook thus seems to be a priority for many upstream players.

So although FIDs at larger projects have picked up, looking beyond the backlog of projects from before the downturn, such developments seem to be less in favour. Scratching the surface, small projects are at least an offshore outlet for upstream investment and in the long run, perhaps cost savings cemented post-2014 might make large projects more competitive.

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Two high-level indicators of vessel and structure demand in the offshore sector are energy prices and oil company E&P spending. A third, slightly more specific indicator is estimated offshore project capital expenditure, or CAPEX. While this metric does not capture demand arising from, for example, offshore exploration campaigns, it can be a key proxy for demand resulting from offshore EPC activity.

CAPEX Defined

Since the start of 2010, around $980bn of CAPEX has been committed to some 669 offshore projects globally. But just what makes up offshore project CAPEX? As defined herein, it consists of estimated capital invested in the development, redevelopment or decommissioning of offshore fields; it excludes spending on licensing rounds, seismic surveys and exploration wells, as well as operational expenditure arising from manning and IMR at active fields. CAPEX is committed via EPC contracts, usually issued soon after a project final investment decision (FID), for items such as MOPUs, fixed platforms, pipelines and subsea trees, as well as support, installation and development drilling services. CAPEX also translates into field developments that create durable demand for OSVs. CAPEX data collected by Clarksons Research is as specified by project operators; where no definitive figure is given, estimates are derived from assessment of comparable projects with known CAPEX.

Measuring CAPEX

One advantage of CAPEX as a metric is that, unlike a count of project FIDs, it reflects the differing ‘weight’ of projects. Indeed, project CAPEX can vary by several orders of magnitude. The B-173A Expansion project off India, for example, entailed the installation of a second shallow water fixed platform on the B-173A gas field. The project, which started up in 2015, had a reported price tag of $67m. In contrast, the ongoing 230,000 bpd Kaombo Ph.1 development off Angola has a reported CAPEX of $16bn. This wide variation in costs helps to explain recent CAPEX trends. During the 2011 to 2013 boom years, estimated CAPEX averaged $204bn p.a. globally, supported by high energy prices and rising E&P budgets. As oil prices tumbled in 2014, CAPEX fell by 54% y-o-y. CAPEX in 2015 was steady on 2014, even though FIDs fell by 41%, as a few giant projects with low breakevens, such as Johan Sverdrup (Norway, $12bn) and WND Ph.1 (Egypt, $12bn), received FIDs. However, other FIDs have continued to slip in the downturn. CAPEX so far in 2016 stands at around $40bn, down 34% y-o-y on an annualised basis.

CAPEX As An Indicator

As offshore CAPEX has fallen, EPC tendering has suffered, and hence, for example, MOPU newbuild contracting has dropped from an average of 18 units p.a. in 2010 to 2013, to just eight units in 2015 and two in 2016 to date. Similarly, 16 pipelayers were contracted in the same period, but only one unit has been ordered since 2013, reflecting depressed utilisation and earnings. Until CAPEX begins to increase once more, these sectors are likely to remain challenged.

In terms of spotting a recovery, then, it is worth keeping an eye on oil companies’ offshore project CAPEX plans. For not only is CAPEX one of a range of factors affecting offshore markets; it is a useful indicator with particular relevance to EPC-led vessel activity and investment too.

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In recent years, Australia has been a major growth area for offshore gas production and a key driver of offshore CAPEX. However, the prospects for Australian gas projects that have yet to be sanctioned are looking increasingly uncertain due to weaker LNG prices and cost overruns at existing projects. The outlook for Australian offshore projects may also be complicated by the recent Australian general election.

Gas Powered

Historically, the majority of offshore oil and gas production in Australia has been produced from Southern Australia, particularly from the Gippsland Basin. However, E&P activity in recent years has moved offshore North West Australia, where the emphasis is on large, deepwater gas projects. As a result, Australian offshore gas production increased with a robust CAGR of 7.9% from 2010 to 2015, reaching 5.88bn cfd last year and making Australia the fifth largest offshore natural gas producer globally.

Ample Supplies

This trend is expected to continue with the start-up of Phase One of the Gorgon gas project earlier in the year, increasing Australia’s 2016 estimated offshore gas production to 6.44bn cfd. This is probably just the beginning as Australia is projected to become an even bigger offshore gas producer. The country currently accounts for 10 projects that are undergoing EPC or Installation & Commissioning. Foremost amongst these are gas mega-projects such as Chevron’s Wheatstone, Shell’s Prelude and Inpex’s Ichthys LNG developments, which are scheduled to start-up in 2017. This is anticipated to accelerate Australia’s projected offshore gas production to 9.10bn cfd in 2017, before levelling off at 10.9bn cfd in 2020.

Moreover, onshore projects like Gladstone LNG and Australia Pacific LNG, which are now online, have begun to ramp up production. This is likely to lead to a rapid growth in available supply, arguably pressuring market fundamentals and so weakening spot LNG prices. Consequently, the combination of low spot prices, abundant supply and the development of associated gas reserves off Australia could hit the commercial prospects of many potential gas projects off Australia. Additionally, spot gas purchases could also gain favour against term contracts, possibly pressuring gas project feasibility.

Taking On Water

Currently, 41 projects representing an estimated $158bn in CAPEX have not entered EPC and 97% of the reserves from these projects are gas. Given the current challenging outlook for gas project economics, these projects might not receive an FID as operators could delay sanctioning until conditions improve, possibly abandoning some projects altogether. The situation could be exacerbated by Australia’s general election, which (at the time of writing) looks likely to produce a hung parliament, muddying energy policy waters and possibly putting a domestic gas reservation policy on future projects on the political agenda. That being said, the drive for environmentally friendly fuels could boost gas demand and improve the viability of gas projects in the longer term.

Political issues aside though, oversupply and low gas prices are key. Due to these factors, the near term investment outlook is very uncertain. However, with a project backlog of $158bn, offshore Australia still retains massive long term potential.

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