The low oil price is having major impact across the oil & gas industry. However, DW's recently released World Floating Production Market Forecast 2015-2019 expects capital expenditure on FPS units to total $81bn between 2015 and 2019. While many industry participants may consider this surprising due to daily announcements of budget cuts, it is important to note that while a number of FPS projects have been put on hold, few have cancelled – indicating that operators are simply employing wait-and-see tactics on projects. Over the next five-years, deepwater projects in the 'golden triangle' of Latin America, US Gulf of Mexico and West Africa, are expected to account for more than 60% of FPS expenditure. This is not unexpected given diminishing reserves in many onshore areas and in shallow waters, coupled with the widely accepted fact that floating production systems are a key enabler for production in deep waters.
Deepwater West Africa, particularly offshore Angola and Nigeria, is a growing market despite the current downturn. As we noted in February, while cuts in expenditure are being announced, IOCs are pressing ahead with key projects in both countries, all of which are expected onstream before 2018. Chevron, ExxonMobil and Eni all have major deepwater projects in Angola, collectively adding a peak capacity of approximately 1 million barrels per day. Total also has a number of FPS projects in development – examples include the Eastern Hub FPSO in Angola and the Egina FPSO in Nigeria.
While Petrobras is currently embroiled in a corruption scandal, a number of the NOC's FPS units were ordered prior to the oil price downturn therefore these projects are unlikely to be affected. However, future orders have some uncertainly due to the scandal. Overall, due to the growing importance of deepwater reserves, associated floating production activity is expected to increase despite the oil price downturn. As such, offshore West Africa will remain a key area for FPS deployments and oil & gas stakeholders' interest in the region is well placed.
Damilola Odufuwa, Douglas-Westwood London
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Governments' responses to low oil prices will have a significant effect on supply dynamics for years to come, depending on whether fiscal regimes are adjusted to provide a landscape in which companies can make big development decisions, says an analyst with research and consulting firm Globaldata.
According to Will Scargill, Globaldata's Upstream Fiscal Analyst, relatively low costs and the design of fiscal regimes in a number of countries should mitigate the impact of the recent price drop in most mature basins. However, the threat to Exploration and Production (E&P) companies' bottom lines means that improved recovery in high-cost mature basins is compromised, new developments in growth areas are being put on hold, and unconventional development is slowing.
Scargill comments: "Several governments have taken positive steps to adapt to lower prices in recent months, with Argentina's measures especially improving project economics. Argentina has reduced the investment threshold for the Investment Promotion Scheme for Hydrocarbon Production and has decreased the rate of export duty, for when oil prices are below $80 per barrel (bbl), to 10–13% from 45%, meaning fields should remain profitable at $50/bbl.
"The impact of low prices in the short to medium term is likely to be felt most keenly by governments in countries that rely on hydrocarbon revenues, such as Russia and Venezuela, while the effect on supply should be relatively limited. The exception to this is in the North Sea, where high costs mean that tax cuts are required if lasting effects on the sector are to be avoided."
However, the analyst notes that to enable companies to make large investment decisions in growth areas and frontier basins, governments should offer a fiscal regime that responds to prevailing price given the cyclical nature of oil prices.
Scargill continues: "Brazil's pre-salt resources could add millions of barrels per day to supply by the 2020s, but this is contingent on E&P firms feeling confident enough to commit billions of dollars to development now.
"Additionally, deepwater discoveries in Mexico's Perdido Fold Belt have generated significant interest, and with an anticipated breakeven price between $41-65/bbl for new licenses, including the additional royalty, the commercial viability of developing these areas will depend on the final fiscal regime design."
The Island Offshore Group reports 2014 revenue of NOK 2.732 mill which is 25% higher than 2013. Fleet utilization was 91% in 2014 which is satisfactory considering completion of a significant maintenance and modification program and a disappointing spot market. A total of 5 new vessels was added to the fleet in 2014 and 2 vessels were sold during the year.
EBITDA for the year totals NOK 1.270 mill, up from NOK 885 mill in 2013. 2014 figures include a sales gain of NOK 277 mill.
2014 profit before tax is NOK 406 mill including unrealized disagio of NOK 210 mill related to conversion of USD denominated loans.
In addition to strong financial results, significant improvement in important QHSE figures was achieved during 2014, hereto reduced personnel injury frequency rate and reduction of the fleet's emission of CO2.
Our strategy remains firm with focus on securing long term commitment with strategically preferred clients. The Group's order backlog is still strong and totals NOK 6.4 billion which equals approximately 2.4 times 2014 revenue.
Contract coverage for 2015 is approximately 80%.
The low oil price is expected to dramatically impact O&G activity on the UKCS. Most notably, the number of wells drilled will decrease – particularly E&A wells. In 2014, drilling campaigns were significantly smaller than forecast – only 14 exploratory wells were drilled from an anticipated 25. This is the lowest number since 1970 and with the current oil price an increase is highly unlikely. However, production is expected to be maintained over the short to mid-term, bolstered by sanctioned projects. Meantime operators are seeking to control costs – BP and Talisman have recently announced large job cuts and many high Capex developments will face delays.
Despite the downturn, the 28th licensing round (November 2014) appears to indicate continued Operator interest. DECC awarded a total of 134 licenses – fewer than the record 27th round in 2012 – but still demonstrating the ongoing attractiveness of the region. This does not mean drilling will return to higher levels: the majority of licenses were awarded on the basis of further analysis of seismic data. Overall, oil companies committed to just five firm wells and four contingent wells. Given the declining oil price and current unattractive fiscal regime, a lack of commitment from oil companies is to be expected. However, the lack of drilling activity still represents a significant concern for the UK industry and encouraging companies into drilling will require careful restructuring of both the fiscal and regulatory framework.
Chancellor George Osborne, in his Autumn Statement, announced plans to revise the fiscal regime and appoint a new regulator. However, given the steep decline in oil price, more needs to be done, particularly on taxation – indeed Lord John Browne recently suggested cutting through the tax complexity and putting it onto a corporation tax basis. However, much depends on the outcome of the general election – anything but a win for Conservatives may delay much needed reforms and suppress the UKCS O&G industry further.
Balwinder Rangi, Douglas-Westwood London
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