I wrote before about my calculations of the breakeven point for some recent and some upcoming North Sea projects, but time marches on and cost estimates and reserve estimates change so I thought it worth updating the picture.
I am doing this calculation with publicly available data, so I doubt that I will have been able to make a truly accurate calculation, or one that matches company's internal estimates, or even the published CPR estimates. Part of that will be down to data availability and part will be down to the methodology I chose. For simplicity, I discount the production profile and the operating costs, but I don't bother discounting the capital costs as it is only rarely that I can lay my hands on how those capital costs are phased. That means the breakeven price I calculate will be higher than it should be, but my method has the virtue that I can apply it to projects where the only data I have is a production profile (check out the Environmental Statements for those if there isn't a CPR) and a total capital cost; operating costs can always be estimated at 4% of capex per annum.
The other consequence of that simplification is that it sets the bar a little higher than just making a return that is equal to the theoretical cost of capital, so I could make a case that the breakeven value I calculate is more realistic, if you think of it as a hurdle oil price for the project. But the main reason I do it the way I do is so that I can do the calculation for as many projects as possible.
So here is an updated chart with the projects ranked by breakeven price. A few investments that made sense when the oil price was $110/bbl aren't looking quite so good now, but we don't know to what extent the operators of those projects can add incremental reserves or squeeze some costs out of the system. It is very hard to change the cost of something you have already built or are in the middle of building, but a few extra barrels could help some of those projects a lot. For clarity, these are pseudo-project economics not company economics which can often look a lot better (or worse) depending on acquisition or farm-in or farm-out arrangements.
At today's price of just under $50/bbl it is hard to see any new project getting off the blocks, and with the long run price now under $70/bbl it will be a brave company or financier that pulls the trigger on a project. But I firmly believe that those will be the companies or financiers that will reap rewards in the long run. BP, LASMO et al sanctioned the Andrew development project on a day when the oil price had fallen to $12/bbl, they reaped the rewards in lower costs during construction and higher oil prices when the field actually came on stream; but on the day that the final investment decision was taken the outlook couldn't have been bleaker.
Getting a development project across that final investment decision hurdle will, in many cases, require a radical rethink of what the project looks like and how the project gets implemented. That is just what we did on the Andrew project, we took six months out to reshape the project before we went for the final investment decision, the plant had been designed to produce 45,000 bbls/day, but with the horizontal wells we had planned the well capacity was quite a bit better so we debottlenecked the plant before we built it and realised we could handle nearly 60,000 bbls/day. The structural engineers did their bit too, when they established that we could securely fasten the platform to the seabed with 12 piles not the original 16 we had planned.
That is the kind of process which can drive costs out of a project but the best way to drive down the breakeven cost per barrel is to find a way to squeeze (or steam) more barrels out of the field. Engineering ingenuity runs out of road eventually and pressuring your contractors only goes so far (if it goes anywhere at all).
Finding a way to produce the extra barrels that will make MER:UK (that's Maximising Economic Recovery in the UK for those who don't read the Wood report every day) a reality will take innovation and fortitude, cutting costs will take ingenuity and collaboration, but we have the capability to do that in the UKCS, of that I am sure.
That's why I say the North Sea isn't dead, it's just resting. Sadly, I'm afraid that Norwegian Blue's a goner.