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Eni’s Arctic Field Comes Online, But Will it Ever Be Profitable?

Eni’s Arctic Field Comes Online, But Will it Ever Be Profitable?

Italian oil giant Eni launched crude oil production last weekend at the Goliat field in the Norwegian shelf of the Barents Sea with a stark lack of fanfare at a time when Brent has again slipped below $40 after a brief rally.

Normally, this news would have been accompanied by a great deal of attention. After all, the Goliat project boasts one of the biggest floating rigs in history, which can produce 100,000 barrels of oil equivalent per day and store up to a million barrels. Related: IEA Sees “Light At The End Of The Tunnel” For Oil Markets

The platform cost Eni and its Norwegian partner, Statoil, $5.5 billion, exceeding the initial budget by some $1.3 billion, according to National Geographic, and going through several delays (and upward budget revisions) before finally being deployed in the Barents Sea. It is these delays, which occurred while the price of crude oil was in free fall, that some feel could mean that Eni made an expensive mistake with Goliat.

The startup comes several months after Shell announced it was suspending its Arctic drilling plans, incurring a loss of some $7 billion from the investment, a decision that was seen as reflecting the fast-changing price environment in oil markets as well as Shell’s unwillingness to take on risky endeavors. Meanwhile Eni was nearing completion of Goliat, which has been seen as an advantage over the long term. Moreover, it’s in tune with the company’s strategic goal of expanding its E&P operations. Related: Oil Falls As Short Covering Seems To Have Run Its Course

There is a problem, however. Back in 2014, Norwegian media reported that Goliat risked becoming unprofitable if the price of oil should dip below $95 a barrel. At the moment, Brent is trading below $40 a barrel. Although Eni itself was quoted by Bloomberg as saying that the Arctic project will be profitable at less than $50 a barrel, the company declined to elaborate on how this would be accomplished in the face of analyst estimations that the company needs $95-$100 a barrel to break even in its Arctic operations.

At the moment, and for the observable future, $50 a barrel seems highly unlikely, regardless of the production freeze pledged by some OPEC producers and the continual rig idling in the U.S. shale patch. The reason: shale boomers can swing the market because they are ready to up production as soon as prices inch higher. Related: OPEC Production Declines Despite Iran’s Efforts

Some analysts, on the other hand, argue that prices will rebound to $50 and more before the end of 2017, but a market rebalance still seems a shaky notion. A glut means excess oil is being stored around the world. Even if global production falls to a level that matches current demand, these excess supplies will need to be worked through before the market rebalances itself.

The productive life of the Goliat field is estimated at 15 years. Given the current price environment and the most likely mid-term prospects for the industry, it looks like Eni may well be unable to recoup its Arctic investment.

By Irina Slav for Oilprice.com

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  • Mario Panebianco on March 17 2016 said:
    Do you suggest to give up 100,000 b/d production and take a loss of US5.5 billion?

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