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Peter Taberner

Peter Taberner

Peter is a reporter for  FX Empire, and the International Finance Magazine, where he writes on energy markets, specializing in nuclear power and the renewable…

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Why Statoil’s $25 North Sea Break-Even Claim Is A One Off

In a crippling environment of low prices, the recent announcement from Statoil’s chief executive Eldar Saetre, that due to their cost saving measures, the Johan Sverdrup oil field will now have a break-even price of $25 per barrel, could perhaps provide a catalyst that can boost profitability for oil companies across the North Sea.

North Sea oil revenue has badly suffered, with crude oil prices just over $45 per barrel, far removed from the over $100 per barrel that was the spot price as little as two years ago.

In Scotland, official figures have recently revealed that income from oil has plummeted a whopping 96 percent, from £1.8 billion in the 2014-15 financial year to just £60 million in 2015-16.

Statoil has achieved the $25 per barrel break-even price through a range of actions taken, including re-negotiations of contracts and broad collaboration on improvements. They also worked with information from the many wells that have been drilled in the area, increasing their understanding of the underground reservoirs.

The emphasis on greater efficiency, has been labelled as phase 1 of the project, with capex investment costs estimated at NOK 99 billion

Another major development from Statoil on the Johan Sverdrup field, is the level of expansion of the production capacity, currently standing at 440,000 barrels of oil per day, originally the plan for development and operation concluded that between 315,000 and 385,000 barrel would be produced.

Despite the progress and remarkable price structure, not everyone is convinced that the developments at Johan Sverdup represent a seminal departure from the current climate in the North Sea.

Mhairidh Evans, a senior research analyst at Wood Mackenzie opined: “The Johan Sverdrup project has one of the lowest breakeven prices of global new developments.”

“It is a unique project within the North Sea, though not a proxy for the North Sea as a whole. All operators are making internal cost savings and supplier cost savings to survive with the current oil price. For new developments, the additional levers that operators have are to redesign or optimise the scope of projects, or to delay.”

As well as reducing the cost base, North Sea operators, particularly in the UK, have a real focus on improving production efficiency at their on-stream fields.

According to Wood Mackenzie, production efficiency had hit an historic low at an average of around 60 percent in 2012 for the UK, and hadn't improved much by the time the oil price dropped in 2014.

Now we see operators starting to report improvements, hitting up to 90 percent in some cases, which maximises production from existing facilities and reduces the cost per barrel. Related: Oil Prices Bounce On OPEC Hopes

“It’s important to remember that the Johan Sverdrup field is atypical, the scale of the project is not typical of opportunities either in Norway or the UK Continental Shelf (UKCS). Some fields on the UKCS can be profitable at $25 but there is such variance in projects on the UKCS given the range in age, and types of development that pinning down an average UKCS ‘break even’ price makes little sense.” Said Mike Tholen, the upstream policy director of industry association Oil & Gas UK.

Oil and Gas UK explained that on the UKCS, the industry is striving to improve its competitiveness and many different aspects of its activities, and has made progress.

Now, the average unit operating costs have fallen from almost $30 barrel of oil equivalent (boe), in 2014 to an expected $17 /boe this year. They have also set a target of $15 /boe by way of focussed company efforts, as well as cross-industry initiatives, through Oil & Gas UK’s Efficiency Task Force (ETF).

The Task Force will focus on three key areas, business process, standardization and culture and behaviours, in the quest for self-improvement.

The business process aspect is centred on reviewing the sector’s daily operators to explore how companies can work together, in sharing resources and practices to create a more economical structure for oil production. Related: Expert Commentary: Traders Turn A Blind Eye To OPEC Rumors

Current projects cover compression systems, inventory management, procurement, maintenance and logistics.

The taskforce is also encouraging companies to adopt standard solutions to reduce costs and accelerate on delivery, for example subsea technology and valves are under focus.

Additionally, there is an Industry Behaviours Charter to promote a collective commitment to cooperate on industry efficiency, where there is a Rapid Efficiency Exchange, inviting companies to share their efficacy in improving industry techniques

Clearly, there is a steadfast effort to drive costs down across the North Sea, although it appears that most other North Sea operations remain far from profitable at $25 per barrel.

By Peter Taberner for Oilprice.com

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