Friday 6 April 2018

Wood Mackenzie saw a significant recovery in upstream Final Investment Decisions (FID) in 2017, with the number of project sanctions more than doubling from 2016. They expect a similar story in 2018 with around 30 major projects to reach FID. And it's all down to continued prudence in industry spending.

With the primary focus of reducing project footprints through fewer wells, smaller facilities, and the greater use of subsea tie-backs and existing infrastructure, projects have achieved lower costs, lower breakevens, higher prices and improved corporate finances. But how much longer will we exist in this new, frugal world?

The Upstream Industry Forges Ahead with Cost Cutting

Projects that did get the greenlight are notably smaller. The average capital expenditure to develop 'major' projects (commercial reserves over 50 mmboe) sanctioned in 2017 fell to only US$2.7 billion, the lowest in a decade. To put this into context, the average project capex for those sanctioned over the last decade was double that at US$5.5 billion.

The Average Project Capex Fell from US$5.5 billion to US$2.7 billion

Wood Mackenzie are seeing significantly smaller projects, alongside a greater appetite for brownfield and expansion projects, and more subsea tie-backs. Brownfield developments are popular in the current capital-constrained environment, with less spend and execution risk than a greenfield project, and a faster route to first production. Both investors and operators want to see faster cycle times and quicker returns on upstream projects.