In this post I present a closer look at 4 developed discoveries (of a total of 10) that started to flow as from 2012 and their production as of September 2013 as these have been reported by the Norwegian Petroleum Directorate (NPD).
A common feature for several of the recent developments offshore Norway is that they have estimated recoverable reserves ranging from 10 – 100 Million Barrels of Oil Equivalents (MBOE) and are expensive to develop and generally developed with sub sea completed wells flowing back to an existing (host) installation for processing. The host installation normally provides for essential services for the operations of these sub sea installations. These discoveries typically annual flow are 15 – 25% of estimated recoverable reserves at some kind of plateau and enter into steep declines as they become 50 – 60% depleted. Normally these developments reach expected plateau a few months after they start to flow.
Several of the recent smaller developments* on the Norwegian Continental Shelf (NCS) have so far under-performed with regard to expected production. So far these have resulted that some companies have taken some write downs, and others will have to accept considerably lower returns on their investments.
The presented 4 developments were now expected to flow a total of 90 – 100,000 BOE/d. Actual data from NPD show that these 4 developments had an average total flow of 13,000 BOE/d for August and September 2013.
*) By smaller developments are here meant discoveries with estimated recoverable reserves below 100 Million Barrels Oil Equivalents (MBOE).
This is worrisome for several reasons:
- Write downs and lowered returns impact the companies’ financial abilities to develop future capacities and to carry through planned exploration activities.
- Write downs destroy shareholder value.
- If there is a general trend with weakened profitability and/or losses from smaller developed discoveries (which for some time has been dominant on NCS), this may lead to future revisions of the criteria the companies use for commercialization of these. In other words more experiences confirming the uncertainties surrounding smaller discoveries could push the commercial break even price lower, thus deferring developments of such discoveries that already are within the companies’ portfolios.
This may fly under the radar coverage with the euphemism “targeting financial performance”.
- To finance these developments, the companies took advantage of their debt carrying capacities and took on more debt. The companies thus bet their future on households and sovereigns (already overstretching their debt carrying capacities) being able to continue to take on more debt to pay for more expensive oil and natural gas so that the companies can retire their debts as these mature.
- Apart from price, production flows have a considerable impact on companies cash flows and profitability. In the short to mid term it is more about the flows and less about the stocks.
- The developments of these smaller discoveries have so far reduced the decline in total production from the legacy installations on the NCS as can be seen in figure 1. For some time these smaller developments also hid the “The Red Queen” effect from NCS discoveries brought to flow since 2002, refer also figure 2.
- A more reserved attitude of the companies towards future developments of the discoveries made (and to be made) due to financial considerations, sets up the potential for a near term further acceleration of the decline in total NCS crude oil production.
This also illustrates that future developments now appear to be at the crossroads with what price the oil companies need for development of discoveries with what the consumers will continue to afford.
The new developments have now reduced the annualized total decline in crude oil production from NCS to just above 7%, refer also to figure 2. Discoveries/fields flowing prior to 2002 has seen a decline in their total crude oil production of more than 70% since 2002.
In this post it is used Barrels of Oil Equivalents (BOE) and conversions as proposed by NPD which is an industry standard. Depending on what category of petroleum these BOE are made up of there is a wide range of prices that they fetch in the market. A BOE of Natural Gas Liquids (NGL) and/or natural gas (in the European market) obtains now a price of around 60% of that of a BOE of crude oil (and for crude oils there is a wide range of benchmark prices).
Since 2002 around 40 new discoveries were developed to flow which gradually grew to a total production of around 0.7 Mb/d (Mb/d; Million barrels per day) by 2009, a level that was sustained for around 3 years. Since 2012 the additions of new developments were not able to sustain this plateau, very much illustrating that these developments had entered “The Red Queen” stage.
GENERAL FOR THE 4 DEVELOPMENTS PRESENTED
Since 2012 and as of September 2013 a total of 10 discoveries on NCS were reported by NPD to have started to flow.
It is hard to come by forecasts on the financial performance of individual developments as companies/owners do not publicize this kind of information.
This post is based upon reserves estimates and actual production data published by the NPD and data on investments of completed developments published by NPD in a recent evaluation report.
Where estimates on break even prices are presented these are at a 7% discount rate pre tax and based upon NPD reserves data as of end 2011, expected production profiles (plateau levels as published by the companies), typical declines and estimates on investment as per the referred NPD evaluation report.
For each of the presented developments there is one figure that shows the actual production as from start of flow and as of September 2013 as these were reported by NPD. A grey line/area in these figures shows expected (plateau) production as this has been presented by the companies.
For developments with reported flows of 12 months or more the 12 Month Moving Average (12 MMA and black line in the figures) was added to describe the annualized flow trend.
Each discovery has an accompanying figure that shows developments in year end NPD estimates of recoverable reserves. Reserves estimates are always burdened with uncertainties and thus subject to revisions as more data become available and experiences are gained.
The development of a petroleum discovery is normally based upon a large set of expectations about reservoir behavior (production profile), investments (including operational costs), product prices and a rate of return. The oil companies are in the development and production of petroleum to make a profit.
Mother Nature often throws in the proverbial wrench (or several) to ridicule initial assumptions about reservoir behavior and expected production. Presently and still with limited production histories the revisions to the initial assumptions start to diverge considerably from those that formed the basis for the sanctioned developments. This may of course work both ways, but for several recent offshore developments on NCS it now appears as actual data (as in more) suggest that most revisions to reserves and (future) flows will be to the downside.
Our society functions from net energy flows made available to it primarily from fossil fuel stocks. To the oil companies the flows are important as these generates the financial cash flows which becomes the foundation for their financial health and enables investments in new capacities to both offset declines from maturing fields and provide any growth in supplies to meet expected growth in demand and an effort to maintain affordable price levels.
The Gaupe field apparently did not reach expected production plateau before it went into terminal decline.
The estimated sanctioned break even oil price for Gaupe was around $50/Bbl to meet a (pre tax) return of 7%.
Gaupe had an estimated development cost of $400 Million (2,380 MNOK).
Based upon NPD’s reserves estimates as of end 2012 the estimated nominal gross value for Gaupe is $280 Million (1,680 MNOK).
As of September 2013 a total of 2.9 MBOE had been recovered from Gaupe of a total NPD estimated recoverable of 4.4 MBOE as of end 2012.
As production experiences were gained from Gaupe the NPD estimated recoverable reserves became subject to a 85% downward revision from 2011 to 2012 as shown in figure 4.
The Marulk development initially performed better than expected. Note how Marulk immediately reached expected plateau production.
Marulk had an estimated development cost of $750 Million (4,476 MNOK).
The estimated sanctioned break even oil price for Marulk was around $35/Bbl to meet a (pre tax) return of 7%.
According to NPD Marulk has in the recent months seen reduced output due to technical issues.
The trend in lower NPD estimates of recoverable reserves for Marulk is within what normally should be expected.
Oselvar did not reach expected plateau and the owners have taken some financial write downs.
Oselvar had an estimated development cost of $850 Million (5,120 MNOK).
As of September 2013 Oselvar had produced petroleum for a gross value of around $160 Million.
Skuld is struggling to reach expected plateau which according to NPD is due to technical issues.
Skuld had an estimated development cost of $1,700 Million (10,147 MNOK).
The estimated sanctioned break even oil price for Skuld was around $35/Bbl to meet a (pre tax) return of 7%.
The lower initial output comes with the potential for lower returns.
Common for the 4 presented NCS developments are that they were sanctioned on expectations about a “low” break even price and thus the potential to become very profitable. As these developments now are struggling to reach expected plateau and/or sustain the plateau, it should be expected that this has the potential to significantly lower returns or even worse, make the developments subject to future reserves and financial write downs.
Costly developments of discoveries that now under-perform should be worrisome for everyone affected. The converging realities of debt saturated consumers (households and sovereigns) and oil companies with heavy debt burdens struggling with profitability bears with it the prospects of some different supply, demand and price dynamics that may, as of yet, be poorly understood, but some outlines may now emerge as reported by Bloomberg in this article:
“The Washington-based IMF forecasts oil prices will slump 7.7% next year while non-fuel commodities will drop 2.9% in dollar terms. It also projects governments will keep cutting budgets, with the aggregate deficit of advanced nations at 4.5% of gross domestic product this year and 3.6% next year.”
Lowered deficits equals lower debt growth that feeds deflationary forces. Dismal production performance is apparently not the only threat to the profitability of the expensive newer developments.