A journey in graphs and capital intensity…

The above graph was taken from a JP Morgan report into the oil price this week. I wouldn’t read too much into the headline, as I have said before in the short-term I think the oil price is a random walk, but it gives you an idea of what a well researched analysis thinks the long term breakeven price is in the 50s. That isn’t my view but it reminded me of this graph from 2013:

Berenberg 2013.png

This is from a report in 2013 that Berenberg Bank published (using Infield as their source). Rystad had a similar one in 2013 (the article is very perceptive in retrospect):

Rystad 2013

The key for me is how far shale has dropped down the cost curve and the fact that this has been driven by productivity improvements while utilisation in the industry has been high (i.e. cost pressure was on the upside not the downside). I would argue a majority of the decrease in offshore costs has come about through over capacity and economic value (debt and equity) being wiped out. Given that many offshore assets are designed for 25 years of operational life this is a real issue.

I was interested to see the Noble/GE link this week with the aim of reducing drilling timing by c. 20%. But surely this points to the future where more planning and onshore data work will lead to less offshore execution time? I thought this was cool:

The Digital Rig solution combines data models from a digital replica of physical assets, known as a digital twin, along with advanced analytics to detect off-standard behavior, providing an early warning to operators to mitigate a problem before it strikes. Thanks to vessel-wide intelligence, personnel both on the vessel or onshore can gain a holistic view of an entire vessel’s health state and the real-time performance of each piece of equipment onboard.

Offshore is going to have to work out how to increase productivity to keep winning projects but a common theme is the need for less capital intensity:

Chevron Corp. is studding the ocean floor with heavy-duty pumping gear as part of an effort to make deepwater oil discoveries competitive with shale.

The idea is to force crude from newly drilled wells in the deepest parts of the Gulf of Mexico to flow through miles and miles of pipe to platforms built a decade or more ago, said Jay Johnson, Chevron’s executive vice president for upstream. By lopping off the billions it would cost to construct each new platform, offshore exploration begins to make economic sense again.

That methodology will use a lot less asset time than a traditional tie-back/FPSO or trunkline solution I am sure. A realistic view of the next offshore cycle requires a recalibration of many mental models I feel.


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