Upstream delivery finally hits the mark

According to industry analyst Wood Mackenzie, upstream oil and gas companies are increasingly delivering major capital projects on time and on budget.

The successful execution of projects is of crucial importance to an upstream industry adapting to lower prices. The downturn forced companies to evaluate and improve how they manage their major capital investments.

The sector has a reputation for missing projected deadlines. The top 15 project overruns of the last decade were a cumulative USD80 bn over budget. “The scale of under-performance was staggering,” said Angus Rodger, research director, Wood Mackenzie. “Surveying the last decade of project delivery, the average development started-up six months later than planned and USD700 mn over budget. That is a huge amount of value destruction.”

However, recent performance indicates that the tide has turned. Wood Mackenzie said there is a growing list of mid to large-scale projects that have been delivered on target over the past 12 months. This includes areas previously notorious for cost blow-outs, such as the Arctic and Caspian. Examples of improved execution include deepwater developments such as BP’s West Nile Delta and Atoll, along with Eni’s Zohr and Cape Three Points projects; LNG (Novatek’s Yamal), shallow-water gas (BP’s Shah Deniz Phase two) and subsea tie-backs such as Woodside’s Persephone and Wintershall’s Maria.

Better upstream execution

Wood Mackenzie said the transition to a simpler, lower-cost business model has aided new project delivery. Most recently, Shell brought its deepwater Kaikias field in the Gulf of Mexico onstream nearly one year ahead of schedule. Wood Mackenzie identified six key factors, that in most recent cases, combined to create better project execution:

1. Spare capacity through the supply chain. This leads to better performance and lower costs. For example, in some basins, such as the Gulf of Mexico and pre-salt Brazil, drilling efficiency has improved dramatically;

2. Service sector collaboration and alignment on contracts, albeit mostly for projects developed in northern Europe;

3. Improved project management. Companies have more people looking at fewer things, while under-utilised service companies can offer their best teams for each major contract;

4. Greater corporate discipline. Tougher pre-final investment decision (FID) screening and more stringent hurdle rates have increased attention on execution and cost control;

5. More pre-FID planning. More contracts are ‘signed and sealed’ pre-sanction, often with preferred partners versus putting everything out to bid;

6. Reduced scope. More tie-backs and brownfield projects are using existing infrastructure.

While there have been a few large-scale oil developments sanctioned in recent years, it is not many by industry standards. It is in the LNG sector where there are clear signs that companies are re-engaging with giant, capital-intensive projects. This includes new developments in Canada, Mozambique, Qatar, Papua New Guinea, Russia and Australia.

“There is a looming wave of big pre-FID LNG developments building on the horizon, all aiming for sanction between 2018 and 2020. After a fallow period in new LNG project sanctions, and megaprojects in general, the next 18 months will likely see a step change. This will be the real test of whether the industry has addressed the issue of poor delivery,” Rodger said.

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BP's West Nile Delta project. Photo credit: BP
BP’s West Nile Delta project. Photo credit: BP

Mexico eyes up major energy projects

A number of major Mexican oil, gas and energy projects have taken shape in the past week. Italian oil major Eni expects to invest USD1.8 bn in three oilfields offshore Mexico by 2040, according to a development plan approved by Mexico’s oil regulator.

The plan covering the Amoca, Mizton and Tecoalli shallow water fields is the second of its kind approved by Mexico’s National Hydrocarbons Commission (CNH). The deal follows the 2013 agreement that has led to more than 100 oil and gas contracts being awarded to international investors in a series of auctions.

Eni forecasts initial crude oil production of 8,000 barrels per day (bpd) in early 2019 from its Amoca and Mizton fields, and ramping up to 90,000 bpd by 2022, according to CNH.

Initial production at the Tecoalli field is expected in 2024. The development plan includes 32 wells, four platforms, plus a gas pipeline connecting to the coast, as well as the acquisition of a floating, production, storage and offloading (FPSO) vessel.

Eni expects to take the final investment decision (FID) in the fourth quarter of 2018, although some initial investments to fund long lead items and to start the construction of the first platform for the early production have already been authorised.

Mexico unveils investment strategy

The Mexican government also unveiled a USD16 bn investment plan to boost the domestic oil production, refinery capacity and hydropower generation. President-elect Lopez Obrador pledged to increase oil production by 600,000 bpd in two years. He said about USD9.5 bn would be invested in refinery modernisation projects. USD8.6 bn of the budget will be allocated to a new refinery in Dos Bocas, Tabasco.

Meanwhile, McDermott also won a contract award from Pemex for subsea pipeline flowline installation in support of its Ayatsil field. It is located 50 miles (80.5 km) northwest of Ciudad del Carmen in the Bay of Campeche offshore Mexico.

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CapProCon a weekly e-newsletter detailing contract awards and developments in the oil and gas, power generation, mining, civil and industrial infrastructure sectors. To learn more, click here.

This website provides just a snapshot of what’s on offer in the CapProCon e-newsletter.

The newsletter, published in association with Heavy Lift and Project Forwarding International (HLPFI) magazine, is designed for those looking to identify project logistics opportunities relating to major industrial projects around the world, while aiding decision making and planning processes.

amcoa. eni. mexico. offshore oil and gas fields.

Recruitment required in oil and gas sector

Industry analyst Rystad Energy believes there is a massive need for recruitment in the offshore oil and gas sector. New projects are being sanctioned and activity levels in the sphere starting to increase.

It says that the negative trend in employment in the oilfield service industry is levelling out. While there was a 35 percent reduction of the workforce between 2014 and 2016, the overall headcount at the top 50 oilfield service companies remained stable from 2016 to 2017.

Companies involved in the North American shale industry faced especially large cuts from 2014 to 2016, however these companies were the ones adding to their workforce last year.

Recruitment drive

Since the end of 2017, hiring has also been picking up within the offshore sector as rising prices encourage more offshore projects to be sanctioned. In 2018, Rystad Energy expects almost 100 projects worth about USD95 bn to be sanctioned. This compares to only 45 projects in 2016. An additional 100 projects are expected to be sanctioned in 2019, says Rystad.

Together with the expected growth in shale market, Rystad expects the oil service sector’s labour market to grow by 20 percent by 2020 – a level last seen in 2010.

About CapProCon

CapProCon a weekly e-newsletter detailing contract awards and developments in the oil and gas, power generation, mining, civil and industrial infrastructure sectors. To learn more, click here.

This website provides just a snapshot of what’s on offer in the CapProCon e-newsletter.

The newsletter, published in association with Heavy Lift and Project Forwarding International (HLPFI) magazine, is designed for those looking to identify project logistics opportunities relating to major industrial projects around the world, while aiding decision making and planning processes.

Commodities outlook improves

Commodity prices are rising and new projects are being approved around the world as energy majors, having driven down costs, begin to invest some of their cash stockpiles, writes David Kershaw.

Commodity prices strengthened in the first quarter of 2018, supported by both demand growth and restricted supply.

The outlook painted by the World Bank’s latest Commodity Markets Outlook sees oil prices rising by 22 percent, from an average of USD53 in 2017 to USD65 per barrel in 2018 through to 2019.

Global demand and continued production restraint by OPEC and non-OPEC producers should serve to prop up prices. Higher oil prices are expected to eventually feed into higher natural gas prices, which the World Bank expects to increase by 8 percent in 2018.

Coal prices will continue to decline to an average USD85 per tonne in 2018, as energy demand shifts towards cleaner energy sources.

Rising oil prices and limited supply are telltale indicators that the energy majors will reach into their pockets and start investing in new exploration and production (E&P) activities. Offshore suppliers have been busy in recent years streamlining operations and reducing their cost base.

The current tailwind in the oil market is likely to propel 100 new offshore projects to be sanctioned in 2018, with a value of approximately USD100 billion, according to Rystad Energy. This compares with only 60 projects in 2017 and below 40 in 2016.

“The offshore suppliers have created their own comeback,” said Audun Martinsen, vice president of oilfield service research at Rystad Energy. “Their constant search for cost reductions and streamlining of operations has enabled them to cut offshore project costs by almost 50 percent compared with the heights of the last cycle.”

Shortening lead times

“Not only are the suppliers charging less for their services, they have also improved the efficiencies of their operations, thus shortening lead times from project sanctioning to first oil. As an example, the time required to drill and complete a well has fallen by 30 percent in the North Sea, the Gulf of Mexico and Brazil over the past four years,” Martinsen added.

Rystad forecasts that about 30 project approvals would come through in Asia this year, including Pegaga in Malaysia and D6 in India. Some 30 projects could come online in Europe, including Neptune Deep in Romania and the already sanctioned Penguins redevelopment in the UK.
Africa should approve nearly 20 projects, including Zinia 2. A similar number is predicted in the Americas, where major schemes like Vito and Mero 2 are maturing.

“E&P companies have more free cashflow at hand in 2018 than they did during the recent peak years of 2008 and 2011. In fact, 60 percent of the companies looking to finance their project development costs can do so through their cash flow. Supported by strong oil
prices, we see a very small risk of these projects not materialising,” Martinsen said.

However, Wood Mackenzie’s second annual State of the Upstream Industry survey, published in April, states that financial health rather than growth remains the priority for upstream oil and gas companies, with low-risk growth still preferred by the sector.

Mergers and acquisitions

Wood Mackenzie did suggest that asset mergers and acquisitions (M&A), as well as frontier exploration, are more attractive options this year than in 2017.

Martin Kelly, Wood Mackenzie’s head of corporate analysis, said: “The industry’s growing confidence is evident in spending expectations, too. More will be spent globally and in each region this year compared with last year. Capital investment, exploration investment and M&A spending will all increase by at least
10 percent year-on-year.”

About CapProCon

CapProCon a weekly e-newsletter detailing contract awards and developments in the oil and gas, power generation, mining, civil and industrial infrastructure sectors. To learn more, click here.

This website provides just a snapshot of what’s on offer in the CapProCon e-newsletter.

The newsletter, published in association with Heavy Lift and Project Forwarding International (HLPFI) magazine, is designed for those looking to identify project logistics opportunities relating to major industrial projects around the world, while aiding decision making and planning processes.

The Transocean Spitsbergen drilling rig. (Photo- Kenneth Engelsvold)
The Transocean Spitsbergen drilling rig. (Photo- Kenneth Engelsvold)

Saudi Aramco: Arabiah EPC deal, denies profits

Bloomberg has reported that Saudi Aramco made a net profit of USD33.8 bn in the first six months of 2017, making it the world’s most profitable company.

It is almost totally free of debt and enjoys production costs running at a fraction of the industry standard. The eye-catching numbers, if accurate, mean that the secretive Saudi energy giant is more profitable than Microsoft, JP Morgan and ExxonMobil combined.

Saudi Aramco said in a statement: “This is inaccurate, Saudi Aramco does not comment on speculation regarding its financial performance and fiscal regime.”

Saudi Aramco selects Arabiah contractor

Meanwhile, the Dhahran-based petroleum and natural gas company has selected SNC-Lavalin to install additional facilities for a major gas processing facility in Saudi Arabia’s Eastern Province. SNC-Lavalin will construct the Arabiah condensate handling facility and sour water disposal unit project at the Wasit gas plant. Work is already underway with a target completion date of late 2019.

saudi aramco. SNC lavalin

The Capital Projects and Contracts (CapProCon) e-newsletter, distributed every Monday, includes dozens more updates and developments. To learn more, click here.

Capital Projects – news in brief – April 18, 2018

A quick round up of major capital projects and industry developments witnessed this week. To learn more about the CapProCon e-newsletter, click here.

New Zealand’s Prime Minister Jacinda Ardern said her government “has a plan to transition towards a carbon-neutral future, one that looks 30 years in advance”. In a bid to hit this target, New Zealand will grant no new offshore oil and gas exploration permits.

The ban applies only to new permits and will not affect the existing 22 offshore exploration blocks in the energy-rich Taranaki region. The move by New Zealand comes weeks after Shell sold its final oil and gas permits and producing assets to Austrian firm OMV.

Oil capital projects

Also the oil and gas arena, BP said it has approved the development of Ghazeer, the second phase of the giant Khazzan gas field in Oman, in cooperation with Oman Oil Company Exploration & Production. The final investment decision (FID) for Ghazeer follows the successful start-up of Khazzan’s first phase of development in September 2017.

BP also revealed that it has established a strategic alliance with Petrobras committing to exploring potential commercial agreements in upstream, downstream, trading and across low carbon initiatives, inside and outside Brazil.

In the civil infrastructure field Reliance Infrastructure (RInfra) and Tata Projects have won five contract packages for the Mumbai Metro line-4 project. Meanwhile, construction of the 473 km-long four-lane highway between Nairobi and Mombasa, Kenya, will be delayed amid concerns that the country is taking on too much debt.

The Capital Projects and Contracts (CapProCon) e-newsletter, distributed every Monday, includes dozens more updates and developments. To learn more, click here.

New Zealand capital projcts
New Zealand has banned all new offshore oil and gas exploration permits. Source: Wikimedia Commons – Wikikiwiman

Oil project awards in brief

Various oil projects were announced over the past several days. To receive these updates, plus dozens more, directly to your inbox, please subscribe to the CapProCon newsletter.

Last week Total, Borealis, and Nova Chemicals said that affiliates of the three companies will form a joint venture focusing on petrochemicals on the US Gulf Coast.

The joint venture will include the under-construction 1 mn tonne per year ethane steam cracker in Port Arthur, Texas; Total’s existing polyethylene 400 kilotonne per year facility in Bayport, Texas; plus a new 625 kilotonne per year Borstar polyethylene unit at Total’s Bayport site, following a decision on the outcome of an acceptable EPC contract.

LTHE and Saipem deals

Meanwhile, L&T Hydrocarbon Engineering (LTHE) secured a USD341.79 mn EPC contract from Al Dhafra Petroleum Operations Company for field development in Abu Dhabi. The scope of the contract includes EPCC of flow lines, gathering facilities and pipelines to transfer crude oil and gas from Haliba fields to a processing facility at Asab. It also includes the installation of 132 kV and 33 kV overhead electrical transmission lines.

Finally, Saipem won a contract valued at approximately USD750 mn for the EPCC of new facilities at Duqm refinery in Oman.

duqm refinery oil projects

Mexico: as hot as a habanero

Majors, national oil companies (NOC) and independents are all scrabbling to get a slice of Mexico’s burgeoning oil and gas industry, according to analyst Wood Mackenzie.

Simon Flowers, chairman and chief analyst, said Mexico is ”as hot as a habanero, the spiciest of Mexican chillies”. The country is vying alongside the top drawer of proven oil provinces for scarce investment capital, such as Brazil and Iran.

Mexico’s proven reserves of 64 bn barrels of oil equivalent (boe) in fields discovered so far, is similar in scale to global giants like Norway, Brazil and the UK.

In the northern part of the Gulf of Mexico, in the deepwater Sabina Rio Grande play, Pemex has already made a series of discoveries in the Perdido area. Each may hold up to 400 mn barrels of oil. Further south in the Salinas Sureste basin, US independent Talos last year found 500 mn barrels at Zama.

Also in the south of the country in the Tampico Basin, explorers are attracted by structures offshore, similar physically to recent onshore discoveries, which could make for giant light oil or gas finds.

“Investment in recent decades has been comparatively modest, barely scratching the surface of many plays. There may be much more oil and gas yet to be found,” said Flowers.

Mexico attracts FDI

Mexico has recognised that it needs external investment capital for its oil and gas industry to flourish. Flowers said oil exports’ contribution to Mexico’s GDP has halved from 6 percent in 2004 when production peaked at 3.8 mn bpd to just three percent today. Oil production this year will be 2.1 mn bpd and will still be in decline into the early 2020s. NOC Pemex was not in shape to turn things around on its own.

The Mexican government has taken bold steps to create a favourable regulatory and fiscal environment, in bid to draw investments. The 2013 Energy Reform was a critical step, opening up Pemex’s monopoly to private investment. One measure of success is the number, quality and range of companies now active in the country’s upstream space.

“Over 80 E&Ps, including all the majors, numerous NOCs, independents, and a growing cadre of domestic small-caps have entered the sector in successive licence rounds. The integrated players see opportunities beyond upstream, in the gas value chain and downstream.”

Wood Mackenzie suggests that domestic political stability under President Pena Nieto has also been a key factor in the progress achieved.

This article was first published in CapProCon. To subscribe, click here.

habanero Mexico
The Mexican oil and gas market was described “as hot a habanero”.

Encouraging signs following oil price rise

Having started 2017 facing a lack of investment and high volumes in storage, the international oil and gas business saw a steady improvement over the course of the year, with the oil price gradually climbing and now approaching USD65 per barrel.

Some cite the production cut agreement worked out by the Organization of Petroleum Exporting Countries (OPEC) and Russia as being behind this recovery, but underlying factors supporting a continuing price rally are also apparent.

Price rally

Some commodity investors suggest that oil prices could surge as high as USD110 per barrel this year. Bullish investors point to the fact that inventories continue to fall, with demand forecast to increase this year. OPEC is expected to restrict oil production output until at least the end of 2018.

The US Energy Industry Association (EIA) reported another strong drawdown in crude stocks for the week ending on January 5, 2018. At 419 mn barrels and falling, US crude inventories have not been this low since early 2015.

On the demand side of the equation, OPEC sees demand growing at a brisk 1.5 mn barrels per day in 2018; the International Energy Agency (IEA) expects a softer 1.3 mn barrel per day growth this year.

Encouraged by the rising oil price, there has been talk of restarting previously postponed projects, which would be good news for the project logistics companies that serve this sector.

But there has also been the suggestion that price increases could slowly undermine the willingness of Middle Eastern producers to comply with agreements made with OPEC, which would create further uncertainty in the sector and could negatively impact oil prices.

This story was first published in the CapProCon e-newsletter.

oil and gas. Capital Projects and Contracts.

OPEC: striving for balance

One year ago the Organization of the Petroleum Exporting Countries (OPEC), plus ten other producers, forged an alliance to reduce their output in a bid to bolster prices.

The fall in oil prices, from a peak of USD115 per barrel in June 2014 to under USD35 at the end of February 2016, had a profound impact on the oil sector and its wider supply chain. The drastic measures adopted in 2016 to address a global stock glut have contributed to oil’s recovery to around USD60 per barrel today.

Ahead of OPEC’s meeting in Vienna later this week, industry analysts suggest that further producers could join the alliance. Currently, the group is removing 1.8 mn bpd of crude oil out of the markets, compared to 2016 levels.

OPEC production cut

The scheduled end of the production curb is currently March 2018. This date, however, could be extended to the end of 2019, following statements made by the Saudi Arabian and Iranian oil ministers – OPEC’s two largest producers.

The effect that any extension will have on oil prices is debatable. In late May 2017, the group decided to prolong the output curb from June 2017 to March 2018. Oil prices fell 20 percent over the next month.

In recent weeks, European and US oil prices have climbed to between USD60 and USD65 per barrel, a year-on-year increase of between 20 and 30 percent. Tensions in the Middle East, triggered by Saudi Arabia’s assertive foreign policy towards Lebanon and Iran, have also supported the oil price in recent weeks.

If oil prices were to continue on their upward trajectory, it’s likely that North American producers would increase their output, contrary to the interest of OPEC and its allies.

OPEC oil and gas