US full cycle upstream cost.
Source: EY analysis data
F&D expenses Lifting costs Other costs Taxes
2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
DEEPWATER MARKET REVIEW
Innovation can sustain deepwater
market at current prices
Costs must be brought down to align with a 3% inflation rate
Deepwater projects can be developed at current oil prices if industry stake- holders act together to cut all costs down to realistic levels. It has been done before: the industry has shown
great ability to overcome economic challenges in past downturns.
Economic fundamentals alone (supply vs.
demand) do not govern commodity prices
anymore – those days are gone forever. Prices of commodities are essentially manipulated and controlled by a few big unregulated financial institutions, hedge funds, derivatives,
and other speculative forces that play by their
own rules of engagement. This is similar to
how the stock price index bubble moves up
and then gets corrected down. The overall
long-term price trend remains a basic inflationary increase within the ups and downs of
supply and demand. In between, speculation-driven price trends go up and down at a lower
frequency; and the occasional nose dive is a
so-called price correction.
The oil and gas industry is no exception
to this phenomenon. The trend in oil price
consists of three parts: a long-term steady
inflationary rise; a short-term (days and
months) supply and demand interaction;
and occasional external (mostly derivative-driven) speculative force lasting a few years.
In the energy sector, there are other minor
factors, such as strict emission control and
advances in renewable clean energy, affecting the price of oil.
During the last decade, capex and opex
have risen steadily at nearly the same pace
with the price of oil. Full-cycle costs are up
about $60 to $65/bbl from about $18/bbl in
the year 2000. This is not sustainable. It is
imperative that production costs come down
equivalent to realistic oil prices. Visionary
leadership must challenge the business as
usual and promote a culture of innovation to
technology, safety, and operations to reduce
cost, increase recovery, and improve safety.
All stakeholders in the oil and gas indus-
try (operators, drilling contractors, consult-
ing engineers, installation contractors, and
service contractors) will have to adjust and
learn to sustain with reasonable profit at
the basic inflationary trend in oil price. This
means that the industry must be able to sup-
port capex, opex, plus a profit at the baseline
oil price. Part of the find and development
(F&D) cost may come from the extra rev-
enue generated from the increased price
driven by speculative force of the derivative
market. This is likely going to be the “new
normal” of the industry.
A new innovative subcontract service,
proposed below, may offer a strategy for
reducing the lift cost part of opex, and can
probably help improve the cost and schedule of brownfield work.
Oil price volatility is nothing new, but the
recent decline and fluctuation at relatively
low levels is something the industry may
have to deal with for some time. So what
is the expected price of oil in 2016 and be-
yond? A review of expert opinions reveals
that there are various schools of thought on
predicting oil prices. Projections range from
as low as $20/bbl to as high as $200/bbl
with respective justifying scenarios. Yes, any
price has a probability, however small that
may be; but no one has the crystal ball to
accurately predict oil prices in a globalized
economy that is subject to diverse geo-polit-
ical constraints, and pressured by specula-
tive forces. The industry must be pragmatic
and learn to live according to most probable
price, which must be based on the basic in-
flationary trend over a long period of time,
and supply and demand fundamentals.
The most probable long-term price trend
will follow economic fundamentals in terms
of supply and demand, with an inflationary
rise, unless disturbed by other external forces. Supply and demand-related price changes will get corrected reasonably quickly.
This is clearly visible in the price trend over
the last 30 years, which never fell below the
inflationary trend value. There were several
significant upward moves due to specula-tion-driven derivative market pressure.
If we consider a 30-year period and start
with an average price of $18/bbl in 1986 and
apply a 2%, 3%, and 4% inflationary increase,
the expected prices in the year 2016 are
$32.6, $43.7, and $58.4/bbl, respectively.
This means, an average price of $44/bbl,
based on 3% inflation, may be considered as