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    Sharing risks and rewards [NGW Magazine]


Top upstream executives told a conference in London that the drive for cost-savings since the 2014 price crash must be maintained. Contractors countered that could risky. (This article is featured in NGW Magazine vol.3, Issue 20)

by: Mark Smedley

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Complimentary, Top Stories, Africa, Americas, Asia/Oceania, Middle East, Europe, Premium, NGW Magazine Articles, Volume 3, Issue 20, Exploration & Production, Investments

Sharing risks and rewards [NGW Magazine]

Exploration and production (E&P) chiefs of BP and Total together with ExxonMobil’s global exploration chief and Chevron’s Africa/Latin America chief were gathered there on one panel to discuss deepwater opportunities at the Oil & Money (O&M) conference October 10.

BP upstream chief Bernard Looney said that subsea infrastructure costs for the sector had been reduced by 56% since 2011 due to a focus on productivity. The company could now look forward to having more production in the US Gulf/North Sea in 2025 than it has today as a result. BP also has a drill-out campaign in the Azeri Caspian Sea, and lots left to find offshore Nova Scotia, Canada and in the US Gulf, adding that offshore Brazil’s national oil production is about 3mn b/d – and growing.

“We’re in Mauritania/Senegal where we’re very excited about the next couple of years,” added Looney, referring to the expected FID shortly on Tortue floating LNG where BP partners Kosmos.

A dollar today gets you much more than a dollar did in the past, the BP E&P chief concluded.

Arnaud Breuillac, his opposite number at Total, said his company has 1bn barrels of oil equivalent that can be developed on a short-cycle across its portfolio. He talked of the merits of retaining such quality acreage. Total typically keeps about 35% of its assets that are “near-field mature exploration” and it was whilst drilling out such an asset that it discovered the estimated 1 trillion ft3 Glendronach gas discovery in September 2018 – at a depth of 4,132 meters below its existing UK west of Shetland Edradour field (Total operator 60% alongside Ineos and SSE each with 20%).

Total’s Breuillac extolled the virtue of benchmarking its portfolio at $50/boe.

Controlling costs

Asked earlier that day whether the upstream sector would go “off to the races” on operating costs – loosening the leash on cost controls - BP CEO Bob Dudley responded that the industry had “such a painful experience” and that BP would stay disciplined: “We plan on a $60-$65/boe future, not $80.”

Dudley also acknowledged that service companies had reduced costs too, describing the shift as a “fundamental change.”

Also with Breuillac and Looney on the deepwater panel, Chevron’s Africa/LatAm E&P chief Clay Neff remarked too: “You look ten years ago, and now, and see we’re in a whole different place.” But he quickly added: “We need to downturn costs so that we are durable into the next phase.”  For the service sector though, that cost-curbing is creating systemic stress.

And speaking separately, the CEO of French major Total, Patrick Pouyanne, held out little hope of the trickle-down effect of high oil prices, despite the wave of upstream investment decisions to come.

He said Total had a pipeline of some 25 projects needing sanctioning over the coming few years as legacy projects decline. This would help mop up some of the capital the company had built up with the revenues from higher oil prices.

"There is no problem regarding allocation of capital," he said. He dismissed worries about cost inflation as there was now spare capacity in the service industry, which he estimated was under-used by about 40%. Further, many of the companies that had needed that capacity in the past had shifted their focus from offshore to onshore US, he said. "Costs are low and will remain low for some time," he said.

High impact exploration

Chevron’s Eurasia and Mideast counterpart, Todd Levy, in a previous O&M panel said that his firm had not shied away from big projects, staying in deepwater Australia and the Kazakh Tengiz oilfield.

On that same panel, BHP’s petroleum chief Steve Pastor also said there was a lot of mileage yet in the US Gulf and over the border in offshore Mexico too.

BHP’s Pastor also said there were potential resources in the unexplored deepwater basin offshore Trinidad & Tobago, where his company remains an explorer: “We hope it’s on trend with what has been found by ExxonMobil and others offshore Guyana.”

ExxonMobil exploration chief Michael Cousins accepted the praise of his peers for those Guyana oil discoveries on the US supermajor’s behalf in the subsequent O&M deepwater panel. But he pointed out that Exxon, partnered by Total, had drilled in deep waters off Uruguay – a similar river delta fan play – but hadn’t succeeded. BP’s Looney though added: “But it has worked offshore Mauritania/Senegal,” referring to Kosmos and Cairn’s success in finding gas and oil there – an area that not just BP but also Exxon, Total and Malaysian state Petronas have piled into since.

Too Much Risk

Sharing the prior panel with Pastor and Levy though were the heads of engineering contracting giants TechnipFMC and Baker Hughes GE (BHGE). Neither held back about their concerns.

“Risk is being accepted into the supply chain,” said TechnipFMC executive chairman Thierry Pilenko: “At some stage, someone will not have the capacity to manage that risk.”

Contractors were under pressure to agree to reducing their profit margin while providing the same consistent quality, he said. At some point, that pressure gives.

Pilenko cited an example of TechnipFMC had headed off problems later in the supply chain. His company spotted how 32% of welds on one project being fulfilled by a sub-contractor in South Korea were sub-standard. The normal rate of welds requiring re-finishing would be 5% to 6%, while a good rate would be 2%-3%. The cause, he explained, was that TechnipFMC’s sub-contractor in turn was “sub- sub- sub-contracting” work to others. “Let’s be very careful about the acceptance of risk,” cautioned the TechnipFMC chairman.

BHGE chief executive Lorenzo Simonelli agreed. “The worst thing about this industry would be if we have a growth cycle – but the service sector finds it has made no money. This cycle has to be sustainable,” he told the same panel.

TechnipFMC’s Pilenko said that it is under scrutiny not only from customers in the upstream, but also from its own investors, about how it spends its money. Shareholder investors “want asset-lite models,” he said, ruing that nowhere is there much appetite for capital investment in the sector: “Something has to change.”