Time Is Money

The inordinate time it can take to bring projects online is nothing new. There are many examples of developments that took decades to flow.

The technologically challenging Kashagan Field offshore Kazakhstan, for example, was discovered in 2000 but is today only slowly spluttering into productive life after several attempts. There are plenty of less challenging fields that have taken equally as long.

In today’s nervous upstream business climate, elongated cycle times and delays are an anathema. They simply cannot be allowed—or afforded—to happen.

Essentially holding the rest of the global industry to account is the phenomenon that is the U.S. unconventionals business. Despite suffering most in terms of investment cuts—following the price plunge, shale investments have been slashed by 66% compared to offshore’s 34% since 2014—it also is best placed to ride any sustained price upturn.

This is thanks to its shorter lead times compared not only to offshore but the rest of the world’s onshore business, too. “For shale developments, we believe that investments will increase from 2017 (short lead times), while for offshore developments we expect to see increased investments in field development activity from 2019,” Jon Fredrik Müller, a partner at analysts Rystad Energy, told Hart Energy.

Shale’s advantage is its payback time, coming in lowest at four years (assuming a price of $70/bbl and eight years at $50/bbl).

Interestingly, in terms of breakeven price, both shale and shallow-water projects are equally attractive. But again, with that shorter payback for shale it is expected to see the largest capex growth (averaging 33% annually over the next five years).

Shale’s performance is dragging the rest of the industry along with it.

Luis Araujo, CEO of Aker Solutions, commented on this recently, stressing the benefits of project repetition and synergy where possible when “competing in an industry with a very short cycle.” Regarding offshore vs. shale as a resource, he added that “there is a place for everyone.”

There is a risk of sorts, however. Not long ago there was an equivalent push to reduce cycle times. When the oil price was $100/bbl, a fast schedule and resultant cash flow was king. Many operators pressed for reduced cycle times to get their projects onstream as soon as possible, with an almost “whatever the cost” approach in terms of engineering needs.

The industry must strive to continue to reduce cycle times, but it must do so without that “at any cost” mentality. If the oil price does continue on its cautious road to a more sustainable level, a little patience with schedules might go a long way toward creating the value needed.

Contact the author, Mark Thomas, at mthomas@hartenergy.com.