Philosophical shift for new world order

PRELUDE FLNG is the “poster boy” for inefficiencies in Australia’s LNG patch, according to a Douglas-Westwood analyst, but there is still a positive future for the sector, which globally will be driven by supply chain costs rather a focus on breaking even at near-term prices.
Philosophical shift for new world order Philosophical shift for new world order Philosophical shift for new world order Philosophical shift for new world order Philosophical shift for new world order
 
In 2016 there was much talk about how Woodside Petroleum's Browse LNG development would need to breakeven at $30-40 oil, before it was eventually shelved.
 
Yet, as the US shale production wildcard casts a shadow over the effectiveness of OPEC and non-cartel producers' recently agreed cuts - if they're even implemented properly - a DW expert told Energy News that oilers, particularly deepwater operators, are looking more at long-term fundamentals.
 
DW's Singapore-based director Asia Pacific Thom Payne said yesterday that a number of deepwater operators went back to the drawing board regarding subsea costs and shaved 70% off their initial estimates, made when they were budgeting for a $100 oil environment.
 
"We've already seen a lot of offshore deepwater companies move away from the idea of figuring out breakeven costs for a particular oil price to, like Statoil, thinking ‘ if we can get this project at a certain cost level then it will be profitable over 20-30 years'," he said.
 

Impact

 
Payne believes these kinds of changes and efficiencies will have the biggest impact in 2017, a period for which DW is still bearish, believing that oil prices will be capped at $US55/bbl.
 
However, he concedes that forecast could unravel if producers such as Russia don't stick to their promises made in the past month.
 
DW expects an uptick in spending next year, and while Payne said Prelude was the "poster boy for inefficiency when it comes to budgeting for projects", the firm believes a lot of costs will be coming out as the local oil patch learns lessons from developments in other regions such as the North Sea and Gulf of Mexico.
 
"[There] we have seen operators going back to the drawing board on projects they previously expected to get sanctioned to have a different configuration," he said.
 
"It's these kinds of things that lend themselves well to a revival in Australia, and certainly we still see a pretty healthy backlog of projects we're expecting to come on stream.
 
"We may not see as big a pie for the supply chain - there might be less dollars going in - but the overall volumes of work should be somewhat similar, and that's going to be a key characteristic of the market as we move to a recovery phase.
 
"In fact, there has been a lot of work even in the downturn, it's just that pricing has been structurally challenged and I don't think we're going to see a return to those $100/bbl pricing levels any time soon.
 
"Some of the efficiencies are being driven through consolidation in the supply chain, but it's also because these guys are being forced to forgo some of the bells and whistles they wanted to put on in 2012-14."
 

Recovery

 
Payne said any recovery in the supply chain must be cost driven rather than dictated by the price of oil. 
 
Yet the antics of the world's biggest producers must be watched, in what Payne sees as a new "game of chicken" between OPEC and non-cartel producers who agreed to production cuts after years of war between Saudi Arabia and US shale producers.
 
"They're all going to be looking at each other and seeing who's going to edge up first, who's going to move away from the quota," he said.
 
"If the price starts to move north - it already has and there's a good argument it will continue to do so - these guys are going to be incentivised to start increasing their production slightly, and historically they haven't stuck to their plans.
 
"The wildcard there is that as prices start moving north, we'll see mobilisation of rigs into the US shale basins, where there has been significant cost cutting.
 
"The only ones who will benefit will be US shale because they'll flood the market and the price will go back down. So there are a lot of moving parts to this quota."
 

Profitability

 
He believes that while the industry will not see $100 oil again any time soon, the sector will still return to profitability, though "there's still quite a lot of supply chain manoeuvring that needs to happen".
 
"All it takes is for something to happen to the OPEC accord and it will change the $55 consensus outlook dramatically. We haven't seen how much US shale drilling that can occur at $55," he said. 
 
"That's a big wildcard, as US rig counts continue to grow week on week.
 
"There are more moving parts in determining the oil price than there have been over the past 15 years, which makes it inherently difficult to get an outlook. 
 
"The industry is no longer entirely dependent on the oil price. Companies are now thinking a lot more about the bottom line.
 
"The thinking is, ‘If we're competent internally and this is a good cost level for this project then yes, we will make money because we believe in the long-term fundamentals'," he said.