Wood Mac: Norwegian Incremental Projects Growing in Importance

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Wood Mackenzie shows that favorable project economics compared to greenfield developments are driving incremental projects in Norway's upstream sector.

In new research prepared for the ONS 2014 conference in Stavanger, Wood Mackenzie said Monday that the role of incremental projects in the Norwegian upstream sector is set to grow in importance in relation to greenfield projects. The research firm said that almost half of Norway's $200 billion upstream development spend over the next decade will be accounted for by incremental projects.

Lennert Koch, Wood Mackenzie's senior research analyst for the upstream industry in North West Europe, commented:

“As the Norwegian Continental Shelf is maturing and the government wants to increase overall recovery rates from 50 to 60 percent, brownfield and incremental projects are becoming more important. We estimate that incremental projects – such as compression installations, infill drilling programs and field redevelopments – account for almost half of the estimated $200 billion of upstream development spend over the next 10 years."

Wood Mackenzie said that the upstream industry is in a period of intense investor pressure, meaning greater scrutiny of capital allocation and project screening. For these reasons the Norwegian industry is having to look carefully over whether to invest in greenfield developments or incremental projects. The firm has found that, on a cost-per-barrel basis, incremental projects stack up favorably.

Wood Mackenzie said that it has compared the economics of Norwegian greenfield developments against those of five large incremental projects: Åsgard subsea compression, Heidrun Nord Flank, Hod redevelopment, Ormen Lange subsea compression and Valhall Vest Flank. Combined, these projects carry a total investment of $11 billion (NOK 69 billion) and will add estimated reserves of 1 billion barrels of oil equivalent, increasing the recovery factor of the initial fields by an average of 9 percent, greatly contributing to the overall increase in recovery rates for Norwegian fields. 

The analysis reveals that while some of the projects Wood Mackenzie profiled are challenging, their economics are in line with Norway's greenfield projects. In fact, the average investment capex per barrel of these projects is 30 percent lower and average rate of return is 18 percent, which means a reduced economic risk to the companies involved in addition to the lower perceived subsurface risk.

However, Koch cautioned: "Several of the incremental projects have already seen large increases in estimated costs, eroding their value which importantly shows that they are just as much at risk of being cancelled as low value greenfields."


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