Petroleum Companies Need to Focus on Reducing Industry Cost

Petroleum Companies Need to Focus on Reducing Industry Cost
Companies need to reduce petroleum industry cost to bring offshore hydrocarbons into production economically, speakers at a conference in Singapore say.

The petroleum industry needs to bring down the cost of exploration and development projects to ensure that offshore hydrocarbons can be brought into production economically, speakers at the Sea Asia 2015 conference in Singapore said Tuesday.

"There is a lot of oil, particularly in deepwater, which is only viable at about $70 (a barrel). If we are in an environment at $50 to $70 (a barrel), then they are never going to be produced unless we can get the cost down below," Andreas Sohmen-Pao, BW Group chairman said. 

While oil prices, which declined nearly 50 percent since the second half of 2014, have adversely affected the petroleum sector and led many firms to cutback on capital and operating expenditures, the issue of industry cost is seen as the more acute problem.

"The problem is not the oil price at all, the problem is the cost of the industry ... when the oil price was coming down from $110 to $100 (a barrel), that's when the (companies') profitability went down. That's when the projects stopped being sanctioned. That's when exploration drilling started to decline ... so in the offshore industry ... you have to solve the problem of cost in the industry," Claus Hemmingsen, CEO of Denmark's Maersk Drilling commented.  

Investment in offshore oil production is still needed as supplies from shale only replaced the decline in conventional onshore oil production.

"Investment in offshore oil production has increased from $150 billion a year to $360 billion a year over 10 years to maintain a production of 28 million barrels a day ... U.S. shale has not replaced offshore production, but (only) ... replaced conventional onshore oil production decline," Hemmingsen said.

Still, the short-term outlook arising from low oil prices poses a tremendous challenge to the offshore oil and gas industry, particularly for the rig sector.

"There is overcapacity that we haven't seen for 15 or 20 years ... with more than 125 jackups being delivered," the Maersk Drilling CEO added.

On oil prices, Sohmen-Pao expected the level to hover at around $70 a barrel as sufficient supplies will be made available by the market.

"I went to talk to a lot of oil companies in Europe and U.S. and ... most people now are saying there is enough oil at $70 per barrel, we will not run short for some time to come, so (we need to) get use to current pricing," he said.

While Saudi Arabia, OPEC's key producer, used to have an excess production capacity of 2 million barrels a day, "shale can give us up to 10 million barrels per day of extra oil as long as the price is around $70 ... technology is bringing that price down ... so shale has completely changed the game. We have enough oil for a long time to come," the BW Group explained.


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Obioma Nnawuihe  |  April 22, 2015
Reduction in the cost of production in the oil sector has been a herculean task for oil companies in veiw of the dawdling oil price. Companies should now begin to focus on other bye product of crude production like gas flaring etc and it effective usage in order to generate more funds to sustain the sector. Flex budgeting is also to be adopted in analysing the cost implications of projects before going into big projects. OPEC big player members like Saudi Arabia should also be persuaded consistenly to see how they can help push up oil price while major oil companies seek for alternatives to crude money. Finally African Market presents also one of the best opportunities in this diversification process in terms untapped resources, lower cost of manpower, overhead, flared gases un-utilized etc

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