Upstream Faces Higher Costs: WoodMac

The 2014 oil price collapse is still being felt across the upstream sector, with operators cutting investment, deferring projects and implementing cost discipline, slashing $910bn from global capital expenditure forecasts for 2015-2020, according to analysis by Wood Mackenzie published December 15.

But while many operators believe the cuts will stick, a new survey released today by consultancy Wood Mackenzie indicates the pictured is more nuanced and that savings next year will be materially lower than in 2016-17, particularly in the US, where the Lower 48 states saw 2017 capex increase almost 50% on 2016 spending. Drilling spend in the region is expected to increase from $64bn in 2017 to $90bn in 2020, but it said that "it will be interesting to see how cost inflation plays out against productivity gains in 2018. The greatest gains have already been realised as we have seen improvements in well productivity more than offset cost inflation in 2017."

Apart from the Permian, cost inflation in the US Lower 48 rose this year, spurred on by higher rig activity and the drawdown of the backlog of drilled but uncompleted wells, it said.

A key beneficiary of these initiatives is Europe where opex has fallen by a quarter since 2014 driven by lower labour and services costs, efficiency gains and higher production. "However, in Asia-Pacific, South America and parts of Sub-Saharan Africa, unit opex is already starting to increase due to a lower cost base, local content requirements and the growing need for enhanced oil recovery in mature assets," it said. Globally, Wood Mackenzie expects operating costs to start increasing from 2018, but still be 5-10% below 2014 levels in 2020.