Across the European region the previous year has seen geopolitical challenges and regulation changes that have presented operators with a number of obstacles in progressing capital intensive projects, whilst the year ahead may well see more political change with a ‘Yes’ vote from Scotland on Independence potentially resulting in an end to the UKCS as a united sector. Despite this, Infield Systems expects capital expenditure to increase significantly across the region, with the number of field developments taking place offshore the North West European Continental Shelf (NWECS) expected to rise dramatically, in particular from 2016 onwards when, in terms of sheer numbers, marginal prospects within the UK North Sea are expected to form the largest share of fields coming on-stream during the forthcoming timeframe.
Across the European region as a whole, the next five years are expected to see continued capital expenditure growth, with Infield Systems forecasting a CAGR of some 13.7% over the 2014-2018 period, driven by developments such as BP’s continuing work West of Shetland and Statoil’s remote Aasta Hansteen project. This compares with the previous five years from 2009-2013, which witnessed relatively modest growth of some 3.6% CAGR; a reflection of the wider economic uncertainty and volatility in market prices at the time. Growth is expected to continue to be driven by Norway and the UK, with the latter expected to see capital expenditure demand driven by key projects such as Jackdaw, Mariner and the Maersk operated Culzean field, the latter of which saw KBR win its FEED contract in May 2014.
In terms of demand across the NWECS, Southern European and Eastern European sub-regions, the NWECS is expected to see its dominance extend over the forthcoming five years, with its market share of capital expenditure increasing to 73%, however, the Eastern European sub-region is expected to see the largest relative increase in market share, driven by the possible extensions of the giant Nord Stream and South Stream projects. However, with the ensuing crisis in Ukraine, a level of uncertainty is now present within the development plans for the offshore Eastern European market. Despite Russia’s intentions to press ahead with the development, the EU’s current order to halt current construction work on Bulgaria’s section of South Stream will inevitably affect the development’s timescale. Within the Southern European region, despite an expected increase in absolute capital expenditure demand, Infield Systems expects the market share of this sub-region to decrease over the forthcoming five years compared to the 2009-2013 period, predominantly as a result of the comparative growth in market share from the other NWECS sub-regions over the following five years. Key developments here are expected to include gas import pipelines, such as the Galsi Spa development bringing North African gas supplies to the European market and the TAP/IGI lines from Greece.
Looking specifically at the NWECS region, a total of nine countries are expected to undergo offshore Capex spend over the forthcoming five years, whilst the market itself will continue to be overwhelmingly dominated by Norway and the UK; accounting for a combined forecast 89% of offshore Capex demand for this sub-region over the forthcoming five year period. Statoil is expected to command a 66% share of offshore Capex over the 2014-2018 timeframe; an increase from the operator’s 40% share over the previous five years. Beyond the possible Nord Steam extensions, Aasta Hansteen remains the most capital intensive development expected to take place over the next five years, driving a significant proportion of demand for the entire European region. However, despite this forecast growth in Norway’s market share; driven predominantly by such projects as Aasta Hansteen and its 481 km pipeline Polarled, the previous year has been a challenging time for the Norwegian NOC.
Norway
With May of 2013 seeing the outgoing Norwegian government introducing new legislation to limit the tax deductions that can be negotiated by oil companies, marginal field developments, increased recovery projects and capital intensive prospects, such as those within Norway’s Arctic zones, are likely to be at risk and undergo re-evaluation by operators. These regulation changes have been particularly detrimental to planned projects such as Johan Castberg, whilst Shell has called into question the economic viability of its extremely complex Linnorm gas project. However, February 2014 has seen the current government propose a revision of these changes, introducing a transition period which would allow some projects to go ahead under the previous regime for a period lasting up to 2020. Some have argued however that the revision does not go far enough, with many fields falling outside of the transition scheme. A big question therefore still exists around the future of a number of marginal projects within Norway’s waters, whilst the government has not yet ruled out a reversal of the new legislation.
Whilst Statoil’s Johan Castberg prospect was called into question following May 2013’s taxation legislation, a raft of other issues has continued to place pressure on the development’s timescale. With an FPSO installation the most economically viable development option on the prospect, Johan Castberg is now unlikely to come on-stream before 2020. The Arctic field has continued to fall behind on expectations, with the recent discovery on the Drivis prospect only the second oil success near the field. Indeed, out of the five wells drilled in the vicinity of the field only two have resulted in valuable discoveries.
The Johan Sverdrup prospect, operated by Statoil and its partners is also expected to be central to Norway’s offshore development over the forthcoming five year period. The recent positive announcement that a recovery rate of 70% is achievable on the field, highlights Statoil’s strategic focus on increased recovery going forwards. The development, which is expected to be the most capital intensive field offshore Norway after Aasta Hansteen, is expected to generate between 120,000 and 200,000 barrels of oil per day and is anticipated to account for more than half of Norway’s oil production by 2040. Other key capital intensive developments expected to take place within Norway’s waters over the forthcoming five years are to include Martin Linge, operated by Total. Here, within the Norwegian sector of the North Sea, the French IOC is at the forefront of sustainable hydrocarbon production through introducing new solutions to reduce CO2 emissions. Once on-stream, currently planned for 2016, Martin Linge will produce 80,000 barrels of oil equivalent per day.
UK
With advances in technology, improvements in the regulatory environment and the profitability of marginal fields improving, significant opportunities remain within the UK’s offshore oil and gas industry. Infield Systems expects operator investment offshore UK to increase by 120% over the 2014-2018 time period compared to the previous five years, with BP, Total and Statoil expected to lead investment on key projects including the Quad 204 development, west of Shetland Satellites and Mariner. However, challenges remain within the NWECS, with both Statoil’s Bressay and the Chevron-operated Rosebank hitting industry headlines during the final months of 2013 as operators implemented new cost reduction strategies. Statoil has also recently announced a delay to the Mariner development by two months in order to complete its topside engineering work. Undergoing government approval in early 2013, the development itself is expected to be one of the largest projects ever undertaken within the North Sea. Once on-stream, which Infield Systems currently expects for 2017, the development is expected to produce around 55,000 barrels of oil per day; equating to 5% of UK output. Beyond these major projects, the maturity of existing developments within the North Sea has also acted to encourage operators to take a second look at marginal prospects. Indeed, the development of marginal fields offshore UK will be central to the continuation of economic recovery and maximising growth within the UK’s offshore sector, with Infield Systems expecting almost 50% of fields entering production offshore UK during the following five years to be a marginal development (with reserves less than <25mn boe and having lain dormant for more than ten years). With UK government incentives enhancing the economic viability of marginal prospects within the area, several operators are now pursuing the development of these fields as a strategic priority.
Elsewhere
Whilst the UK and Norway dominate NWECS capital expenditure, elsewhere within the region some interesting projects are expected to take place over the forthcoming period, particularly offshore Netherlands, Sweden and Denmark. Offshore Netherlands, various consortia are looking at CO2 injection pipeline schemes and in some potential political scenarios there may also be need for a second line for the BBL pipeline corridor between Callantsoog and Bacton. The import line, could extend to a total of 235km once completed, currently expected for 2018. Indeed, the pipeline sector is expected to dominate Capex demand offshore Netherlands over the forthcoming five years, with 71% of forecast spend directed towards the sector. Infield Systems also expects the pipeline sector to dominate development within the Baltic Sea during the period, with several potential side extensions to the Nord Stream pipeline system to be considered. One for instance could extend within Sweden’s waters up to a total of 220km, which is expected to be installed before the close of 2018. Offshore Denmark, capital expenditure is expected to be more diverse, with the pipeline sector forming the largest share of demand, but with Capex demand also expected on several fixed platform developments, the largest of which is expected to be the Amalie/Gita installation.
Whilst significant challenges remain across Europe, particularly in the immediate aftermath of legislative changes and political upheaval, robust demand growth remains forecast over the forthcoming five years, in particular for the NWECS sub-region. Whilst operators look to focus upon marginal field developments and increased recovery techniques, Capex demand will continue to be driven by giant capital intensive projects such as Aasta Hansteen and Johan Sverdrup, placing Europe at the forefront of technological innovation going towards the end of the decade.