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Cost Overruns Threaten Offshore Development

The prospect of oil prices remaining at about $60 a barrel, combined with impressive cuts in development and operational costs since 2014, have encouraged E&P companies to accelerate development of their offshore projects including Mad Dog Phase 2 in the Gulf of Mexico, the Azeri–Chirag–Gunashli in the Caspian Sea and the Tortue and Bonga Southwest field off the coast of West Africa.

Sanctioning of offshore field projects to rise

Indeed, Rystad Energy expects sanctioning of offshore field projects to rise to around $100 billion a year over the next four years, or double the annual average of 2015-18. But, rushing the final investment decision, especially for tailor-made designs, can increase uncertainty over the final cost by as much as 20 percent either way. Consequently, “for offshore operators, that means the expected variation for projects to be sanctioned during the period from 2019 to 2023 could be as high as $220 billion” according to a June 2019 study by Rystad Energy.

The need for good planning

Quite naturally, the success rate of sanctioned projects around the world varies widely. As Rystad Energy demonstrates, even taking into account funding based on a thorough engineering definition, operators could still see a cumulative $111 billion cost overrun. Indeed, Rystad has found cases in which accelerating a sanctioning decision without proper engineering definition can often result in actual costs exceeding target costs by up to 50 percent. Read more https://www.rigzone.com/news/cost_overruns_threaten_offshore_development-01-jul-2019-159178-article/

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