VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH? San Donato Milanese – 20 November 2014 L’esplosione dei costi – il nemico N°1 Daslav Brkic Senior Vice President Business and Technology Development Saipem 1
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
San Donato Milanese – 20 November 2014
L’esplosione dei costi – il nemico N°1
Daslav Brkic
Senior Vice President Business and Technology Development
Saipem
1
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
The cost explosion
Upstream Capital Costs Index
250
200
150
100
Q4 2014: 238
Q1 2014: 232
Costindex (
2000=
100)
Source: IHS Energy (August 2014 )
2000 2002 2004 2006 2008 2010 2012 2014 2016
0
2
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
Russia
3
Nigeria
Many causes: difficult and inaccessible locations…
Kazakhstan U.A.E.
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
But also…
Underestimation of project costs
Inaccurate designs
More expensive new reserves
Incredibly more complex projects
Higher costs throughout the entire supply chain
Tight labor market
Skills shortage
Bureaucratic barriers, regulatory and permitting issues
Geopolitical challenges
Exchange rate fluctuations
Source: KBR (2007) from Oxford Institute for Energy Studies (2014)
4
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
ROCE data include Anadarko, Apache, BG Group, BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Hess, Marathon Oil, Occidental, Repsol, Shell, Statoil, and TOTAL. Upstream ROCE defined as [Upstream Net Income / Upstream Year-End Net Capitalized Costs].
Consequences: Declining oil company returns even in a high oil price environment
5
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
6
Consequences: Declining growth rate and margins for EPC contractors
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
7
Consequences: Investment contraction
Numerous project cancellations, postponements
Tighter Capex discipline from oil companies
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
• Reduced expectations of economic growth
• Abundance of oil and gas supply
• Stronger US $
• OPEC’s quest for market share
Impact of oil price sudden collapse?
It is early to draw long–term conclusions
and clear forecasts for the future
Source: EIA - US Energy Information Administration
8
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
More accurate, more realistic initial project estimates
Broader acceptance of alternative Vendors and subcontractors from low cost markets (particularly China)
More design optimization and value engineering
Re-visitation of execution approaches and contractual forms
CAPEX reduction efforts
9
Smaller EPC LSTK packages
Return of PMCs
Direct execution of certain EPC components by some IOCs
Technology development programs for cost reduction
Frame agreements with quantity discounts - Collaborative sourcing
Alternative contractual arrangements e.g. "Hybrid Convertible"
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
Source: Author, Oxford Institute for Energy Studies (2014)
Example: LNG liquefaction plants capital cost escalation (US $)
10
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
11
Rapidly growing project costs - A major obstacle for new LNG projects
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
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Source: KPMG (2013)
Australia: A boom in oil & gas and mining investments
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
13
Source: KPMG (2013)
Numerous new projects on the drawing board
But:
"A$ 150bn of projects at
feasibility or FEED stage
were delayed or cancelled
over the past 12 months"
VIII Convegno Sezione Logistica, Trasporti e Spedizioni COST SAVING...REALITY OR MYTH?
14
Conclusions
While today the oil and gas industry certainly has many challenges, rising costs are a major factor
The causes are numerous, and our industry is actively looking for several mitigating programs