Monday, February 6, 2023

Guyana, Brazil will have to brace for costlier deepwater projects

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In a recent analysis of deepwater developments, Wood Mackenzie said that supply chain constraints remain a concern. And this spells difficulty for operators under pressure to increase drilling and production at a time when energy markets have been sent into a tailspin by Russia’s war in Ukraine.

WoodMac said service companies have made huge fleet reductions for key equipment such as floating rigs and production systems since the peaks of the 2010s. With activity levels growing, the research consultancy said equipment and services availability will be a constraint.

“Cost inflation will continue to risk project economics as higher utilisation combines with higher commodity prices,” WoodMac said. “In some regions deepwater rig costs have doubled compared to 2021 day rates. It has hit global hotspots such as the US [Gulf of Mexico] GoM and Brazil hardest, Gato do Mato in the Brazilian pre-salt for example, will be delayed by up to two years due to rising costs.”

WoodMac said constraints in the global deepwater supply chain will, with time, increase lead times and unit costs across the board. Participants have pushed operational efficiencies such as cutting drill-days and modularising facilities to offset some of the impact, the firm explained, but the hard-fought efficiency gains made during previous downturns are starting to reverse.

At the centre of this are two nations with long-held plans to ramp up deepwater oil production in this decade by more than 3 million barrels per day (bpd) collectively – Guyana and Brazil.

IHS Markit had said several months ago that Brazil’s Petrobras was faced with bids to supply pricey floating production, storage, and offloading (FPSO) vessels for its offshore projects.

Petrobras this year ordered P-80, P-82 and P-83 FPSOs at prices ranging from US$2.8 billion to US$3.05 billion a piece. All three vessels are being designed to produce approximately 225,000 bpd.

But the highest price tag on a bid came from the Brazilian contractor Ocyan for the FPSO to Sergipe Aguas Profundas (with 120,000 bpd of oil processing and 8 million cubic metres per day for gas exporting), in a Build-Operate-Transfer model. IHS said the contractor proposed a US$4 billion price tag for the EPC of the unit and four years of operation, with conditions pointing to the war between Russia and Ukraine. Petrobras, according to IHS, cancelled the tender in May this year, surprised by the price and conditions. If this project is not pursued, it wipes 120,000 bpd to Petrobras’ 2022-2026 strategic plan to up offshore production by 2.2 million bpd.

IHS Markit said the high prices are the new normal.

In Guyana, the plan is to have six FPSOs operating in the Stabroek Block by 2027, at 1.2 million bpd, with potential for a total of 10 closer to the end of the decade.

While the first four sanctioned projects are being managed essentially unscathed, the fifth project (Uaru) is expected to carry a higher cost. Hess Corporation’s Chief Financial Officer, John Rielly said, “while the Uaru project is going to have industry-leading returns and a low cost of supply, the cost of the Uaru project will be higher, reflecting the current market conditions as well as additional scope to reduce greenhouse gas emissions.”

And by higher, he is assumed to mean higher than the fourth project (Yellowtail), which bears largely similar specifications and, it is estimated, will cost US$10 billion to develop. SBM Offshore had to secure US$1.75 billion financing for the FPSO, titled ONE GUYANA, which will be producing 250,000 bpd. Exxon awarded a contract to MODEC for front end engineering and design (FEED) for the Uaru project, establishing the Japan-based company as a competitor to SBM Offshore which, up until this project, has been building and supplying all Guyana FPSOs.

ExxonMobil, the operator, is expected to submit the field development plan (FDP) for Uaru before the end of 2022. The total estimated cost of the development is usually revealed when the government approves the project, and the partners take FID. If the review process goes as is typical, FID is expected in the first half of 2023.

Commended by its Stabroek Block partner, Hess, for its work on Guyana’s projects, ExxonMobil has proven itself a time- and cost-efficient project manager. It remains to be seen how well the oil major will be able to manage the current environment’s constraints to the benefit of Guyana and its shareholders, for Uaru and the FPSOs to follow.

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