Which One Was Yours and Why Will the Next One Be Better?

Field Development Projects

The Oil and Gas industry has undergone a few turbulent years. The industry operates in a landscape that is becoming increasingly volatile, uncertain, complex and ambiguous (VUCA). The downturn in the industry means uncertainty for all stakeholders. Having attended several conferences and events this year, we noticed one topic which was barely covered and yet, it is essential, project risk management. It is deemed to be one of the most important key elements of any investment in this industry.

Well planned and executed field development projects are essential for all stakeholders. The operators need the field development to be on time, to realise revenues from production, or to validate assets from exploration and appraisal. Drilling contractors rely on being drill ready to generate day rate income and cover OPEX (operational expenditure) as well as paying back CAPEX (capital expenditure). Investors and lenders rely heavily on the revenues and profits to service their debt and investment. Failing projects devastate financial performance for all the stakeholders and mars the industry’s reputation.

The development of an oil and gas field costs millions of dollars and may require a long time (5-10 years) to be fully realized. As we all know, the field development phase is where value is added to the prospect. A well de-risked Field Development Plan (FDP) leads to a timely FID (Final Invesment Decision) and within the projected budget.

FDPs include the needed support for field optimization, and contain all activities and processes required to optimally develop a field. This key component is what differentiates projects and attract investors to the projects. It is of paramount importance not to minimise the importance of the economics and risk assessment of FDPs.

In 2013, we ran a research that looked at the quarterly results of 15 drilling contractors and the relationship between project delays and financial results. The results disclosed that nearly a third of the companies cited ‘project delays’ and ‘start-up delays’ as a reason for lower than forecast
revenues.

Since First Oil has the biggest impact on funding and cash flow, when there are more project delays in the industry, it reduces the number of investors who would be willing to invest in the industry.

At the start of 2018, there were 104 delayed oil and gas projects waiting for investment approval, according to Rystad Energy. As table 1 below shows, the global offshore investments have reduced since 2014 due to the low oil prices. Rystad Energy analysts believe that even though 2018 has the lowest investment level, it is also the year that marks an upward trend. However, it will take another seven years before global offshore investments reach pre- 2014 levels. These predictions, highlight that the challenges for independent operators to attract investors will continue for a long while.

Based on our own analysis, explorers, especially small independent oil companies, are still struggling to find potential investors for their projects. The current oil prices and its uncertainties have made the struggle even harder than what it was pre-2014. How could explorers decrease the risk for investors? How could they make their proposition more appealing to investors?

The lack of financing could be attributed to misaligned objectives of the operators and investors. Some of the investors are interested on quick ROI (return on investments) projects, while most of the explorers have a long-range perspective. It could also be attributed to explorers who use too many technical jargons when they are pitching to investors. Lack of simplicity, risk identification and clear project plans make investors, not so keen to invest into exploration…