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Low oil prices to delay European upstream developments

Oilfield Technology,

With oil prices falling to a four-year low, the development of two frontier basins in northwest Europe, the Barents Sea and the West of Shetland (WoS), is likely to be postponed and further progress will require cost reductions, GlobalData reports.

Both Chevron and Statoil, operators of the WoS Rosebank and Barents Sea Johan Castberg fields, respectively, are continuing to delay their Final Investment Decisions (FIDs) for the projects, which have 240 and 545 million barrels of oil equivalent of recoverable reserves, respectively.

Matthew Ingham, GlobalData’s Upstream Analyst covering Europe, explained that the sanction of these projects is crucial to permitting the construction of much-needed infrastructure that will provide an export route for the region’s hydrocarbons, of which there are thought to be vast reserves.

Ingham commented: “The implications of plummeting oil prices will be felt most heavily by the UK and Norway’s governments, highlighting the ripple effect of petroleum production on state tax revenues.

“Although Rosebank is currently the only UK field to qualify for the large deepwater oil field allowance, further fiscal allowances may be required for the project to go ahead. As such, it would not be surprising to see further delays in the FID for Rosebank and Johan Castberg to 2016.”

Despite this, Ingham noted that oil price volatility is expected to stabilise in the medium-to-long term and the development of the two projects is anticipated to begin, providing there are cost reductions and near field discoveries made in both projects.

“The latest estimates put total development capital expenditure for Rosebank at US$9.68 billion, but cost reductions of around 30% are required for the project to become economically viable. Assuming these reductions can be achieved and the project sanctioned, production seems likely to come on-stream in 2021, three years later than previously anticipated.

“For the Barents Sea project to progress, oil prices must return to levels of around US$110 per barrel, if no tax allowances are forthcoming from the Norwegian government, to achieve a full-cycle net present value of US$318 million and an internal rate of return of 11.1%. Assuming that Johan Castberg is sanctioned in 2015, Statoil will aim to commence production in 2020, two years behind schedule,” Ingham concluded.

Adapted from GlobalData press release by Katie Woodward

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