How to Ensure a Competitive, Realistic Net Present Value in Today’s Business Environment
Solomon Associates estimates the projected lifecycle expenditures for about 69% of new upstream projects worldwide can and should be reduced. Assuming projects are evaluated based on a price of 20 US dollars per barrel (USD/bbl) and Total Expenditures (TotEx), which include capital expenditures (CapEx) and operating expenditures (OpEx), Solomon sees investors targeting TotEx below 10–15 USD/barrel of oil equivalent (BOE) to achieve positive economic returns and sustainable operational performance.
This scenario calls for operators of more than 500 upstream greenfield investments to re-evaluate the components of their project cash flow. Although the traditional optimization approach focuses on reviewing production and CapEx forecasts, some investors have found they need improvement on creating assumptions for OpEx forecasts.
When evaluating existing assets, offshore operations in many cases show more cost improvement opportunities than onshore operations. This situation stems from offshore projects requiring larger capital investments than onshore projects, and operators use weak assumptions to make facility design decisions and inaccurate cost estimations to determine costs from early to late project evaluation stages. Solomon also estimates about 84% of offshore greenfield investments require a re-evaluation of their TotEx.
Figure 1. Asset Life Cycle Estimated TotEx
Suitable Management Practices Can Mitigate Impact of Facility Design Decisions on OpEx
Solomon estimates a 45% average OpEx weight on asset lifecycle TotEx from small to large developments (>0 to >1 billion recoverable reserves). This impact can be even above 50% for the largest offshore and onshore projects that face operational uncertainty due to their remoteness and level of technical complexity. Furthermore, investments in regions with immature oil and gas activity require more assumptions on price scenarios and diverse country factors that can impact the level of long-term asset operating expenditures.
The use of suitable OpEx management practices from the early stages of the asset lifecycle for maintenance, labor, energy, chemicals and transportation can help to mitigate the impact that facility design decisions have on mature stages of the asset lifecycle. These practices can also contain the effect that facility design decisions have on the annual evaluation of the field economic limit and recoverable reserves.
Figure 2. OpEx as Percent of Asset Lifecyle Estimated TotEx
What Drives a Robust, Credible OpEx Estimation?
Because each oil and gas asset in the world is unique, analogous asset data could serve as a starting point to develop robust estimations. However, it takes more than just data to develop a statistically significant OpEx estimation. Companies can have a broad portfolio of existing asset historical data or third-party public data sources to feed their models, but the quality of this data may not be guaranteed. Developing robust technical and economic assumptions for a new operation based on specific characteristics and complexities can only be accomplished by blending a strong dataset with industry experience.
How does your lifecycle operating expenditure estimates compare?
Large Dataset Quality
Solomon’s upstream database has information on more than 5,000 offshore and onshore fields in 6 regions and over 50 countries. Solomon updates its database annually by gathering data from operators’ information systems and reviewing it with them over a period of several weeks.
Robust Estimation Methodology
Solomon offers a unique approach to estimate the complexity level of your new operation, allowing you to properly estimate new OpEx scenarios when variations on your design characteristics are made. Solomon combines the expertise of industry subject matter experts with statistical models to identify the key cost drivers and weight of cost drivers on each operation type, such as production and capacity levels, kit size, wells and other market factors. This approach, combined with Solomon’s country prices database, allows you to generate accurate OpEx estimates at each stage of an asset’s lifecycle.
The charts below show an example of the OpEx estimation for one specific year of a new upstream project’s lifecycle using two different facility design cases. In Case 1, an analyst is using a percentage of CapEx, while in Case 2, the same analyst is using the unit cost from a similar internal field. Without access to industry benchmarking services output, however, neither approach allows for the creation of an optimized and achievable target for that specific year.
Solomon’s OpEx Estimation solution provides outputs based on normalized benchmark rankings (such as Q1 and Q2) derived from the annual complexity level of your asset, allowing decision makers to evaluate multiple cash flow scenarios based on multiple OpEx probabilities (P10, P50, and P90). In addition, Solomon’s industry experts have helped operators to evaluate design alternatives to maximize the value of the return of their investment.