Wood Mackenzie: FPSO a cheaper solution for Johan Castberg

Wood Mackenzie’s latest analysis of the Johan Castberg area in the Barents Sea considers the alternative development concepts under consideration by Statoil and partners Eni SpA (ENI) and Petoro AS.

Wood Mackenzie says the Norwegian project could achieve an internal rate of return (IRR) of 15.9% and breakeven of less than US$60/barrel, by opting for a Floating Production, Storage and Offloading (FPSO) solution in favour of the proposed pipeline, and additionally by benefitting from Government tax-incentives. The estimated IRR of the original concept is 10.4% – which is considered marginal for the operators. However, Wood Mackenzie believes the Norwegian Government is likely to favour the construction of the pipeline to create much needed infrastructure and unlock the development of smaller fields in the Barents Sea.

Wood Mackenzie’s latest upstream analysis considers alternative development concepts and potential tax-incentives that could help boost economics and increase the probability of the Johan Castberg project being sanctioned.

Ross Cassidy, Head of North West Europe Upstream research for Wood Mackenzie asserts: “We have modelled three scenarios for the development of the Johan Castberg area, the original concept announced in early 2014; a reduced cost concept; and an FPSO solution with no pipeline or terminal. The analysis shows that the Johan Castberg area could achieve a post-tax IRR of 15% and breakeven of US$60/barrel, by discarding the 280km pipeline and onshore terminal, in favour of an FPSO development. In addition we found applying the same tax-incentive introduced for the Barents’ Snohvit LNG project further increases the project’s IRR to 15.9%”

Related: Statoil: Johan Castberg Development Put Off

Cassidy explains: “The original development concept is under review following poor exploration results from the latest drilling campaign, an increase in tax, and rising costs. As it stands the estimated IRR of the original concept – the construction of a pipeline and onshore terminal – is 10.4% which is considered extremely marginal for the operator, with 15% considered the standard industry benchmark for a robust project.”

“Exploration activity has been increasing in the frontier Barents Sea in recent years, but an inability to commercialise Johan Castberg’s estimated 580 million barrels of oil could be detrimental to future activity. This is why we believe the Norwegian Government – Statoil’s largest shareholder – is likely to favour the construction of a pipeline as it is expected to create much needed infrastructure and could be instrumental in enabling the development of smaller fields in the area,” Cassidy adds.

Wood Mackenzie says while the development will provide both Statoil and Eni with a strategic hub for future exploration in the prospective acreage, it comes at a higher cost and tax breaks will need to be introduced to incentivise the operators to select this concept over an FPSO.

James Webb, North West Europe Upstream Analyst for Wood Mackenzie explains: “We estimate the cost of the pipeline to shore and onshore terminal at over NOK 12.5 Billion (US$2.1 Billion), so the FPSO option coupled with government tax incentives really is the best case scenario in terms of reducing overall costs. However, even at 15.9% the project would still remain below average in terms of IRR for both Statoil and Eni – who typically average a rate of 17% and 16% for probable developments respectively. As a result tax-incentives, beyond those received by the Snøhvit development, could be required to incentivise the field partners to select a development concept incorporating the pipeline and terminal. We believe the current project economics could cause the field partners to consider farming down to reduce exposure.”

The Johan Castberg area is widely regarded as the next major development in the Norwegian Barents sea, although so far, marginal economics have stalled project sanction – which was due mid-2014. Statoil is due to announce the preferred development concept in June 2014 and Wood Mackenzie asserts that key discussions between stakeholders are crucial to attain a desirable outcome for all parties.

Johan Castberg (PL 532) is located 240 kilometres north-west of Hammerfest in Norway. The field consists of the Skrugard discovery from 2011 and Havis, which was discovered in 2012.