Given a choice, Statoil ASA and the other owners of the giant Johan Sverdrup oilfield would have preferred to avoid the collapse of crude prices that has upended the industry.
However, there is a silver lining: price cuts by desperate oil service companies are now raising margins on projects that are still viable as crude prices have slumped below US$30 a barrel.
For Sverdrup, which may hold as much as 3 billion barrels, the crash could help make it among Norway’s most profitable projects ever. However, there is a catch: Crude prices will need to recover by the time production starts in 2019.
“The Johan Sverdrup project will be an all-time profitable project because it’s being developed now with very low input prices,” said Jarand Rystad, managing partner at Oslo-based consultancy Rystad Energy AS. “The oil price will rise, so it will be an enormously profitable field.”
Statoil, the operator of the field, has cut the estimate for capital spending on Sverdrup to 160 billion kroner (US$18 billion) to 190 billion kroner from 170 billion kroner to 220 billion kroner previously, Det Norske Oljeselskap ASA, another of the deposit’s stakeholders, said on Monday.
With 60 percent of the investments in kroner, the project is also profiting from a slide of the Norwegian currency against the dollar in parallel with the oil slump.
Det Norske expects the investments to come in at the lower end of the range, and maybe even lower, chief executive officer Karl Johnny Hersvik said.
“You’re hitting a market in steep decline, and there’s good capacity to implement this type of project in the Norwegian supplier industry, at very advantageous prices,” he said. “So at least the first part of the equation is fulfilled.”
According to Rystad, the return on invested capital in the field will be 25 percent if their forecast of oil returning to US$100 in 2020 comes true.
Statoil agrees that the timing is good with project costs in general dropping as much as 30 percent to 40 percent, according to Ola Anders Skauby. The company has so far awarded contracts on Sverdrup for more than 50 billion kroner, of which more than 70 percent has gone to Norwegian companies.
“Norwegian suppliers have proven very competitive,” Skauby said by telephone. “That’s led us to already see a positive development for Sverdrup. We’ll have to get back to possible updates on figures.”
Statoil and Det Norske expect the second part of the equation to add up as well, with oil prices rising in the long term. The benchmark Brent blend will average US$63.5 a barrel in 2019, according to the mean estimate of eight analysts surveyed by Bloomberg over the past two months.
“Sverdrup is perfectly timed in relation with the oil price drop,” Swedbank AB analyst Teodor Sveen Nilsen said by phone.
The field will end up in the top five most profitable oil projects offshore Norway along with Statfjord, Oseberg, Ekofisk and Gullfaks, if not ahead of these, he said.
Statoil started awarding a flurry of contracts to suppliers from engineering firms to platform and pipeline builders after submitting a development plan to the government in February last year.
A couple of examples illustrate how costs have fallen: rig owner Odfjell Drilling agreed to drill starting this year for half the price it charged before; Kvaerner, which will deliver one platform deck and three substructures, signed contracts for the latter last year at the same nominal price as it was charging in 2005, it said in October last year.
The project now has a break-even price of US$25 a barrel, according to Swedbank. Carnegie Investment Bank AB sees it even lower at US$20.
“Indirectly, lower oil price has a positive effect on the Johan Sverdrup project, as it has contributed to significantly lower capex,” Carnegie analyst Kjetil Bakken said.
Sverdrup, which is expected to produce for 50 years, was discovered in two parts by Lundin Petroleum AB and Statoil in 2010 and 2011. It represents a lifeline for the industry as oil investments in Norway are set to drop for a third consecutive year and will not rise again until 2019, according to the Norwegian Petroleum Directorate.
BUSINESS UPDATE: The iPhone assembler said operations outlook is expected to show quarter-on-quarter and year-on-year growth for the second quarter Hon Hai Precision Industry Co (鴻海精密) yesterday reported strong growth in sales last month, potentially raising expectations for iPhone sales while artificial intelligence (AI)-related business booms. The company, which assembles the majority of Apple Inc’s smartphones, reported a 19.03 percent rise in monthly sales to NT$510.9 billion (US$15.78 billion), from NT$429.22 billion in the same period last year. On a monthly basis, sales rose 14.16 percent, it said. The company in a statement said that last month’s revenue was a record-breaking April performance. Hon Hai, known also as Foxconn Technology Group (富士康科技集團), assembles most iPhones, but the company is diversifying its business to
ARTIFICIAL INTELLIGENCE: The chipmaker last month raised its capital spending by 28 percent for this year to NT$32 billion from a previous estimate of NT$25 billion Contract chipmaker Powerchip Semiconductor Manufacturing Corp (力積電子) yesterday launched a new 12-inch fab, tapping into advanced chip-on-wafer-on-substrate (CoWoS) packaging technology to support rising demand for artificial intelligence (AI) devices. Powerchip is to offer interposers, one of three parts in CoWoS packaging technology, with shipments scheduled for the second half of this year, Powerchip chairman Frank Huang (黃崇仁) told reporters on the sidelines of a fab inauguration ceremony in the Tongluo Science Park (銅鑼科學園區) in Miaoli County yesterday. “We are working with customers to supply CoWoS-related business, utilizing part of this new fab’s capacity,” Huang said, adding that Powerchip intended to bridge
Microsoft Corp yesterday said that it would create Thailand’s first data center region to boost cloud and artificial intelligence (AI) infrastructure, promising AI training to more than 100,000 people to develop tech. Bangkok is a key economic player in Southeast Asia, but it has lagged behind Indonesia and Singapore when it comes to the tech industry. Thailand has an “incredible opportunity to build a digital-first, AI-powered future,” Microsoft chairman and chief executive officer Satya Nadella said at an event in Bangkok. Data center regions are physical locations that store computing infrastructure, allowing secure and reliable access to cloud platforms. The global embrace of AI
Qualcomm Inc, the world’s biggest seller of smartphone processors, gave an upbeat forecast for sales and profit in the current period, suggesting demand for handsets is increasing after a two-year slump. Revenue in the three months ended in June will be US$8.8 billion to US$9.6 billion, the company said in a statement Wednesday. Excluding certain items, earnings will be US$2.15 to US$2.35 a share. Analysts had projected sales of US$9.08 billion and earnings of US$2.16 a share. The outlook signals that the smartphone market has begun to bounce back, tracking with Qualcomm’s forecast that demand would gradually recover this year. The San