OpEx often underestimated, introduces risk in OpEx evaluation for greenfield project
Operators decide to pursue many upstream projects using sparse information, according to an article from consulting firm McKinsey (M. Pergler and A. Rasmussen: Making better decisions about the risk of capital projects, May 2014). Typically, the overall cost budget is of high importance to the executive management, but the detail of the cost evaluation is often superficial, resulting in project cost forecasts missing targets.
These missed targets occur because companies tend to fall into the trap of overoptimistic assumptions, which mask the likelihood of a project falling short of cash, the article authors noted. These high-risk capital projects can benefit from establishing an improved data-driven decision platform, where risks are evaluated on detailed project deliverables.
Most oil and gas companies conduct a detailed evaluation of all capital expenditures (CapEx) using industry data that is readily available in the market. When it comes to operating expenditures (OpEx) costs, however, the picture is blurred due to a perceived lack of reliable data that can provide an accurate forecast.
In the past, project OpEx tended to be lower than CapEx. For example, OpEx costs would run approximately 5–6 USD/bbl versus CapEx of 20–30 USD/bbl. Over time, however, OpEx on an average per barrel basis has risen closer to the level of CapEx. Growth in OpEx can be attributed to rising exploration and production activity in more expensive environments such as deepwater, and increases in safety and regulatory requirements, maintenance costs for aging fields and production infrastructure, along with transportation and staffing costs.
When breaking down costs on an upstream field exploration project over its lifetime, today you will find on average that OpEx accounts for approximately 40%, CapEx comprises around 50%, whereas administration, taxes, and miscellaneous costs account for about 10%.
Upstream field exploration is categorized as an investment project where OpEx expenditure counts for a larger part of all project costs, and why a detailed OpEx budget for the investment project often is required.
Despite this need, we see most operators doing detailed budgeting and breakdown on field development CapEx whereas OpEx is an estimated sum of the CapEx, manually allocated out on the expected lifetime of the field. The percentage allocation based on the CapEx investment also doesn’t consider differences in operational factors, such as distance to shore, personnel transport, staffing requirements, shore base costs and the type of operational asset (i.e., FPSO, fixed structure, floating vessels, and others).
Overly optimistic assumptions on OpEx cost are the result of a lack of understanding of these costs. Traditionally, the people involved in estimating OpEx for greenfield development projects are primarily experienced in CapEx, and don’t likely fully appreciate the costs involved in operating a facility. These people typically work in a separate department from those involved in operations and maintenance.
The sharp fluctuations seen in oil prices in recent years show that accuracy in operating cost estimates is more important than ever. The operator needs to have not only a clear view of the invested capital in field development, but also a long-term outlook of the future cost of operation. This clear view is needed to optimally manage investment strategy and establish a possible exit strategy, based on the field’s production profile.
Further, design and structure changes often occur in a new build project that are not reflected in the OpEx budget, despite the major impact these changes often make on OpEx costs. For example, a constructed platform may turn out to be heavier than the initial platform design weight. The operator then must take steps to reconfigure the platform’s equipment to meet the new weight requirements, such as reducing the number of compressors. Fewer compressors can change the platform’s production output, ultimately affecting profitability.
Such changes need to be reflected in the OpEx estimate, not only on the project net present value (NPV), but also the impact on annual costs for operation, having a substantial impact on any investment and exit strategies of the operator.
Solomon's Upstream New Projects OpEx Estimator Tool
To cope with the challenges of creating reliable OpEx estimates for an upstream greenfield project, HSB Solomon Associates LLC (Solomon) has developed the Upstream New Projects OpEx Estimator Tool – OpEx estimation tool for new upstream projects. The online, multi-user platform leverages Solomon’s proprietary Upstream Study database, making it possible to predict lifetime OpEx cost for new CapEx investments with unrivaled accuracy. The tool enables the establishment of highly accurate NPV for new projects. Learn more about the New Projects OpEx Estimator Tool.
Using more than 30 years of benchmarking data for the upstream oil and gas industry, Solomon has established an empirical field operations database containing more than 5,000 oil and gas assets around the globe. All these data have been collected through benchmarking participation and have been both verified and quality assured before they were added to Solomon’s Upstream Study database. The database contains detailed data on operating costs, field characteristics, facility characteristics, production, fuel consumption, staffing, well service activities, and maintenance activities. It also contains details on operational and maintenance philosophy.