Statoil's Johan Castberg field's breakeven point rises
BY KJETIL MALKENES HOVLAND
OSLO -- The oil price required for Statoil's Barents Sea oil field Johan Castberg to be profitable has risen to $85 per barrel, independent consultancy Wood Mackenzie estimates, after the company's surprise decision earlier this week to delay the project due to higher costs.
The decision highlights the marginal profitability of Arctic oil and gas projects with complex reservoirs and huge infrastructure requirements amid oil sector cost inflation, industry observers say, and could hamper the development of one of the country's major new oil finds.
Johan Castberg, estimated to contain volumes of up to 600 MMbbl of crude oil, is among Norway's biggest discoveries in the last decade, and would open up a vast new province in the Barents Sea, potentially becoming a hub for other oil producing fields in the future.
The recent information on cost increases suggest that the breakeven for Johan Castberg will be around $85 per barrel Malcolm Dickson, senior analyst at Wood Mackenzie, told the Wall Street Journal. Its previous estimate was below $71 per barrel.
Statoil has blamed the delay on higher uncertainty, partly due to a recently proposed government tax change, which it said increased the project's breakeven price by $7 per barrel. Rising costs and uncertainty about the resources were also important factors, the company said.
According to Norway's Ministry of Petroleum and Energy, the Johan Castberg breakeven has increased to $81 per barrel from $64 per barrel, with $10 per barrel due to higher costs and lower resource estimates, and $7 per barrel due to the tax change.
But Mr Dickson said: "The increased costs affected profitability more than the tax rise, according to our model."
Of course, when a field that contains 500 MMbbl isn't profitable, it's worrisome, Arctic Securities analyst Trond Omdal told the Wall Street Journal, adding that he was in line with Wood Mackenzie's breakeven estimate. "It's a warning call about the sector's cost development."
Fifteen oil companies operating in Norway, including Statoil, recently warned that the government's tax change proposal could affect so called marginal projects. The government says that when the tax change takes full effect, companies will be able to deduct about 88% of their project costs from taxes, from previously 91%.
Oil companies operating in Norway will likely be reluctant to invest in new projects with a breakeven exceeding $75 a barrel, according to Norwegian independent consultancy Rystad Energy.
In February, Statoil estimated that Johan Castberg would cost between $13.7 billion and $ 15.59 billion, including pipelines and an onshore oil terminal at the northern shores of Norway. The field would produce about 200 Mbpd in its early stages, the company estimated.
Statoil now plans to drill four new exploration wells in the area.
It's risky, but there's plenty of upside there. Hopefully the exploration will work out in the surrounding area, which would strengthen the profitability said Mr. Dickson.
Operator Statoil owns 50% of the Johan Castberg license. Eni holds 30% and Petoro 20%.
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