France's Total said it would go ahead with a deepwater project offshore Angola after cutting its cost to $16 billion, keeping Africa's No.2 producer on track to expand its oil industry.
 

Development of the ultra-deep Kaombo field has been repeatedly delayed on cost grounds, threatening to add it to a growing list of large-scale global projects that have been mothballed as oil companies have cut investments and returned cash to shareholders.

Taking advantage of strong oil prices, Total had made the highest investments in its history over the past three years, drilling in areas that are hard and costly to explore. It said last year it would start a "soft landing" in spending.

But cutting $4 billion off the cost of Kaombo - important for Angola to replace older fields and hit its production targets - meant it could now go ahead.

"Total has significantly optimized the project's design and contracting strategy in recent months," Yves-Louis Darricarrere, Total's president for upstream, said in a statement on Monday.

The firm also raised its output capacity estimate for the project, located in Angola's offshore Block 32 and due to start up in 2017, to 230,000 bpd from 200,000.

Half of the cuts came from a reassessment of the project's specifications, using a "'just good enough' approach rather than 'the best possible'," Arnaud Breuillac, the company's exploration and production chief, told Platts on Friday.
 

The company decided, for example, to build its two 115,000 barrels-per-day (bpd) floating production storage and offloading units by making alterations to two very large crude carriers (VLCCs) instead of building them from scratch, he added.

Using the converted VLCCs and other less bespoke equipment could save $2 billion.
 

"Total is known to see too big normally, there's a change in the way they operate," said Julien Laurent, an analyst for Natixis in Paris. "...Production will reach a plateau less quickly, the curve will be flatter, but will last longer."
 

Total is saving another $1 billion by cutting the work hours done on the project locally, because rates are more expensive in Angola than elsewhere.

"Globally, deep water costs are rising - this year by almost 20 percent, so the fact that Total could find slack in its capex to continue with its Angola project shows how investors view Angola's longer-term offshore prospects," said Rolake Akinkugbe, head of energy and natural resources coverage at FBN Capital.

"By and large, they are bullish."

 

In a similar move last year, Britain's BP scrapped bespoke plans to develop its Mad Dog 2 project in the Gulf of Mexico, opting instead for a repeatable model it had used before. BP said it thought the old model could recover 90 percent as much oil at a fraction of the cost.


Cutting Costs to Survive
"If we are not able to do something about costs as an industry, not only oil companies but all of the supply chain, we may have to suspend or maybe cancel projects," Total's Breuillac told an oil conference last week.

"If we start postponing projects, this means this oil will be missing 10 years from now," he added. "You'd get into what we've had so often in our industry: an increase in oil prices that could be detrimental to the world economy."

Total is already the top operator in Angola, with equity production of 186,000 bpd, mainly due to its Girassol, Dalia and Pazflor deepwater fields in the huge Block 17. The blocks it operates produce 600,000 bpd, over a third of national output.

Total also confirmed on Monday that it was on track to start output on the CLOV project in Block 17, which will have capacity of 160,000 bpd in mid-2014.
 

"With the investments it is making in Blocks 17 and 32, it will be very difficult for any other oil company to overtake Total as the leading operator in Angola," said Jose de Oliveira, head of the Energy Nucleus at Luanda's Catholic University.
 

Angola wants to increase production to 2 million bpd next year from 1.73 million bpd in 2013 and then maintain that level for five years, but faces technical problems and production declines at older fields.

Credit rating agency Fitch on Thursday cut Angola's outlook to stable from positive, citing challenges to the oil sector as one of the main drivers behind the decision.
 

"Kaombo is very important if Angola wants to put production at 2 million bpd, because output at some of the older fields, namely in blocks 14 and 15, is declining," Oliveira said.
 

Total and Angolan state-owned firm Sonangol each hold 30 percent of Block 32, Angolan-Chinese joint venture Sonangol Sinopec International has 20 percent, Exxon Mobil's Esso unit 15 percent and Portugal's Galp 5 percent.
 

Kaombo is located about 260 km (160 miles) off Luanda in water depths of 1,400 to 1,900 metres (4,600-6,200 ft).

Total shares were up 1.6 percent at 48.49 euros at 1225 GMT, outperforming a 0.65 percent rise in the European oil and gas sector index.

 

By Natalie Huet and Shrikesh Laxmidas

(Additional reporting by Michel Rose; editing by Andrew Callus and John Stonestreet)