* Costs cut to $16 bln from $20 bln
* Project aims to pump 230,000 barrels/day, start in 2017
* Seen as key for expansion of Angola's oil industry
* Cost-conscious oil industry has shelved other deepwater
(Adds details on production, analyst, executive comments)
By Natalie Huet and Shrikesh Laxmidas
PARIS/LUANDA, April 14 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
(Additional reporting by Michel Rose; editing by Andrew Callus
and John Stonestreet)