Even oil patch veterans who have been through many business cycles are rattled by the rapid decline in oil prices, and its implications for the companies and people in the energy industry. Eighteen months ago, with three-digit oil, optimism and swagger prevailed, with the unconventional boom going full blast and expectations for robust deepwater activity unchecked. But it is 2015, and the industry’s psychic and economic indicators are clouded in uncertainty. And as the saying goes, investment flees uncertainty, especially in the offshore sector, where large investments are required.
The rig picture. Major oil companies usually plan their activities on a long-term horizon measured in decades, not years. But as oil prices dropped through their $75/bbl and $60/bbl break-even points on the way to $40 crude, most operators made the short-term decision to cut their E&P budgets by 20% or more.
As a result, the offshore rig count has tumbled, just as new generations of deepwater rigs are coming onto the market. As of late August, only 31 rigs were drilling in the Gulf of Mexico, down from 64 a year ago, according to Baker Hughes. Quest Offshore recently reported that 236 fifth-to-seventh-generation floating rigs, including 75 drillships, are part of the global supply or under construction. At least another 100 older-generation floaters were available earlier this year.
Only about 175 floaters are on contract. Floater day rates have declined from as much as $650,000/day to $250,000/day. Utilization rates have dropped to around 80% for floaters and even lower for jackups. Quest reports that one-third of the fifth-to-seventh-generation rigs will roll off their contracts by the end of 2016, making the oversupply even worse.
Drilling contractors have responded by retiring less-capable older rigs, negotiating with shipyards to stretch out delivery of new rigs, and by offering rate reductions to extend current contracts. Contractors also have gone through rounds of layoffs, or like Hercules, filed for Chapter 11 bankruptcy. At least 60 floaters have been scrapped already or are cold-stacked. As many as 140 more may need to be scrapped. Moody’s announced on Aug. 25 that it is seriously considering downgrading the credit of 11 offshore contractors “in light of … adverse industry affects and the prolonged nature of this challenging operating environment.”
Quest forecasts that rig attrition will continue, and that floating rig supply and demand will meet sometime in 2017. This is in synch with conventional wisdom that the industry will have to withstand a year of hard times before production drops to meet demand, and oil prices recover. This may be an astute assessment of what lies ahead, or it may be wishful thinking.
What lease sale? The lukewarm interest in August 2015’s Western Gulf of Mexico Lease Sale 246 was another sign that oil company decision-makers are taking a wait-and-see-attitude amid low commodity prices. Only five companies submitted bids for acreage on the Outer Continental Shelf offshore Texas. A total of $22.7 million in high bids was offered for 33 tracts, comprised of 190,080 acres, out of 4,083 blocks and 21.9 million acres on auction. A single company, BHP Billiton Petroleum, submitted 26 bids for a total of $16.3 million. “The continuing drop in oil prices, and low natural gas prices, obviously affect industry’s short-term investment decisions,” said BOEM Director Abigail Ross Hopper after the sale.
In contrast, Western Gulf of Mexico Lease Sale 238, conducted in August 2014, received $110 million in high bids on 81 tracts. Five earlier Gulf of Mexico lease sales garnered a combined $2.3 billion in bids.
One could argue that the Western Gulf of Mexico is away from the most active, central part of the Gulf, and that the recent sale may not be the best indicator of the industry’s intention to explore and develop deepwater reserves. You may recall that the last Central Gulf Lease Sale on March 18 also was disappointing, receiving the lowest number of bids since 1986. The tepid response by Western Gulf bidders is another sign that operators’ hesitation may delay exploration enough to endanger reserve replacement by the early 2020s.
Collaboration and consolidation. Even before the oil price decline, operators and service companies were looking for more efficient ways to develop challenging subsea fields. In 2013, Schlumberger and Cameron International formed the OneSubsea JV, creating a separate business unit with a combination of reservoir, downhole and seafloor technology and expertise. Subsequently, Baker Hughes and Aker Solutions formed an alliance in 2014, and FMC Technologies and Technip formed the Forsys JV in 2015, to achieve similar goals of improving development and delivery of subsea technology.
The OneSubsea JV resulted in a profitable business focused on standardizing subsea systems, which helped operators solve complex problems. It gave Cameron a welcome boost, as its other product lines experienced pressure from customers to reduce the cost, and limit the scope, of current and future projects.
Apparently, both companies appreciated the synergy of the OneSubsea venture. On Aug. 26, Schlumberger and Cameron jointly announced a definitive merger agreement in a deal valued at $14.8 billion. “We believe that the next technical breakthrough will be achieved through the integration of Schlumberger’s reservoir and well technologies, with Cameron’s leadership in surface, drilling, processing and flow control technologies,” said Schlumberger CEO Paal Kibsgaard.
This combination, following the Halliburton-Baker Hughes merger, is part of a transformation of the industry landscape, which will displace and disorient many people, but also will drive efficiency, innovation and eventually create new opportunities.
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