Offshore pessimism may point to recovery

Crude oil futures prices are higher today (up about a half percent at 1 p.m. EDT) on reports that Saudi Arabia is considering cutting its oil exports by an additional one million barrels a day, starting with a 600,000 bbl. per day cut (bpd) in August.

The rumor, reported by Reuters, comes as the latest OPEC production cut compliance estimate fell to 78% from its prior 100%-plus. At the same time, Ecuador announced it would stop complying with the OPEC production agreement because it needed the revenue from the extra oil. While Ecuador was only curtailing 25,000 bpd, a small volume, its announcement showcases the pressure many small OPEC members are under since oil prices have failed to rally to levels anticipated at the time the production agreement was reached at the end of 2016.

Higher oil prices are critical for the future of the oil business, but no one is sure exactly how high they need to rise in order to restore activity. The latest figures show that oil production from large offshore fields has not declined as quickly as forecast, rewarding their owners with more cash than was budgeted. While oil prices may not rise to levels anticipated earlier this year, the industry should take heart in BP CEO Robert Dudley’s comment at the World Petroleum Congress that prices aren’t “lower forever.” Like a good forecaster, Dudley wasn’t specific about a timetable.

Offshore producers are continuing to do the easy things to sustain or increase production. Recently, infield drilling and maintenance work have been the lifeblood of offshore work. Importantly, there are signs of a slight uptick in drilling contract awards, although the competition for them has kept contract day rates depressed. This isn’t discouraging, since this is the normal condition for the business when it is bouncing along the bottom of a cycle and just beginning its recovery phase.

What happens in this recovery phase is that the low day rates and the short-term nature of contracts (producers at this stage often only contract a rig for one well plus an option) puts significant pressure on service companies to use their limited cash reserves extremely judiciously since no one knows just how long this phase will last. That means the funds required to keep vessels and rigs in regulatory and insurance compliance (or return them to) isn’t available for many companies.

Although this limitation may be temporary, it is the key phase the industry must transit as the business sees an acceleration in offshore day rates. He who has the cash will suddenly become king. However, if he misspends it, he will quickly return to pauper status once again.

 

 

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

1 Comment

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    Great insight Allen,

    I certainly agree. From my perspective, given the current state, the US GOM shelf will remain stagnant into the foreseeable future. Without significant technological intervention, decommissioning will remain the norm, maintenance and regulatory work will be the driver with overcapacity of companies vying for the little work that exists. More service companies and small operators will fall due to oil low prices into 2018 and beyond.

    Deepwater projects are few and far between and companies will have to sustain themselves for longer periods of time. Again, there is overcapacity and not enough work.

    Even if we were to see significant price increases and budget increases, never in the history of oil and gas have I witnessed a return to previous budgets without time to have confidence in the new higher prices. So, return to work in any offshore environment will take at minimum 1-2 years.

    Then there is the equipment and workforce requirements. Laid up marine assets and support equipment will have to be refurbished at high costs to meet regulatory and operator safety requirements. People is another matter, finding, training and pay historically goes up as a result of convincing people to return to the industry.

    Combine these elements and I, unfortunately, don’t see a return to any sustainable o & g industry until 2019-2020.

    The key to survival is to find a niche that few or no companies have or develop new technology for industry. Diversification is king in times like this and great management is a must. Management that can make difficult decisions and can execute strategy.

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