Gulf of Mexico offshore service sector charts road to recovery

Awaiting higher, sustained oil prices, Gulf stakeholders confront a new reality


On the eve of this year’s annual Offshore Technology Conference in Houston in May, discussions with industry experts have been more reserved than usual due to the lack of a rebound in the offshore energy market that many predicted for 2017. In fact, the market has rebounded a bit, but not enough.

Prices (WTI $51.72 bbl. as of April 6, up almost 50% from a year ago) have stimulated a bit of activity, but not enough, and not the kind that presages a recovery.

New activity is comprised primarily of BP’s commitment to complete the $9 billion Mad Dog Phase 2 project in the deepwater U.S. Gulf of Mexico and Shell’s plan with MOEX North America LLC (MOEX NA), a wholly owned subsidiary of Mitsui Oil Exploration Co. Ltd, to execute phase one of the Kaikias deepwater project in the U.S. Gulf.

Mad Dog Phase 2 will include a new floating production platform with the capacity to produce up to 140,000 bpd from up to 14 production wells. Oil production is expected to begin in late 2021. In 2013, BP (operator, with 60.5% working interest) and co-owners, BHP Billiton (23.9%) and Union Oil Company of California (15.6%) decided to re-evaluate the Mad Dog Phase 2 after an initial design proved too complex and costly. Since then, BP has worked to simplify and standardize the platform’s design, reducing the overall project cost by about 60%. Today, the leaner $9 billion project, which also includes capacity for water injection, is projected to be profitable at or below current oil prices.

BP discovered the Mad Dog field in 1998 and began production there with its first platform in 2005. Continued appraisal drilling in the field during 2009 and 2011 doubled the resource estimate of the Mad Dog field to more than 4 billion bbls., spurring the need for another platform at the field. The second Mad Dog platform will be moored approximately six miles to the southwest of the existing Mad Dog platform, which is located in 4,500′ of water about 190 miles south of New Orleans. The current Mad Dog platform has the capacity to produce up to 80,000 bbls. of oil and 60 mcf of natural gas per day.

Shell’s Kaikias project is an attractive near-field opportunity with a go-forward break-even price below $40 bbl. It will produce oil and gas through a subsea tieback to the nearby Shell-operated Ursa production hub.

Despite these projects, the U.S. Gulf is primarily a dead sea when it comes to oil and gas activity. The Baker Hughes rig count for the last week in March was down to 18 rigs from 28 rigs at the same time last year.

According to IHS Markit marine analyst Richard Sanchez, the market for contracted jackup rigs fell between five and seven rigs from January 2016 to March 2017, while the market for contracted floating rigs showed a steady decline from 45 to 26 over the same period. Figures for rigs in the U.S. Gulf vary due to working status and the jobs being undertaken, but both sets of figures show rig declines in the 35% to 40% range.

Outside deepwater, there is not much to look forward to on the shelf either. Vessel activity levels there are at historic lows. Inexpensive shale production onshore that can easily be turned on and off has made the older Gulf shallow-water properties a liability for many.

Crewboat Market

Edison Chouest vessels stacked in Houma, La., in August 2016. Ken Hocke photo.

Edison Chouest vessels stacked in Houma, La., in August 2016. Ken Hocke photo.

For companies that own and operate crewboats, chances are business has been tough lately. WorkBoat talked with several crewboat owners and operators who provided an overview of the market.

The most striking trend has been the decimation of their fleets. SeaTran Marine LLC, New Iberia, La., for example, has nearly half of its fleet of 19 crewboats coldstacked, said Charlie Tizzard, the company’s executive vice president and chief financial officer. He said that he knows one owner whose entire fleet of eight vessels is stacked. With about half of SeaTran’s fleet stacked, Tizzard is worried about the risks of stacking. “The longer a boat sits in a humid environment, the more damage is done.”

Marine Transportation Services Inc., Panama City, Fla., has 14 vessels in its fleet, five of which are stacked and for sale, said co-owner Kim Whitfield.

Muchowich Offshore Oil Services Inc., Clute, Texas, had eight crewboats in its fleet but sold two older vessels “to create reserve cash flow for the rough times,” said Stacy Stanley, the company’s president and CEO.

These three operators are not alone, noted Tizzard. “Lots of boats are stacked and none will be unstacked at these day rates,” he said. “Day rates are as low as they have been.”

For example, day rates for Stanley’s 160′ Raymond M have fallen from $4,700 in 2015 to a current day rate of $3,500. If there is a bright spot, Stanley said, it is utilization, which is up a bit for Offshore Oil Services. “The average utilization rate for this year is 51%, compared to 27% in 2016 and 42% in 2015,” she said. Stanley said the company can “see the light at the end of the tunnel, but it is just a flicker.”

Like others, Stanley is ready for a recovery. “It has been hard for me, but I have been forced to learn so much about my business. That’s the silver lining for me.”

Whitfield has had a similar experience. Noting that the offshore drilling industry is still in the tank, she said that her company is now servicing the construction, production, plug and abandonment, workover and pipeline markets. Whitfield said that she still continues to get a few calls inquiring about available vessels, but has not, thus far, received any term commitments. Like Stanley, she also does not see a rapid recovery but rather a “trickle” recovery. She hopes to ride it out, but to do that, operators will also have to weather associated crewing issues.

Marine Transportation Services has 14 vessels in its fleet, five of which stacked and for sale. The company's Queen Craft Shipyard built the Kimberly D in 2014 and has built or rebuilt each of MTS' other crewboats. David Krapf photo.

Marine Transportation Services has 14 vessels in its fleet, five of which stacked and for sale. The company’s Queen Craft Shipyard built the Kimberly D in 2014 and has built or rebuilt each of MTS’ other crewboats. David Krapf photo.

“Personnel will be a huge problem when the industry returns,” Whitfield said. “We have to find the personnel and provide mandatory training. We (the crewboat industry) are the people who break in new hands. Then they are usually poached by the larger OSV/PSV operators.”

SeaTran is not suffering quite as much as some of its competitors. “Day rates are pretty low, but due to cutbacks we aren’t registering losses on operations,” Tizzard noted. “With reference to operations, we have a positive cash flow.”

And there are a couple of advantages to this market, he said. One is that interest rates are in the 4% range as opposed to over 20% in the 1980s. The other, he noted, is that “the insurance market is as soft as I have seen it. They are pricing deals to generate cash.”

Tizzard, unlike most of his counterparts, believes that the market could begin to improve as early as next year due to the new administration’s commitment to the energy industry. If oil prices improve to the $50 to $60 a barrel range, he thinks things will get started again because many operators can make money at those prices.

OSV/PSV Market

When you talk to OSV/PSV owners, the conversations essentially mirror those of crewboat operators.

Matthew Rigdon at Jackson Offshore Operators, Houston, said an increase in global oil demand is needed to stimulate the market. Otherwise, he doesn’t see any ramp up on the drilling side in the Gulf. Rigdon counts around 24 working U.S. Gulf rigs at present but believes two will leave the market by the end of the year. Day rates, he said, have remained fairly stable of late but sustained oil prices of $45-$50 will place downward pressure on day rates from oil and gas operators.

Mid-March data from IHS Markit shows the deterioration in utilization rates in both the platform supply vessel and anchor-handling markets.

Mid-March data from IHS Markit shows the deterioration in utilization rates in both the platform supply vessel and anchor-handling markets.

Rigdon discussed a changing utilization market, referred to as a “pool” model, where vessels are no longer dedicated to specific activities but utilized for “jobs at hand.” And operators are moving vessels out of the missions they were designed for. If an owner can charter a vessel for things other than its design focus, such as subsea intervention versus platform supply, they are willing to make light upgrades (small cranes, etc.) to move them into other markets/jobs.

Looking ahead, Rigdon sees an industry with operators constantly trying to make their vessels more competitive. And, he noted that Jones Act vessels that have moved out of the market are unlikely to come back. This applies especially to lower spec vessels that have been displaced.

Looking back, IHS Markit’s Sanchez noted that the workboat industry’s recovery after the Deepwater Horizon moratorium was a “perfect storm.” Most stacked newbuilds entered the market at the same time, a market in which there were not enough boats because the Gulf OSV supply had shrunk. But that market did not last long — oil prices plummeted as shale oil hit the market. The resulting market in deepwater, Sanchez believes, may finally rebound after 2020.

Until then, although oil prices should increase by 2018, day rates may not recover due to oversupply, except for customers of the major oil companies. The majors, Sanchez said, “often have higher assurance standards. Therefore, they pay a bit more but not everyone can work for them.” Outside the super majors, the rest of the oil and gas operators has market income below operating expenses and currently cannot contribute to an upturn. This forces vessel day rates down to cost, or lower. Compounding low day rates are the oil and gas operators’ new demands for soft contracts with escape clauses.

Gulf Specialty Market

A new sector of the Gulf market is evolving. This market incorporates specialty vessels designed to carry out jobs that involves more than hauling cargo or mud or deploying anchors. This vessel class is characterized by Bordelon Marine Inc.’s fleet of three ultralight intervention vessels (ULIVs).

“These vessels, equipped with all the equipment required for subsea intervention, including cranes, ROVs and LAR (launch and recovery) systems and a helideck, are a response to clients who are in a position to ask for more,” said Wes Bordelon, president and CEO of Bordelon Marine, Lockport, La.

The vessels, known as Stingray series 260s, are an example of “all suppliers giving their best equipment,” Bordelon said. “They are also a response to our emphasis on high-spec, high standard vessels.”

Looking ahead, Bordelon said, “the shelf is not in play today but is stabilizing. Purging has happened with shelf players and the shelf has realigned more quickly. We thought that 2017 would see volatility but, with a reasonable floor of $50, maybe we were wrong.” With regard to the oil and gas operators, “they are asking for it all, and they can have it.”

Bordelon said that recovery of the Gulf vessel market would require an oil price above $50. But, he noted, shale intervenes at $50, and that “is a new paradigm and maybe we can’t predict stability.”

In this environment, “companies can stand another year or two but not forever,” Bordelon said. Recovery will be difficult, and it depends on company size. Bringing one or two vessels out of short stack is not a big deal but larger companies will have trouble bringing longer stacks out.

Bordelon agreed with crewboat operator Whitfield, that talent loss is a big problem. “It is insidious and it exists,” he said. The problem is that the second and subsequent generations of laid off workers go elsewhere. It is a problem that will last for years.

Bordelon is generally positive about a recovery. Like Stanley, he sees a light at the end of the tunnel, but “it is way down there.” Until the train emerges from the tunnel, he said, the key to staying healthy is a reliable, sustainable budget for 2018, and a realigned industry rebuilt through mergers and consolidations. What’s the bottom line? “There is just too much steel out there for the level of activity,” Bordelon said.


This article was originally published in the May 2017 issue of WorkBoat Magazine.

About the author

Dr. William J. Pike

Dr. William J. Pike has 45 years experience in the upstream oil and gas industry, including more than 20 years in oil and gas drilling and production operations, both onshore and offshore. He has worked in the U.S., Canada, Britain, Europe and Russia as a technical and economic advisor to the energy industries and various governmental agencies. Pike was editor-in-chief and editorial director for Hart Energy Publishing’s E&P magazine and was also the editor of the Journal of Petroleum Technology, the official publication of the Society of Petroleum Engineers. He holds a doctorate in energy economics from the University of Aberdeen in Scotland.

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