For innovators, now’s the time to shine
“We are now seeing scaled-down projects emerge with less wells, more subsea tiebacks, and reduced facilities and capacities, and this all translates into lower break-evens.” Angus Rodger, Wood Mackenzie
Congratulations to everyone attending the Offshore Technology Conference. You’re still in the business.
That’s no small feat, all things considered. Oil prices have undergone the longest, most dramatic route in the commodity’s history, and the offshore business is still not good.
Dozens of companies that once routinely sent thousands of employees to make deals at OTC no longer exist. Last year’s attendance was way down, the parties were not half as extravagant, and too many attendees were looking for new jobs.
The offshore industry hobbles along nonetheless, asking the fundamental question about its future: Can offshore be half as good as its landlubbing comrades?
Oil and natural gas markets are all about production costs, and offshore wells will have a hard time competing with cheap land-based production either from the Organization of the Petroleum Exporting Countries or U.S. shale oil companies.
When OPEC let prices start collapsing from $105 a barrel in the second half of 2014 to under $30 last year, most pundits thought the goal was to wipe out the U.S. shale producers. After all, shale drillers were the obvious target, having put an unneeded 1 million new barrels on the global market.
Offshore drillers talked tough in 2015, bragging about how one deep-water rig could produce as much oil per day as 1,000 shale wells, and last 30 years instead of three. That was a proposition major international oil companies could never pass up, or so the argument went.
Two years later, though, oil prices are still half of what they were in 2014. And there is no data-based argument to expect them to rise above $65 a barrel for at least three years.
International oil companies, meanwhile, have delayed or canceled investments in dozens of major offshore projects. Yes, there are still some new projects coming online, but Barclays investment bank predicts offshore drilling spending will drop another 20 percent to 25 percent this year, the third year of reduced spending.
Instead, Big Oil is moving into the shale oil business, where it can make money at $50 a barrel for West Texas Intermediate crude.
Exxon Mobil Corp., Royal Dutch Shell and Chevron Corp. plan to spend $10 billion developing shale oil fields this year, according to Bloomberg News. Most of the investment will be in West Texas’ Permian Basin. Marathon Oil Corp. is selling off Canadian oil sands assets to buy Permian acreage, and pipeline companies are spending billions to transport the coming tsunami of crude to the coast for export overseas.
That is why OPEC is more worried about protecting market share than propping up prices. The oil ministers know that if prices rise again, that will simply bring offshore and shale companies back into the market at a time when demand growth is almost nil in wealthy countries, and poor countries can’t afford higher prices.
Shale drillers are battling it out with OPEC, slashing production costs by 30 percent. Shale drillers also have a capital expenses advantage because their wells are cheap and their rigs can be stacked quickly when prices fall and redeployed at the slightest price signal.
For the foreseeable future, therefore, oil companies will compete on cost of production rather than quantity. But can the offshore industry compete in this market? Maybe. The average offshore project has shaved costs by 20 percent, according to consulting firm Wood Mackenzie. The best projects have cut break-even prices from $75 a barrel to $50 a barrel.
“This is not just a result of cheaper rig day rates. Of far greater impact are the steps the industry in the Gulf of Mexico and elsewhere have taken to re-evaluate project designs and improve well performance,” Angus Rodger, Asia-Pacific upstream research director at Wood Mackenzie, wrote. “We are now seeing scaled-down projects emerge with less wells, more subsea tie-backs, and reduced facilities and capacities, and this all translates into lower break-evens.”
In other words, the trick is to do more with less. But we all know what that means: fewer jobs, longer days, and less work and profit for contractors.
Wood MacKenzie also reports that 70 percent of the 45 deep-water projects on the drawing board are proposed by eight companies: Brazil’s Petrobras, Exxon Mobil, Chevron, Shell, BP, Total, Eni and Statoil. That gives those companies incredible power to demand lower prices from services companies.
“Only the most cost-competitive projects and regions will attract new investment,” the consulting firm declared.
This year’s OTC will be all about who can do the most with the least, and frankly, that’s healthy for the industry and the consumer. The brightest people who can develop the best innovations deserve to survive, and the rest of us will be rewarded with low prices at the pump.
So here’s the question for all of the attendees: Do you have what it takes?