Industry Needs to Make Tough Call on Deepwater Projects in Challenging Time

Industry Needs to Make Tough Call on Deepwater Projects in Challenging Time
Difficult decisions are needed to tackle challenges in the current market as the number of deepwater projects dropped 42 percent in the past year to 122.

Weak crude prices, the slowdown of Chinese economic growth and the Middle East’s production have reduced hydrocarbon prospects in deepwater basins by a hefty 42 percent within the past year.

Deepwater prospects are down to 122 as of January, down from 210 projects a year ago, Jason Waldie, associate director at energy research group Douglas-Westwood, said.

Capital expenditure (capex) for the deepwater prospects, usually housing larger fields that could provide stable hydrocarbon supplies in the future, fell 35 percent to $137 billion in January from $210 billion forecast in January 2015.

Tough Decisions

Jason Waldie
Jason Waldie, associate director at Douglas-Westwood
Associate Director
at Douglas – Westwood

“Now is the time to make tough decisions” in the industry, Waldie said.

“Things could change very quickly. We just can’t predict external factors,” such as uncertainties in the market place and challenges to manage assets and costs on future projects, he said.

He expects oil prices to move up slightly in the second half of 2016 from the low levels recorded in the first half. A recovery in prices in the second quarter of 2015 took a quick double-dip on the Chinese stock market crash among other factors.

Industry-wide deflation is likely to persist throughout this year.

“Offshore budget revisions and renegotiations are expected to continue, with opportunity to innovate and refresh the industry,” Waldie told Rigzone, adding that “rig oversupply is a major issue.”

Several industry players have scrapped drilling rigs and plan to retire more, and new deliveries are being delayed. Singapore rig builder SembCorp Marine Ltd. holds a $7 billion orderbook for seven drillships after client Sete Brasil Participacoes SA filed for bankruptcy.

“Obviously, when there is a lack of demand, the prices will come down. There are so many rigs not being used at full capacity. Dayrates are seeing reductions of around about 40 percent,” Waldie estimates.

Chartering or leasing rates of mobile offshore drilling units fell in 2015 across all segments and will continue to struggle until 2017-2018 when orderbooks begin to thin.

Assets Overpriced

“The reality … assets were overpriced and likely would not work as long for as much money spent as previously thought,” Waldie said.

Today, the average annual earning potential for a jackup is down by 61 percent; for a floater, it’s down by 54 percent. Further write-downs are likely for older model assets that aren’t under contracts.

More M&A?

Mergers and acquisitions (M&A) loom on the horizon in the current industry environment, many insiders say.

“The sector’s prolonged oil crisis and depressed valuations could catalyze more M&A activities, which had stalled last year due to price impasse,” Pei Hwa Ho and Suvro Sarkar, analysts at Singapore’s DBS Research Group, said in an April 20 note.

“We also expect to see a wider consolidation scale in the oil and gas industry as the players face further financial pain,” they said, adding that they have “identified several potential takeover/privatization candidates in Southeast Asia – Baker Tech, Mermaid, POSH, Rig Tender and MMHE.” 

E&P Capex

Global exploration and production capex surged by 389 percent between 2000 and 2014, Waldie said at the Offshore Drilling Conference held April 19 in Singapore.

“This was beyond justification as oil production increased only 18 percent and gas output 40 percent during 2000 to 2014,” he said.

Comparatively, the oil price collapse has reduced costs by 20 to 30 percent so far. As such, project revisions and contract renegotiation persist for offshore projects.

Moving forward, Waldie said the industry must keep on top of costs in the next upcycle expected in 2019 to 2020.

Core Markets

The small recovery in the second quarter, following a 40 percent dip in oil prices from November 2014 to January 2015, took a double dip as the Chinese stock market crashed and trade sanctions on Iran were lifted. As a result, there was tension between Iran and Saudi Arabia over oil production even as U.S. oil supplies increased, Waldie said.

He pointed out that high cost deepwater projects in the U.S. were delayed or cancelled due to the downturn, while weaker commodity prices has led to significant capex reduction and bankruptcies in the onshore sector.

To ensure future supplies and pre-empt another spike in global oil prices, industry sources believe that deepwater drilling and production is crucial. And, the oil price must reach $50 or above.

The Douglas-Westwood consultant noted that China’s continuing capex cuts for deepwater is a concern. This is expected to curtail production growth from 2019 as project sanctioning decreases in the near-term. The Chinese have significant indigenous production although it remains a major importer.

Meantime, Waldie said Indonesia, once a leading petroleum producer in Asia, is struggling with output. Gas production is expected to plateau at 1.4 million barrels of oil equivalent with further delay on some major projects. These include Chevron Corp.’s Indonesian Deepwater Development in Kutei Basin as uncertainty in Indonesian regulations and a lack of infrastructure pose risks for upstream activities.

He added that Indonesia hopes to boost hydrocarbon production to 1.6 million barrels per day, a high which was previously reached in the 1980s, from current output of 830,000 barrels per day by tripling upstream spending from 2013 to 2017.

Likewise, Malaysia has ambitious plan. It allocated $90 billion for the upstream sector under the Economic Transformation Program to reverse the decline in production.

Still, he opined that Asia producers face challenges in increasing supplies, especially in a low oil price environment.

“Do not expect $100 per barrel price that soon. Mild recovery expected in 2017-2018 but not close to 2013-2014 levels,” Waldie said.



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