Offshore: Which Way in ’09?
Unknowns Best Offshore Industry After Record-breaking Year(s)
In mid July of 2008, oil prices shattered all-time records and hovered around $140 per barrel. Analysts had dire warnings of $200 per barrel oil. Gone are the days of “cheap” oil, cable newscasts screamed. Exactly a decade ago, oil prices slumped below $10 per barrel in December of 1998. Analysts then decried prices would never again rise to $40 per barrel, markets were saturated.
It seems commodity analysts’ predictions change as much as the nightly weatherman’s.
Today, as the oil and gas industry embarks upon 2009, most companies again are left with more questions than answers about the future of the industry and concerns of unknown initiatives and policies soon to be formed by a new administration in the White House.
This uncertainty comes on the heels of nearly three years of record profits.
“The last three years have been record years even for us,” said Joe Bennett, executive vice president and chief investor relations officer for New Orleans-based Tidewater Inc. (TDW) “When oil prices rose to $70, $100 and over $120, everyone – including us – thought the chances of seeing $50 per barrel oil again was pretty slim. But no one expected the credit markets to fall apart.”
Ken Wells, president of the Offshore Marine Service Association (OMSA), said 2009 could provide critical answers for both E&P companies and the offshore service industry.
“Some of our members had their best years and quarters ever recently,” Wells said. “At trade shows, just about everyone you talk to said they were very busy and still signing long-term contracts. But, there are certainly enough people smarter than me that say the industry doesn’t run on $40 oil.”
Wells cited three dynamics affecting the domestic offshore industry going forward. First, deep-water projects have timelines that extend well beyond these uncertain economic times – billion-dollar projects budgeted for decades. Secondly, the economic downturn has caused a need for companies to boost cash flow and they want to make sure their existing infrastructure is producing.
The big question mark rests with mid-level projects, Wells said.
“Are the independent producers going to be able to obtain the credit to put their plans into action and are they going to find the a good value and a place where they can cut their expenses,” Wells asked. “No one is in a position to answer that right now.”
While the offshore oil and gas industry is a bottom-line business, long-time business relationships are valuable during downturns, Wells explained.
“These times are going to test whether customer relationships are still strong,” he said. “Relationships have always been important in this industry and there are [offshore service] companies that signed on for longer term contracts at the expense of [higher] rates. Now they are waiting to see if that accounts for much.”
The offshore industry is also waiting to see if promises made by Congress will be kept and what policies President-elect Barack Obama will implement.
“There is a lot of speculation as to how the new administration proceeds,” said Cathy Landry, a spokeswoman for the American Petroleum Institute. “The industry hopes everyone looks at energy in the broader context of the economy. We hope for a fact-based comprehensive energy policy that recognizes the importance of the oil and gas industry not only to the nation’s economy in terms of jobs for Americans, but also in terms of revenues for the federal government in terms of bonus bids, royalties, taxes and fees.”
In November, the Department of the Interior announced it had received record payments of $23.4 billion in royalties and bids in 2008 from domestic energy production, while state received $2.59 billion. Of the total, more than $10 billion came from bonus bids for offshore leases on the Outer Continental Shelf and Gulf of Mexico and .
“These record payments demonstrate the importance of domestic oil and natural gas to our nation’s economy,” said Jack Gerard, president of the American Petroleum Institute. “Imagine how much more revenue and jobs could be created for the benefit of all Americans if Congress and the Obama Administration listen to the American people and put ’s vast oil and natural gas resources, including those that have been subject to federal moratoria, to good use to strengthen our nation’s economy and energy security.”
On Dec. 15, Obama named Steven Chu, a Nobel Prize winning physicist, as his secretary of energy. In the announcement, Obama pledged to follow through on a decades-long promise to reduce the nation’s dependence on foreign oil.
“This time it has to be different,” Obama said in the announcement. “This time we cannot fail, nor can we be lulled into complacency simply because the price at the pump has for now gone down.”
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While optimistic, industry leaders are cautious whenever a new administration enters the White House.
“It’s truly too early to know,” Bennett said. “No one knows what will happen under this administration, so we’ll just have to wait and see.”
Others are encouraged by Obama’s early signals.
“At this point, Obama is saying all the right things,” Wells said. “[Obama] said it would be wrong to take this drop in prices as a sign we don’t need to do something. He seems to have a clear understanding that this country needs a comprehensive energy policy and hopefully he sees a piece of it as expanded offshore drilling. We can talk about alternative energy all we want, but to get there we have to expand offshore drilling to bridge the gap in the long term.”
Wells said a key to that expansion is ensuring adequate funding for the U.S. Minerals Management Service, the agency that handles geological and environmental studies of offshore lease tracts to prepare them for exploration.
“We must make sure Congress doesn’t starve MMS and be the reason more areas aren’t opened to exploration,” Wells said. “Obama is in the right position to do what’s right for the future, because when a Republican talks about expanded drilling, it produces an automatic response from opponents. But, when a Democrat talks about it, the nation could see some results.”
Industry Starting To Feel Affects
With now seeing the affects of Wall Street, declines are beginning to be felt in the oil and gas industry.
“The big driver in North America is natural gas and we’re certainly seeing a falling rig count on land already and that will probably impact the Gulf of Mexico, at least on the shelf,” said Gary Flaharty, a research specialist for Houston-based Baker Hughes Inc. “I think the deep-water producers will hold up OK and on a global basis oil is fundamentally tight. Obviously, we have the impact of a global recession. Natural gas production was up about 10 percent last year, but next year the Department of Energy expects production to be flat. So, we may see declines until those numbers get back more in line with demand.”
Robert Socha, vice president of marketing for Lockport, La.-based Bollinger Shipyards, said the shipbuilding sector was insulated from the downturn until recently.
“When oil prices started to slip, boat utilization – while still strong – began to fall a bit and that trickles down to shipyards,” Socha said.
Customers began to revamp budgets, especially for those projects requiring new lines of credit, Socha added.
“Day rates are still up at this point and the utilization is still there, but the industry is hearing from customers to do what they can to reduce rates now,” Socha said. “For the most part, industry has been hesitant to jump in and reduce rates and from a shipyard perspective, this is a seasonal slowdown anyway.”
With an eye on bridging the economic downturn, Bollinger began a new-build program based on speculation. The program, which calls for 12 new 210-foot OSVs, will keep their workforce intact and the vessels will be sold to the highest bidder in the future. In fact, Bollinger sold the first two vessels from the program to Odyssey Marine via an online auction.
“These vessels are bridging the gap between now and the start of a new government contract,” Socha said. “Bollinger is continuing to aggressively move forward. We’re improving our shipyards and building larger drydocks to handle larger supply boats to support our customer base. We’re building a better Bollinger.”
At Tidewater, Bennett said it is hard to tell now what 2009 will hold.
“We continue to be going through a bit of a transition that will likely last a while, but it’s difficult to know what the oil companies will be doing in 2009, because they haven’t disclosed their budgets yet,” Bennett said. “Everyone knows 2009 will have its challenges and fortunately we’ve been through these times before. We know how and where to cut costs and we’re monitoring our vessels closely.”
On Dec. 19, Barclay Capital’s Original E&P Spending Survey was released, painting a cloudy picture for the domestic and global oil and gas industry. According to the report, the sharpest declines will be felt domestically, as companies predicted a 26 percent drop in spending to $79 billion from $106 billion.
Globally, however, the industry is expected to contract a modest 12 percent, with spending totaling $400 billion from $454 bill a year ago.
“Given the longer-term nature of international projects and the dominance of the majors and national oil companies internationally, E&P cap expenditure budgets outside are showing more moderate declines – down 6 percent in 2009 to $300 billion from $319 billion in 2008. This would end a nine-year upturn,” the report states.
“That [$300 billion] is still a pretty darn healthy level of spending,” Bennett said. “So, the sky isn’t falling. Are we seeing a hick-up? Sure we are. But on a much longer term basis, basic fundamentals are still good and should cause oil prices to go up again. Now no one knows the timing of that. We believe reasonable [oil] prices are in the $70 to $80 price range.”
But for now, it appears the oil and gas industry and its support sector is weathering the economic storm.
“Our business doesn’t change on a dime,” Bennett said. “It takes a little while for any real market change to affect us.”