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Saturday, November 18, 2017

Projections center on When, not If

April 17, 2000

The cyclical nature of the offshore exploration and production beast is legendary in financial circles, riding boom and bust waves for years at a time. While industry analysts and insiders alike had forecast a pick-up in activity no sooner than mid-year 2000, the collective industry is “itching” to get back to the business of building, repairing and supplying the myriad of rigs, boats and other business opportunities that abound in a full-blown boom oil market. Patience, it seems, is wearing thin, particularly in the face of dwindling business prospects and the lingering of the $30+ barrel of oil. While it seems all too natural that sustained high prices would sooner than later drive a resurgence of the moribund offshore business, a host of factors — chief among them the very nature of today's corporate consolidated oil industry and the political powerplays by the OPEC nations — have conspired to delay the inevitable upswing in the Gulf of Mexico.

In discussing Schlumberger’s safety and training program Bruce Adams, the QHSE manager, admits that the high level of hiring in 1Q 2000 has created “high” demand for safety and training sessions.

Delays Ahead Despite the logic of a serious business run resulting from current oil pricing, it seems that the rebound will be delayed a bit longer than originally anticipated. The supply and demand curve will be permanently skewered by the fact that so few hold such a tight grip on the majority of the world's oil supply.

It was late in 1997 when the offshore oilfield markets were enjoying one of its extended booms, and signs of the times included soaring dayrates, yards working at overcapacity and desperate for labor to fulfill the mounting new and refurbish rig and vessel orders. The offshore oil sector was a Wall Street darling, supplanting technology and biotechs for a while as "the" sector in which to invest. Also, evolving technology that allowed producers to discover and recover resources in deeper waters more efficiently seemingly made the industry bulletproof.

Enter OPEC.

At a meeting in Jakarta, Indonesia in November 1997, OPEC leaders decided to raise production quotas in an effort to cash in on the high-flying market. While this action alone cannot be blamed for the staggering collapse of oil pricing in 1998 and 1999, it — combined with a serious financial crisis and resultant oil demand downturn in Asia — conspired to drag per barrel pricing into a quagmire that hit bottom at less than $10 per barrel in March of last year.

Following repeated cries from around the globe, OPEC finally cut daily production in an effort to prop the lagging price of oil. That action taken last spring has resulted in a more than tripling of the price of oil, which barreled through the $30 level in recent months. The production output has effectively squeezed supply worldwide, as demand has steadily increased during the drawdown. According to recent reports from International Energy Agency (IEA), "the numbers show markets are tight and getting tighter."

The recent oil-price crisis set back non-OPEC output growth for at least a year, a recent report released by Deutsche Banc Alex. Brown said, adding, while currently high oil prices should spur investment, the extensive 16-month price slide should delay any significant output response from non-OPEC producers.

Analysts say there is a lag time for exploration spending to play catch up with oil prices - for every one month when crude prices are below the cost of production, it takes three months of high prices to regain the volume of production lost during the low cost period.

Exploration for oil outside of OPEC picked up in the late 1970s in order to counter dependence on the cartel's oil following oil price shocks in 1973 and 1979. Currently, the world depends on this group's production to meet about two-thirds of the current 75 million bpd of crude oil demand.

Although oil demand growing and crude oil prices have topped $33 a barrel, analysts say upstream spending still lags. A Deutsche Banc energy analyst explains: "Demand seems to be back on track (following the Asian economic crisis), especially with the U.S. economy continuing to surprise. But companies continue to approach upstream spending cautiously, choosing instead to reduce debt, buy back shares, and explore for natural gas."

Significant Growth on the Horizon? From 2000 to 2003, Deutsche Banc Alex. Brown estimates that worldwide demand should grow some 6.5 million-bpd, or 1.625 million bpd annually. On the supply side, after five years of growth during which non-OPEC production rose by an average of around 770,000 bpd annually, 1999 saw output outside the cartel stay flat. This year, expectations are for a large gain, but not from new projects but from those put on hold last year. Other analysts' predictions are significantly more skeptical, with some predicting a jump of 200,000 to 300,000 for 2000, with no quantifiable measure until 3Q 2000.

While many industry watchers continue to tout the high price of oil as an indicator that production in other, non-OPEC entities will start soon, many continue to maintain faith in the much watched international rig count as a measure of increased activity.

Another trend that demands attention of interested U.S. marine builders and suppliers will be the decision by the MMS whether to allow the use of FPSOs in the Gulf of Mexico. Allowing these vessels, which are used widely in other offshore oil producing regions around the world (see chart), would spark activity in U.S. yards. While a decision is not expected before 2001, there is significant opposition to the deployment of FPSO vessels in the Gulf, due mainly to the environmental concern — real or perceived — which comes with offshore storage operations.

According to a recent report from Washington, D.C.-based International Maritime Associates, there are currently 107 floating production systems in operation worldwide, which is an increase of 67 percent over the total tallied in September 1996. At the time of the report (November 1999), orders were in hand for 21 floating production and five storage systems. Another 54 floating storage vessels (without production capability) are currently in operation.

Looking ahead, International Maritime Associates projects orders to 62 to 84 additional floating production systems to meet installation requirements by the end of 2005, with FPSOs counting for about 70 percent of the new units, and the balance being production semis, TLPs or spars. Capital expenditures for these new systems will total $17.3 to $23.8 billion over the next five years.

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