MODU shortage unrecognized in IEA global oil supply forecasts

Rick Von Flatern
Technology Editor

Prospering in a boom requires the same good decisions at the top as during a bust. And good decisions require wellreasoned estimates about what to expect in the near and distant future. Such predictions abound in the oil industry about price, supply, and demand. Being able to discern between informed speculation and questionable prediction is one key difference between successful managers and ones that are less so.

Deciding what oracles to heed is a decision that often falls back on familiarity or the good name of the predictor. This can be a sometimes flawed, potentially disastrous, criteria. One recently published look into the future, a massive work from the International Energy Agency titled Global Offshore Oil Projects to 2000, according to at least one reader of the report and long time student of its subject, may be a case in point.

Matthew Simmons is president of Simmons & Company International and chairman of the National Ocean Industries Association, and after three readings of the report, he is expressing serious reservations about its conclusions. "In my first read through I thought, 'other than the fact I know some of these things won't work because of a lack of rigs, it sure is a credible report'," said Simmons from his Houston office. "It was only on the third time through, when I started to really write it up, that the magnitude of all these little things finally started to hit me."

Principle survey author, David H. Knapp, wrote in the report's preface that the "survey provides a detailed review of global offshore oil production prospects up to the year 2000 based on known projects and identifies trends expected to carry into the next decade." The upshot of the 150-page, 89-table, 21-figure report is to project a 6.3 million b/d global oil supply increase by millennium's end.

Simmons, like most established oil people, have a natural inclination to lend a great deal of weight to information published by the highly regarded IEA. And therein, he says, lies the problem. "There are going to be a lot of people making a lot of mistakes on the assumption that we have five to six million barrel per day of added supply on the way."

Among the problems Simmons found in the details of the report, called by its acronym, GOOP: an assumption that fields experiencing significant depletion rates between 1900 and 1995 would slow and then stop their declines; and a glaring disagreement with common consensus over the state of the worldwide offshore drilling rig market.

75-150 rigs needed

Simmons has calculated that the 6.3 million b/d increase would require adding 75-150 drilling rigs to the worldwide offshore fleet. He has also figured that considering most rigs now under construction are upgrades of units already in the rig count, a newbuild ordered today would not be available until mid-1999, and a historical 2.5% per year rig attrition rate, the rig fleet is more likely to show a net loss than anything like a triple-digit gain by 2000.

In response to questions of the influence of rig availability on the IEA's conclusions, Knapp said "My instincts tell me that there is a rig availability problem out there, but that it is more likely after 2000." In the same response, he conceded that rigs were not in abundance but "very few of the projects underway have as yet suffered delays or cancellations due to lack of rigs, oil field services, or production equipment."

Knapp followed with examples of projects able to meet initial production schedules by finding replacement facilities for suddenly unavailable ones. But all Knapp's anecdotes seemed to demonstrate only the availability of production platforms and FPSOs and his contention that a rig shortage is a problem for the next century seemed to fly in the face of a great deal of evidence that it is already a serious problem.

In fact, most observers place the first signs of a tightening rig market in mid-1995, when demand for harsh environment and deepwater rigs began to rise. Jackups, constantly coming off 30-day contracts and far more plentiful than semisubmersibles, appeared more available than they actually were. But if jackups were ever much more readily available than their larger cousins, they are not now. In fact, while using a November rig locator and gathering information for a presentation to an industry audience, Simmons made the discovery that by excluding non-competitive rigs owned by national oil companies, and rigs made unavailable by required upgrades, conversions, or other major repair work, "the number of (offshore) rigs available, ready to drill, had dwindled to seven in the world."

Knapp said GOOP conclusions included significant production added by continuing technological advancement and that "there is an implicit assumption that seismic and rig productivity will continue to improve and disseminate into offshore areas around the world." This ever-improving technology, Knapp argued, "will add to the world's oil supplies through higher exploratory success rates, more wells per rig, more barrels per foot due to horizontal/multilateral/advanced fractured and 4D seismically monitored wells."

Simmons does not share the IEA faith in technology's ability to so substantially effect worldwide oil production levels. "There is a fundamentally flawed assumption that says 'technology has totally changed the rules of the game and anything people want done will get done in time and within any estimates'," he said. "They seem to think that technology has so changed the game you can essentially just will new reserves into existence."

The IEA's overlooking the existence of such a tight rig market may be a function of the large amount of time it takes to gather, organize, and disseminate so much data. Not long ago rigs were available for a fraction of their current cost and utilization rates were less than 70%. Even those few who thought a real turnaround in oil industry fortunes was at hand, said so only very cautiously. But other flaws appear procedural and one, the individual country, by-field production tables, seems designed to raise supply expectations without explanation, says Simmons.

In each of the country tables an entry of "other" appears at the end of the list of field names. Despite the fact these entries follow fields whose production numbers are negligible, some add substantial production to the country's future tally. Some of these "others" account for an added 150,000 b/d - 200,000 b/d while other, named fields have almost no production at all.

Simmons says, if the report has flaws, they are that, as a product of the IEA, it will earn a place in many executives' decision-making reference list. After all, nothing affects any business's success as does the future global supply of its product and few agencies are more highly regarded than the IEA. The problem is compounded by the fact that few of the men and women engaged in any organization's most critical decisions have the time to study all the input they need and so must rely on others to summarize and interpret reams of sometimes esoteric data. As Simmons's challenges suggest, it is a practice fraught with risk.