As a survivor of the great depression in the Oil Patch (1982-1993) when oil prices tanked from $34 to under $8 in three years and over 400,000 jobs were shed, I was one of those praying for another boom while promising not to squander it. That boom is finally upon us and it is therefore somewhat ironic that I should be musing over this question at all.
The game begins with drilling the hole that unlocks the product that makes the money. A major beneficiary of high oil prices has been the drilling supply chain: drilling contractors, equipment suppliers, shipyards, and logistic companies. The frenzy to drill holes has outstripped the supply of rigs and services, resulting in a rapid escalation in drilling costs. Deepwater drilling spread costs have more than doubled in the last few years. The shortage of drill rigs and sharp cost increases have caused significant delays in sanctioning many deepwater projects and a dramatic skewing of developmental capital expenditures towards drilling that is threatening the economic viability of several projects. This is a potentially troubling development for the contracting industry that has geared up for a wave of new projects many of which are being deferred or cancelled.
Drilling contractors have responded by building powerful new generation rigs at a pace not seen since the late 70’s. Day rates should moderate as these rigs enter the market, but that will not happen for several years.
Another beneficiary is the subsea supply chain including engineering companies, hardware suppliers, and installation contractors. Subsea developments have the advantage of rapidly bringing offshore reservoirs on-stream, with a high return on invested capital. In the last decade alone, subsea developments have gone from a niche to a mainstay of deepwater field developments. Subsea hardware contractors are investing their profits in subsea boosting, compression, and processing technologies that improve economics of new developments, increase recovery from existing developments, and enable commercial exploitation of future developments. Installation contractors, flush with cash, are pouring money into building a new generation of construction, pipeline, and subsea installation vessels. Similar to drilling vessels, installation spread day rates have escalated sharply, driving up subsea development costs.
One of the most dramatic consequences of high oil prices has been the unprecedented demand for skilled personnel ranging from engineers and managers to welders and tool pushers. Competition for these resources is so fierce that bidding wars have broken out and salaries have soared. While this is great for the individuals, it has been tough on service companies and ultimately bad for the industry. Company loyalty was the first casualty of this competition for scarce resources. Attrition has become an epidemic, resulting in little continuity in organizations that boast of great track records but have few experienced people who worked on these projects. The migration of people has become so chronic that the joke among service companies is of operators demanding the “A” team, after having just hired them from these very service companies.
Quality control on projects has suffered for lack of sufficient skilled personnel, resulting in major delays in delivery of several deepwater projects.
The good news is that service companies have started aggressively recruiting college graduates. Starting salaries for petroleum, geophysical, mechanical, marine, and process engineers are at an all time high and, perhaps, will attract the best and brightest in the future. At this rate we may have enough trained to run the business before the big crew change.
An unintended but inevitable consequence of high oil price is that it has drawn the unwelcome attention of our politicians. The outrage and posturing is as shrill as it is predictable. It is easy to make big oil the bogey man for the price at the pump and to call for punitive measures, and the US Congress has done so with misplaced vigor. The industry is fighting back with a campaign to educate the public about the role industry plays in ensuring a steady supply of this vital resource, that profits are not out of line with other industries and are necessary for the massive capital outlays required to keep the pipeline full.
High oil prices make unconventionals (heavy oil, tar sands, oil shale) and alternative energy (ethanol, biodiesel, wind, solar) more attractive. Renewables are the darlings of politicians, who are lavishing subsidies for ethanol and biodiesel while punishing Big Oil. Looking to the future and to moderate portfolio risk, operators are increasingly diverting capital to these alternatives, and therefore siphoning off investment from offshore developments.
Over 80% of the world’s known conventional hydrocarbon reserves are controlled by National Oil Companies (NOCs). They are beginning to flex their petrodollar-fueled muscle. NOCs are demanding big downstream investments in chemicals, refining, LNG, and GTL from International Oil Company’s (IOCs). Production Sharing Agreements are being renegotiated on less favorable terms with IOCs. Many NOCs are requiring significant local content of goods and services. IOCs and service companies are scrambling to adapt to this changing geopolitical landscape. The uncertainty is causing additional delays and cost escalations in large offshore developments and increasing execution risk. The bar for sanctioning offshore developments is being raised continuously. Today, in Nigeria, it takes at least a 400 MMbbl reservoir to justify a standalone development.
In summary, recent high oil prices are creating profound changes in the offshore business, the full impact of which we have not fully absorbed nor completely comprehended. My conclusion on the conundrum, “High Oil Prices – Boon or Bane for the Offshore Industry?” is an unequivocal Yes. In the meantime, like the rest of us, I intend to enjoy the benefits of the boom while it lasts. Laissez le bon temps rouler!
Richard D’Souza
Granherne/KBR
This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to Eldon Ball at[email protected].
