Deepwater State

Is there finally some light at the end of the tunnel for offshore?

By Bill Pike, Correspondent

Over the past year, the U.S. Gulf of Mexico oil and gas industry has been characterized by more depressed activity. Major oil companies such as ExxonMobil and ConocoPhillips have essentially abandoned the region with activity levels at significant lows. The activity slump is partially a result of low oil prices that have plagued the industry recently.

Last year, a recovery in oil prices looked promising but prices in the fourth quarter tumbled from just over $75 bbl. for West Texas Intermediate (WTI) to less than $45 bbl. Although the WTI price rose 32% in the first quarter to $60.14 bbl., it has not returned to the highs of 2018. This has stifled a strong recovery and has been driving sustained depressed activity levels in the U.S. Gulf.

The roller coaster price of oil over the past year has been driven both by international production issues and the continuing explosion of shale oil production in the U.S., particularly in the Permian Basin and New Mexico.

Production in Saudi Arabia, a key international producer, has remained fairly steady, with periodic, unsustained cuts having little effect on the rising production levels in the country. In Venezuela, a once prominent producer and OPEC member, production has fallen to almost nothing, due to the continuing political issues in the country. And in Russia, oil production, which has seen a continuous rise over the last few years, hit a post-Soviet record high of 11.16 million barrels per day (bpd) last year on an annual average basis, according to data from its energy ministry. Each of these factors and others have contributed to destabilized oil prices.

But it was U.S shale production that drove the lack of confidence. U.S. crude oil production hit a record 12 million bpd in the week ending Feb. 15, an increase of 100,000 bpd from the previous week, U.S. Energy Information Administration (EIA) petroleum data showed. This confirmed that U.S. production is growing faster than forecasts suggested just a few months ago. U.S. crude oil exports also hit an all-time high that week, surging to 3.6 million bpd, beating the previous record of 3.2 million bpd set in November 2018. The EIA now estimates that U.S. crude oil production will average 12.4 million bpd this year and 13.2 million bpd next year, with most of the growth coming from the Permian Basin.

WTI OIL Price

Source: Business Insider, https://markets.businessinsider.com/commodities/oil-price?type=wti

BRIGHTER FUTURE?

Drilling should increase in 2019, according to a report by analysts Wood Mackenzie. Production will get a boost as Shell’s Appomattox deepwater field in the Gulf of Mexico is brought on line and Chevron’s Anchor project in Green Canyon Block 807 is expected to move forward, WoodMac said.

Senior researcher William Turner of Wood Mackenzie expects 2019 to be

a strong year for the Gulf of Mexico. “In addition to exciting new projects, which could usher in more than $10 billion of investment into the region, a couple of historic firsts set to occur next year could set the stage for years to come,” said Turner.

In its annual outlook, US Gulf of Mexico: 5 things to look for in 2019, WoodMac said that after four years of steady decline, exploration activity is expected to increase next year by 30%. Shell and Chevron will lead the way, but the actual growth in exploration will come from new entrants, Wood- Mac said.

Merger and acquisition activity in the Gulf of Mexico is also expected to pick up, according to WoodMac.

“There appears to be plenty for sale in deepwater Gulf of Mexico,” Turner said. “We believe the quality of the assets is high. If oil prices cooperate, we could see a thriving M&A market in 2019.”

A key factor to ensuring a strong year ahead and in the future will be holding on to the industrywide efficiency gains made since 2014, the WoodMac report said.

“In the last four years, deepwater operators have focused heavily on lean operations, standardization and industry collaboration to achieve fiscal discipline,” said Turner. “Reverting to inefficient ways of doing things is a real threat that operators need to look out for in 2019. The challenge to operators and the service sector alike will be to hold onto lessons learned, mitigate efficiency risks where possible and properly plan for higher costs and longer schedules where unavoidable.”

GOM PRODUCERS

In 2017, ExxonMobil began to consider selling deepwater assets in the Gulf of Mexico that produced about 50,000 bpd. At that time, the company had stakes in Gulf assets that produced the equivalent of more than 200,000 bpd and 730 million cubic feet of gas daily, according to company data. While Exxon is the most valuable publicly traded oil company, it is only the ninth-largest operator in the Gulf.

To Exxon and others like ConocoPhillips, the Gulf of Mexico has been displaced by cheaper shale formations onshore and by new offshore plays like Guyana, where Exxon’s giant Liza field is expected to produce 120,000 bpd in its first phase.

At the same time that ExxonMobil was considering shedding some of its investments in the Gulf, ConocoPhillips officials said that the company would stop searching for oil and gas in deepwater fields, and that it planned to sell offshore leases it doesn’t intend to drill.

It is not a coincidence that ExxonMobil is now one of the biggest players in the Permian Basin, with Chevron planning to operate in its stacked plays for years to come.

But a large number of players have stayed, betting on the GOM’s recovery. Shell, which maintains a strong position and interest in the U.S. Gulf, was the largest bidder in the most recent GOM lease sale, offering nearly $95 million in 88 bids in licensing round 252.

Shell made a primary discovery, one of its largest exploration finds in the past decade in the U.S. Gulf of Mexico, in February 2018. In a conference call, Shell CEO Ben van Beurden said: “When we announced the Whale discovery last year, I said we’re looking to accelerate the development cycle and bring the project on stream faster. So, I’m pleased to announce that we’re already assessing the results of the exploration and appraisal wells that we have drilled at Whale.”

BP is also a major player in the GOM and has approved a major expansion at the Atlantis project.

“BP’s Gulf of Mexico business is key to our strategy of growing production of advantaged high-margin oil,” said Bernard Looney, BP’s chief executive, upstream. “We are building on our world-class position, upgrading the resources at our fields through technology, productivity and exploration success.”

Looney said that these fields are still young — only 12% of the hydrocarbons in place across BP’s Gulf portfolio have been produced so far. “We can see many opportunities for further development, offering the potential

to continue to create significant value through the middle of the next decade and beyond,” he said.

WORKBOAT ACTIVITY

Is 2019 the year when the Gulf of Mexico offshore market finally shows some life?

Jackson Offshore

Given the roller coaster ride the workboat industry has been on over the last few years, with more down cycles than up cycles, it is no wonder that opinions about the market tend to

be on the conservative side. IHS Markit’s Richard Sanchez noted that the more optimistic market watchers project that the industry will add one to two rigs this year, but that oil prices do not appear to be strong enough to draw additional activity. Sanchez looks for only one rig to be added in 2019. “The workboat industry is not very exciting now,” he said.

Peter Laborde of Laborde Marine, New Orleans, agreed. “The market is still at the bottom of the trough. Recovery is 18 months to two years away.”

Jackson Offshore Operators’ vice president and chief operating officer Matt Rigdon is looking at three or four years before business returns to normal levels. “In deepwater, the market has been flat since mid-2018, at approxi-

mately 20 vessels,” he said. “In my opinion, any significant increase in vessels numbers is unlikely this year. Perhaps we will add one vessel but there won’t be a boom.

“We don’t think the market will return to normalcy until 2022, 2023,” Rigdon continued. “Probably the biggest concern with regard to the timing of this prediction is what levels of production will we see from onshore unconventional production in the next few years.”

The prospect of large-scale mandatory drydockings contributes to the muted outlook. With large numbers of vessels stacked for long terms and active vessels seeking drydock extensions, a potential drydocking crisis looms.

“With regard to mandatory upcoming drydockings in the $1 million to $2 million range, owners are looking at current day rates and it doesn’t

make sense,” said Sanchez. “Those with big fleets can, and do, withdraw boats with pending drydockings from the market and replace them with other vessels.”

Rigdon agreed. “The market will be tight in the coming months due to the number of vessels that must be drydocked. Over half of the deepwater vessels now in operation were delivered in the 2014-2015 time frame. They are now due for the mandatory five-year special survey.”

But he sees a potential upside. “The fall in working OSVs due to drydocking will put supply and demand almost in equilibrium,” Rigdon noted. “The second factor in favor of day rates is that the spot market for vessels is, more or less, vanished. One of our customers looking for a spot market vessel had only one vessel offered in a recent opportunity announcement.”

The outlook for day rates are mixed. According to Sanchez, shallow water is currently more active than deepwater, with day rates up $800 to $1,000 over average rates over the last four years. “For big vessels, day rates have improved some but big boat owners don’t want to sign less than 90-day contracts which may make day rate negotiations a bit more strenuous,” said Sanchez.

The day rate for large OSVs is $13,000 to $17,000 on average, with spot rates up to $20,000. Larger vessels (4,000 to 6,000 dwt) need day rates of $25,000 per day to begin repaying everyone and cover construction and operational costs.

“The industry overbuilt its fleet in 2013 and 2014 and haven’t seen a recovery that uses all the extra vessels,” Sanchez said. “Stronger oil prices would help. In this respect, workboat owners are suffering from their own success.”