New year could herald offshore rebound

January 2, 2011

New reports point, cautiously, to better times ahead for the industry in 2011. But uncertainty in the post-Macondo Gulf of Mexico remains, as Russell McCulley writes.

World oil demand bounced back in 2010 to its 2007 all-time high, according to a December report from Wood Mackenzie. The analyst said 2010 demand would reach an annual average of 86.7 million b/d – 100,000b/d higher than 2007 – and grow to 88.1 million b/d in 2011. WoodMac attributed a full 85% of the recovery in demand in 2010 to emerging Asian markets, led by China and the rest of Asia.

Demand in OECD countries fell by some 3.9 million b/d over the course of 2008 and 2009, while demand in emerging markets increased by 1.6 million b/d, said WoodMac principal oil demand analyst Francis Osborne. 'By 2012 we expect OECD demand to still be more than 5% below pre-recession levels, while demand in the emerging markets will be 6.5 million b/d higher,' he said.

'At the start of this year we had estimated that demand growth in 2010 would be of the order of 2 million b/d, at the top end of industry expectations: it now looks as though it may be closer to 2.5 million b/d, with 2010 looking like one of the fastest growing years on record,' Osborne said.

A November WoodMac report on global upstream capital spending reached similarly unbalanced conclusions, putting the 2010 total at more than $380 billion – $19 billion higher than 2009, but unevenly distributed, with recoveries in Canada and Russia lagging. While WoodMac expects global upstream capital spending to return to 2008's historic high by 2012 or 2013, spending in Canada and Russia could take several more years to recover.

'The economic crisis of late- 2008 shook the foundations of the global upstream business,' said WoodMac regional upstream research manager Iain Brown. 'Many higher cost capital projects were delayed, shelved or abandoned, and annual spend dropped by over $55 billion. Now, just one year on, the industry has proven remarkably resilient. Many plans have been restored or expanded, in the expectation that demand and commodity prices will remain relatively robust over the longer-term.'

The report predicts capital spending in Australia to grow three-fold by 2013 and in Iraq to increase by $10 billion over the next three years.

Much of that spending will be absorbed by the rising costs of building and maintaining oil & gas facilities, a new report from IHS indicates. The IHS Cera Upstream Capital Costs Index rose 3% in the latter half of 2010 after 'bottoming out during the previous six-month tracking period', IHS reported. The company's Upstream Operating Costs Index rose by 1% over the same period.

The results were the first to be released since the BP Gulf of Mexico blowout and spill. IHS Cera reports that six rigs exited the Gulf of Mexico after the federally imposed drilling moratorium.

'The fact that overall upstream costs are trending upwards points to the increase in oil and gas activities worldwide,' said IHS Cera chairman Daniel Yergin. 'While the oil spill in the US Gulf of Mexico and the resulting moratorium has had significant impact on that region, its ramifications have, thus far, shown little impact on deepwater activity elsewhere. However, increased certification and regulations will likely push up total project costs globally in the future.'

IHS Herold in December released a report projecting a healthy recovery in 2011 for the oilfield services sector, despite the drilling moratorium's impact. The company's Review on the oil field services sector said rising oil prices, unconventional drilling in North America and worldwide offshore opportunities helped sustain company revenues in 2010, a trend that should accelerate in 2011.

'Many of the service companies, and in particular the offshore drilling companies, took a financial beating following the Gulf drilling moratorium,' said report author and IHS energy analyst John Parry. 'With the lifting of the moratorium, the industry has moved to a more offensive posture. While valuation of the underlying equities in the sector remain about 35% below their peak in 2008, we believe strong oil prices and higher exploration and production budgets will help drive growth in the oilfield services sector in 2011, and current forward earnings estimates suggest a potential restoration to prior peak 2008 stock price levels by 2012.'

The fallout from the spill could present opportunities for service providers as drillers seek compliance with new Bureau of Ocean Energy Management, Regulation & Enforcement (BOEMRE) rules, Credit Suisse oilfield services analyst Brad Handler told delegates to December's Deep Gulf conference in Galveston, Texas. Among the beneficiaries could be manufacturers of BOPs and tooling packages and inspection services. Handler also expects to see increasing demand for higher-spec jackups and floaters, with new orders for 13 jackups and two semisubmersibles logged in 4Q 2010, compared to a total of 25 newbuild orders in the preceding seven quarters.

'Various contract drillers are concluding there's a sustained demand for the higher-end of both the jackup and the floater markets, and are investing accordingly,' Handler said.

BOEMRE sought to clarify some post-Macondo regulations in recent weeks, but as 2010 drew to a close it was still unclear what liability burden operators might face as deepwater drilling resumes. Two other unknowns – how much the agency will tighten the criteria for categorical exclusions, and how newly required environmental impact studies will affect proposed lease sales – will delay the US offshore's recovery, Handler said.

'Add up all three items, and it's pretty easy to conclude that the outlook for 2011 isn't promising at all' for Gulf of Mexico operators, he said, adding that more rigs and jobs are likely to exit the region before deepwater activity climbs back to pre-Macondo levels.

If imposed, new liability requirements – as high as $30 billion, the Macondo disaster's expected price tag – could squeeze all but the largest companies out of the deepwater gulf, Deloitte vice chairman and oil & gas practice leader Gary Adams told the Deloitte Oil & Gas Conference in Houston in November.

'The companies that operate in the Gulf of Mexico are evaluating their portfolios to determine, could I absorb this type of liability if it should happen again?' he said of the 20 April 2010 Macondo disaster. 'Our research shows that there are about ten companies, international and national oil companies that operate in the Gulf, that have a market capitalization of $30 billion or more. Only ten.'

November's mid-term elections, which produced a Republican sweep in the US House of Representatives, may have cooled the prospect of liability requirements of that order. But independent producers could still feel the squeeze.

'There's a potential shakeup that will happen in the Gulf of Mexico,' Adams continued. 'And the shakeup, if it means oil and gas companies departing the Gulf, doesn't mean good things for the United States as far as production goes. Because we count on a lot of these companies to provide production.'

The next several months could see an increased pace of merger and acquisition activity as companies evaluate risk and redirect their energies, he said.

As for energy prices in 2011, few analysts are willing to offer predictions, at least publicly. But Adam Sieminski, chief energy economist at Deutsche Bank, took a stab at it at the Deloitte conference. Projecting a modest worldwide economic growth rate of 3.8% in 2011, Sieminski cautioned: 'You might want to be a little careful about those $100 a barrel forecasts.' The price per barrel likely won't reach that mark until 2015, he said, with prices in 2011 expected to hover around the $80 per barrel range.

'There's still a lot of OPEC spare capacity,' he said. 'There's a lot of inventory, globally. Demand is recovering, but we're still not hitting on all cylinders in the demand engine.' OE



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