Review&Forecast—January 2010 IssueOil, Gas Industry Finishes Challenging Year, Looks for Slight Improvement
By Susanne Pagano
The global recession, financial turmoil, weakened demand for oil and gas and uncertain commodity prices presented challenging and sometimes jittery market conditions in most of 2009. But in the year’s homestretch, most oil patch businesses were optimistic that the next 12 months would bring a slight improvement.
It’s been a tough balancing act for drilling contractors, oil field equipment suppliers and service companies in the offshore energy sector. Companies reined in capital spending budgets but retained long-term deepwater drilling and field development programs.
After oil bottomed out at less than $35 per barrel early in the year, prices slowly stabilized to levels of $70 to $75 a barrel—about half of what they were in mid-2008. Many energy companies subsequently reported a fall in profits following the steep oil price decline.
Rig Day Rates
Since May, daily charter rates on new deepwater semisubmersible contracts declined and then leveled off in the latter part of the year, observed Tom Marsh, U.S. publisher for ODS-Petrodata in Houston, Texas. Toward year-end, day rates for semis designed to drill in more than 7,500 feet of water offshore Texas and Louisiana ranged from about $410,000 to $496,000, Marsh said. Rates for midwater-depth semis have dropped significantly in a couple of recent contracts, Marsh added, with the units working at rates from $150,000 to $375,000 a day.
There has also been pressure on floating rig day rates, but many contracts were negotiated several years ago and could not be lowered, according to Marsh.
“A lot of the big-money day rates are locked in for several years,” he observed.
As year-end approached, charter rates for jack-ups in the Gulf of Mexico ranged from about $28,000 to $180,000 a day, depending on the rig’s water depth rating and other specifications.
New high-specification drilling rigs entered the marketplace, including the first unit in Ensco International’s (Dallas, Texas) 8500 series of ultradeepwater semisubmersibles, the Ensco 8500. The rig, built in Singapore, immediately began a four-year contract with Anadarko Petroleum Corp. (The Woodlands, Texas) and Eni International (Rome, Italy) in the Gulf of Mexico. Several months later, the second of seven semis in the Ensco 8500 series began operations for Nexen Inc. (Calgary, Canada) and Noble Energy (Houston).
Moreover, Transocean Ltd.’s (Houston) new ultradeepwater drillship, the Discoverer Americas, recently began drilling for Statoil (Stavanger, Norway) in the Gulf of Mexico under a four-year contract. Transocean has six similar new-build deepwater floaters in various stages of construction or preparation for initial contracts that are scheduled to begin in the next two years.
An estimated 130 offshore drilling rigs were under construction, on order or planned worldwide in late 2009.
Discoveries and Other Activities
Independent and major oil and gas operators logged several promising deepwater discoveries in the Gulf of Mexico. Anadarko logged four deepwater discoveries. Company management called the successful wells a demonstration of the quality of its deepwater portfolio of high-impact projects. Evaluation of the midyear Mississippi Canyon Vito discovery in about 4,000 feet of water continues, along with the timing of an appraisal well. Other discoveries include Samurai, in 3,400 feet of water in Green Canyon.
The year’s activities included drilling one of the deepest wells ever, BP’s (London, England) Tiber prospect in the U.S. Gulf of Mexico’s Keathley Canyon. The well encountered oil in multiple lower tertiary reservoirs. Calling the discovery “giant,” BP said appraisal would be required to determine the well’s size and commercial significance.
Many Gulf of Mexico fields began production throughout the year, including BP’s Thunder Horse, Chevron’s (San Ramon, California) Tahiti and BHP Billiton’s (Melbourne, Australia) Shenzi.
In the international sector, Murphy Oil (El Dorado, Arkansas) commenced oil production from West Africa’s deepwater Azurite field, utilizing the industry’s first floating production, storage and offloading facility with a drilling rig on board (FDPSO). Murphy officials called Azurite an innovative approach to minimizing the cost and maximizing the value of a deepwater development.
The FDPSO has the capacity to store 1.3 million barrels of oil and process 40,000 barrels of oil per day, and it is being used for drilling and completing the production and injection wells.
The past year also brought a few mergers and new joint ventures among oil field equipment suppliers and service contractors. One venture was announced between National Oilwell Varco (Houston) and Schlumberger Ltd. (Houston). The Houston-based venture, IntelliServ, will provide high-speed drill string telemetry systems.
Demand slipped for supply vessels that support drilling and production operations offshore Texas and Louisiana, market analysts reported. Utilization was highest for workboats suited to support deepwater rigs. A new company, Bee Mar LLC (Houston) joined the market, offering oil operators a fleet of DP-2-class platform supply vessels designed to support drilling, production and construction projects.
Separately, one longtime vessel builder and operator, Edison Chouest Offshore (Galliano, Louisiana), firmed up plans to design and fabricate a dozen 300-foot deepwater diesel-electric supply boats—10 of the vessels will be built at the company’s domestic shipyards, and two will be built at a new Chouest facility in Brazil.
Finally, Devon Energy Corp. (Oklahoma City, Oklahoma) disclosed intentions to divest its Gulf of Mexico and international oil and gas assets beginning in 2010, saying it will instead focus on North American onshore plays.
A Look Ahead
As in other years, several variables make it difficult to forecast offshore activity over the next 12 months. For certain, priorities will include new technology to enhance global exploration and production, analysts say. Most market observers do not expect serious oil price fluctuations beyond the current price range, while operators agree that natural gas prices need to improve beyond $4 per British thermal unit to spur drilling in shallow waters.
Oil and gas companies remain strategically committed to drilling and developing new reserves in deepwater regions of the Gulf of Mexico as well as attractive prospects offshore Brazil and West Africa, among other regions. Key shallow-water wells and development projects will move forward.
ODS-Petrodata expects the Gulf of Mexico’s rig count to remain at about 60 rigs during most of 2010, a utilization rate of about 50 percent.
Early in the year, the worldwide rig fleet totaled about 750 rigs, with some 570 units under contract.
Activity levels will hinge on oil companies’ exploration and production budgets, which many analysts believe may decrease compared with 2009 expenditures.
Marathon Oil (Houston) was one of the first U.S. oil and gas companies to announce its capital spending plans for 2010. Marathon’s overall capital budget will be smaller, but more dollars will be allocated to exploration and production programs.
Separately, ConocoPhillips (Houston) disclosed that its global capital expenditures would be reduced by 12 percent from $12.5 billion in 2009 to $11 billion in 2010. The company also said it would sell $10 billion in assets in the next two years to reduce its debt-to-capital ratio.
The gulf’s first floating production, storage and offloading (FPSO) facility for the deepwater Chinook/Cascade field is expected to begin operations midyear, according to operator Petrobras America (Houston). Engineering continues on another FPSO facility to develop Chevron’s domestic Jack and St. Malo discoveries.
The U.S. Minerals Management Service forecasts Gulf of Mexico oil production to increase substantially over the next several years, possibly reaching 1.9 million barrels of oil per day by 2013.
However, the gulf’s natural gas production is forecast to continue its decline over the next four years due to aging projects in shallow water. Future increases depend on the successful development of undiscovered resources in the gulf, agency officials said.