Offshore drillers have been battered by the plunge in oil prices with falling day rates and a growing number of older rigs headed for demolition.
Lower oil prices added to the pain of a down market due to a glut of drilling capacity. A wave of new, efficient drilling rigs coming into service created an oversupply that has been magnified by more productive drilling operations, said Bob Fryklund, chief upstream strategist at IHS Energy.
He said day rates for new contracts are off by more than 50%, with rigs once commanding day rates of USD 650,000 now leasing for USD 250,000, he said.
For oil companies, “it is a good time to renegotiate contracts. It is a bad time to be on the other end,” Fryklund said during a presentation at the 2015 Offshore Technology Conference (OTC).
Drilling rigs are the highest profile target for cost cuts, but “operators are seeking reductions in the cost of most things,” said Andrew Meyers, a manager at Douglas-Westwood, which provides market data and consulting services for companies working offshore.
This low-cost environment is expected to linger. It could take until 2018 for the rig market to tighten enough for rates to recover, said Thomas Shattuck, a research analyst at Wood McKenzie.
But when the oversupply passes, the cost of offshore services will rise again. Lasting cost control will require companies to rethink how projects are run to eliminate inefficient methods that add to the cost of the complex multibillion-dollar developments.
“You can cut costs a certain amount but efficiencies that increase productivity are likely to have a benefit that lasts into the next up cycle,” Fryklund said.
There is fat to cut. Even when oil was still selling for USD 100/bbl, operators were saying fast-rising costs were eroding margins.
“There have been a lot of inefficiencies in the market for a long time,” Meyers said. The problems include soaring project management costs. Multiple design teams can create incompatible systems requiring costly changes.
One sign of the times is the rising number of joint ventures between large offshore service companies that promise to bring together a wider range of experts into teams that look at the larger picture.
“There is a little rethinking of project development,” said Imran Khan, a senior research analyst covering the Gulf of Mexico at Wood Mackenzie. “It is a challenging environment economically and technologically. Low oil prices offer a strong argument for doing things differently, but are not the only motivation for change,” he said.
It is still too early to know if things will change, but the record of past cost-cutting efforts have been spotty. “What I understand is with every downturn, the major operators talk about savings (on project development), but they never materialize,” Khan said. “This time, they say it is different. Time will tell.”
Numbers from IHS show lower oil prices are squeezing the deepwater business.
- For deepwater rigs, the reported day rates for new contracts have dropped from USD 650,000 to USD 250,000.
- The impact of a glut of new equipment has been increased by rising productivity, with deepwater drilling times up 20% to 35% over 5 years, depending on the location.
- Deepwater operators are cutting exploration and production budgets by 12% to 20%, less than half the cuts by operators in unconventional plays.
- The break-even cost for 65% of the projects that have yet to be sanctioned is less than USD 60/bbl. If the average rises to USD 75/bbl, 75% of them are viable.
Break-even Estimates
The tough times facing drilling echoes the brutal sound of cost cutting for onshore unconventional operators in the United States. But offshore, the volume is not as loud.
While unconventional operators onshore are cutting exploration budgets by 30% to 60%, large operators working offshore have been making cuts from 12% to 20%, Fryklund said.
With benchmark oil prices recently at around USD 60/bbl, a large percentage of the offshore projects under development do not appear to require deep cost cutting to reach breakeven. IHS estimates that the break-even cost for 65% of the projects that have yet to be sanctioned is less than USD 60/bbl, and 75% of them are viable at USD 75/bbl.
Those are among many break-even estimates offered, often with widely varying numbers. Meyers said that is a sign of the unsettled state of the business now.
More efficient drilling equipment is reducing well costs. “We are spending less to drill the same number of wells as we have gotten more efficient,” Fryklund said. “Drilling time in the deep water has improved from 20% to 35% in the last 5 years depending on the play or region.”
“The costs have then gone down as both the days needed to drill have gone down and the day rate for offshore rigs has gone down. Hence, we are getting more for our dollars. Same with seismic as the cost of seismic is coming down as we overbuilt capacity again,” he said.
Cost control offshore measures reflect the long-term nature of finding and developing deepwater fields. In the deepest water of the US Gulf of Mexico, early estimates indicate producing the oil in the Lower Tertiary—a trend offering enormous potential reserves and technical obstacles—will come with a break-even cost of USD 85/bbl. The actual cost is as speculative as the value of oil when these frontier projects come online years from now.
“It is not really about today’s price,” said Shattuck of Wood McKenzie. They are among the projects that “still require appraisal work and are still waiting for equipment that is being developed.”
The international oil companies able to finance deepwater megaprojects are most often integrated producers with refining operations that are now doing well because of low crude prices. Generally, these giants do not feel the same financial pressure as the independent oil companies working in shale plays.
For those selling new technology, the difference has been evident. Compared with onshore, selling innovative ideas for offshore operations has been like “pushing a rope,” said Rustom Mody, vice president of enterprise technology and chief engineer at Baker Hughes. “They just haven’t felt the same pressure to improve—at least, not yet.”
“Unconventional development is like a running on a hamster wheel to keep up with the cash flow needed to replace short-lived wells,” he said. “A deepwater project is a 10- to 12-year investment costing billions of dollars. They do not worry as much about price fluctuations on a long-term project with production of millions of barrels.”
If oil prices linger in this range, though, that could change as operators look for ways to sharply reduce costs. “In my 35 years in this industry, new technology is more likely to be accepted in a downturn. In good times, everybody is too busy making money,” Mody said.
Attention to Details
Significant gains in productivity is also possible with close attention to detail. Offshore finds dominate the list of the largest discoveries in recent years and many of them are carbonates. Fryklund said these rocks are commonly described only as “limestone-dolomite.” A more detailed understanding of the formation’s makeup and history could deliver more productive developments.
Organizational details also have a significant impact. “Traditionally, a lot of work for fit-for-purpose offshore production facilities is done” by separate teams with little communication among them, Meyers said. The result has been overbuilt systems that are a product of uncertainty about the size of the reservoir, and sometimes conflicting evaluations by the teams.
To address the problems, service companies have been creating joint ventures able to perform a wider range of tasks with a goal of better coordinated design work beginning early in the process. This trend began with OneSubsea, which was formed by Cameron International and Schlumberger in 2013. Last year, Baker Hughes and Aker Solutions announced a venture with similar goals in mind.
At OTC, FMC Technologies and Technip promoted their recently formed venture, Forsys Subsea, with a display promising that its team “will significantly reduce the cost of subsea field development and provide the technology to maximize well performance.”
It is too early to know if these organizations will deliver on such promises. The oldest of them has not been around long enough to have done early planning work on a deepwater field and see it through first oil production, much less see how it produces long term.
Fryklund said the early results have been positive. There have been projects where costs have been reduced 10% to 20% because these partnerships delivered projects in less time with fewer costly change orders, and in some case using innovative methods.
At an OTC briefing, BHP reported that OneSubsea helped it reduce the cost of its Shenzi project by figuring out how it could use a standard subsea tree for production and injection wells with limited modifications for the project in the Gulf of Mexico.
For Cameron, OneSubsea has helped improve its results at a time when “almost every prospective project we’re tracking has gone through or is going through some sort of second or third round of analysis and re-engineering to reduce both scope and price,” said Jack Moore, chairman and chief executive officer of Cameron, during an investor briefing.
The company’s sales of subsea equipment, however, rose sharply during this year’s first quarter because orders for 23 subsea trees by BP. Scott Rowe, president and chief operating officer of Cameron, attributed the sale to work by OneSubsea to reduce the cost of a BP project offshore Egypt by using standardization to speed a project that is filling an urgent need for more gas in the country.
Over the long term, one way to improve the returns on deepwater projects will be to reduce the long time between discovery and first oil production. For deepwater fields, that average time has been stuck at 7 years in most places. There have been smaller projects in the Gulf of Mexico, though, delivered in 3 years indicating that gap can be reduced, Fryklund said.
Coming Soon
The future might look smaller, simpler, and less costly to install. One product that appeared to be designed for the times was a new subsea tree designed by Proserv that debuted at OTC.
The subsea equipment maker expanded into that product line with a basic vertical tree that weighs significantly less and is designed to reduce the number of days needed for installation, said Steve Lykins, president of the Americas at Proserv.
“The savings can make a field that is not viable become viable,” he said, suggesting it could be an option for satellite developments tied back to platforms. More tiebacks are expected because they offer a lower-cost way of putting discoveries into production at a time when the average new field is smaller.
Another source of added barrels is older deepwater wells in need of repair. The high cost of work done using floating drilling rigs has limited subsea well workovers.
FMC’s exhibit at OTC showed a model of the Island Performer, a new vessel recently stationed in the Gulf of Mexico, which was built to do riserless interventions in water depths of up to 6,500 ft. It is equipped to deliver tools on a wireline for in-well work or use coiled tubing to pump acid into wells to stimulate production.
The vessel is owned and managed by FTO, a joint venture combining FMC’s subsea expertise and Edison Chouest’s offshore operations skills. The Island Performer, which has also been booked for other offshore construction work, will test the demand for this young technology in the Gulf of Mexico.
While cost control is the theme of the moment, new approaches may have a better chance in this difficult economic environment.
“When you look at major breakthroughs and innovations, most major changes of technology happened during times of stress,” said Neal Prescott, executive director of offshore technology of Fluor Offshore Solutions.
He explained that clients frequently ask for a lower-cost design that meets multiple design requirements. Those designs frequently do not offer the hoped-for savings, so he suggests reducing the requirements because, “If you really want to save money, you have to think differently.”
