Let the good times roll
  from: Offshore Engineer
  by: Jennifer Pallanich
  Friday, April 04, 2008

The oil industry is flush with cash, thanks to a continued upward march in prices. It’s almost hard not to make money these days, and market watchdogs see continued good times for 2008, although they temper that optimism with a few cautions. Jennifer Pallanich reports.

Pundits see 2008 as a year ripe for more money-making with supply – from hydrocarbons to rigs to personnel to materials – remaining the controlling element.

‘The days of cheap oil are over, thank God,’ says Matt Simmons, chairman of Simmons & Co International. The idea of $200/barrel oil also doesn’t seem to bother him. Rather, he believes it would create a sustainable economy through reinvestment, which would offset the price burden on consumers. ‘The good news is prices are going to go up.’

This is good all around, he says, adding developing countries have booming economies because of the high prices. ‘We’re reenergizing parts of our economy that have been in the doldrums for the last 35 years,’ Simmons says.

The high oil prices translate into excess money, he says, and it comes down to how the companies reinvest wellhead revenue. There’s been some renegotiating of contracts and changes in tax structure in efforts to make sure all receive a fair share, and shareholders are seeing better returns. Investment through increased activity, acquiring resources and training are also occurring.

Roger Read, managing director senior energy analyst at Natixis Bleichroeder, says that back in September 2007, his firm expected oil to range between $70 and $75 per barrel during 2008, depending on the quarter.

‘We’re not too worried about supply surprising us,’ he says, adding the firm is also comfortable with its estimates on decline rates. The wild card, he adds, is growth in demand. ‘Demand surprise could trip up the forecast.’

For three quarters of a century, the industry found far more reserves than the world knew how to use, Simmons says. This pretty problem yielded an unfortunate byproduct: the cyclical nature of oil and gas. ‘A boom led to a find, a find led to overproduction, and overproduction led to a bust.’ Nestled inside that equation, he adds, demand became insatiable. Demand doesn’t know when to slow down and supply cannot keep pace with demand, he says.

‘That’s the unique problem of peak oil – we have no solution to it,’ he says.

While industry observers argue about whether the world has reached peak oil, Simmons is sure about the status of the flip side of supply. ‘We have not reached peak demand,’ he says. ‘We’re going to have to find a way to put the breaks on demand without creating a war.’

Read says high prices have affected the developed world since 2004, but that developing areas like China, India and the Middle East have nonetheless had growth rates surging past 5% over the last few years. ‘Is oil in the range of $100 altogether bad? It would not appear so,’ he adds.

Read expects 2008 to be a continuation of 2007’s trends, especially with rig utilization.

‘Demand is so much higher than the available supply or the incremental addition,’ he says. ‘Expect the market to be as tight at the end of 2008 as it is at the end of 2007, despite the capacity additions.’

Read expects orders for 12 to 18 more deepwater units in 2008, which is in line with 2007 levels, when about half were built with contracts and half without.

‘That’s sort of the market appetite for risk,’ he says.

Petrodata doesn’t expect the average working rig count in the US Gulf of Mexico will change significantly from where it was in 2007, ODS-Petrodata publisher Tom Marsh said during the IADC Drilling Gulf of Mexico conference in Galveston last month, contingent on oil prices staying above $40 to $50 per barrel.

‘We still have not recovered to the highest level of contracted rigs ever seen, but we’re getting there,’ he says. The rig activity rate ‘would have been higher if there were more rigs available’.

That tightness may have an unexpected effect, according to Simmons: ‘Most supply people get their numbers wrong because they don’t appreciate how tight the rig capacity is today.’

Marsh sees incentive changes and supply constraints, with demand exceeding supply at least to 2014, as ‘potential threats to this level of activity’.

He says the US Gulf drilling market has changed. Higher energy prices have created two markets with different drivers and jackup consolidation. ‘There are different trends, different drivers, and different players from both the contractor standpoint and the operator standpoint,’ he says.

Read sees the US Gulf of Mexico shallow market as the exception to booming times. Persistent oversupply of jackups has been the picture for the last 18 months, he says, and that trend should continue, although he sees some hints of equilibrium in that market.

Despite that, Read says, ‘we expect to see a steady rate of orders for new jackups’. He expects 15-25 to be ordered this year for delivery in 2010-2012.

‘There are only so many shipyard slots available for building these rigs,’ he notes, adding demand has given the shipyards a bit more power than at other times in the drilling cycle.

Less established yards are jumping into the fray, Read says, and watching their fabrication efforts will be key. ‘I expect you’re going to see spectacular problems from some of these speculative builders because if you’ve not done something before, it’s hard to prepare for all the contingencies,’ he says.

Read says 2008 could bring some consolidation of the smaller or speculative entrants, but he is not calling for consolidation among established players.

Marsh notes the recently completed Transocean and GlobalSantaFe merger, saying he doubts these will be the last mergers the industry will see.

‘More changes are afoot,’ he says, adding changes could also come in the form of tax or incentive adjustments.

Like the shipyards, the offshore construction companies are in right place at right time, Read says. As more vessels are built for deeper waters, he expects the offshore construction companies to see orders related to supporting those depths.

In short supply

Simmons remains skeptical about the quality of reported reserves data, citing days past when producers overstated their reserves replacement at rates like 120% of output, and ‘everybody was doing the same thing’. That style of reporting, of course, led to massive reserves writedowns, with Shell paving the way for other operators to lower their own reserves numbers during an era of increased scrutiny. Today, he adds, the reported rate tends to be a more modest 80% of production. The problem remains, however, that true standards for booking reserves don’t exist. For instance, he says, the ‘vast amount’ of the world’s reserves are either exaggerated or include unconventional resources, like oil sands.

He brings up the declining number of significant finds and lower average find sizes as another cause for concern.

‘There are some irrefutable trends that should be very disturbing, even to our band of optimists,’ he says. ‘When you have numbers and size dropping, that’s an exponential whammy.’

The trends combine in a troubling way with today’s improved technology, he adds. The technology created problems, such as ‘monster production declines’. First and second generation deepwater Gulf of Mexico fields often haven’t lived up to their projections, he says, adding many drop down from peak production quite quickly and/or peak lower than expected.

‘It’s amazing how many of these fields never came close to their planned peak rates,’ Simmons says.

And for all the Brazilian optimism about the deepwater Tupi find, which holds an estimated 5 to 8 billion barrels, it is still a frontier discovery, he cautions.

Many wells, such as Brazil’s Tupi and Jack in the US Gulf of Mexico, now are much deeper, he says, with drill rates slowing to costly feet-per-hour and feetper- day ranges. The wells can take six to nine months to drill, he says. Petrobras’ Tupi is in the Santos Basin under a salt formation that lies 3000m to 4000m below the seabed, and Chevron’s Jack No2 well was drilled to 28,175ft TD in the deepwater Gulf of Mexico.

‘One appraisal test doesn’t make a field happen,’ Simmons says.

He indicates some operators are becoming frustrated with the difficulty of keeping drilling rigs on site long enough to drill certain wells. It may well be 2009 before a suitable rig is available for work on Jack or similar fields, he says.

That might ease with the expected arrival of some newbuilds heading to the Gulf of Mexico tertiary trend in 2008 and 2009, Read says. He says it will become ‘not unusual’ to see developments in 8000ft of water.

Elsewhere, ‘Tupi is going to be the question on everyone’s mind,’ Read says. That find, he notes, creates many opportunities for service companies with the subsalt and directional horizontal drilling challenges.

Michael Dyer, director of Latin America for the IHS Global E&P;Reporting Service, believes Petrobras’ subsalt Tupi supergiant discovery will draw a lot of attention, with equipment likely directed towards additional exploration and outpost wells in the area. Petrobras will reportedly re-shuffle its portfolio and prioritize the subsalt trend in the near future, possibly relinquishing some of its frontier acreage, Dyer notes. The company acquired a modest number of additional frontier blocks in the recent ANP Round 9.

He says in 2007, operators working off Brazil were projected to drill about 45 offshore wells, with 27 in water greater than 300m and the remainder on the shelf. Petrobras was projected to operate about 80% of the deepwater wells and about 40% of the shelf wells.

In 2008, Dyer estimates operators will drill 50-55 offshore wells. He cautions this may be difficult to achieve. Brazilian operators used about 35 rigs monthly during the 2007 drilling campaign, but only about 10 rigs were working on exploration wells, Dyer notes. A large inventory of offshore contracts need to be drilled, he says, but only seven additional rigs are expected to join the fleet in Brazil this year with additional rigs scheduled to arrive in 2009.

Based on the 2000m+ water depths and the few rigs equipped to drill in ultradeepwater, he projects 10-12 ultradeepwater wells off Brazil in 2008.

A number of frontier basin blocks in the eastern and northern offshore Brazil have seen delays in wildcat activities for a number of years. The ANP has granted operators extensions to a number of these contracts, partly due to the rig problems, and in some cases due to delays in receiving environmental permits. Other operators planning to drill offshore wildcats in Brazil during 2008 include Anadarko, BG, Devon, ExxonMobil, and Queiroz Galvao.

Stephen Trammel, senior product manager for new product development at IHS Energy, says he is excited about opportunities associated with the Gulf ’s lower tertiary play and heavy oil, which is big in Canada and Venezuela. Known unconventional resources globally have been projected at three times the known discovered reserves today, he says.

‘The Gulf of Mexico plays an important hinge for unconventionals,’ Trammel says, with steep decline in the Gulf driving companies to look onshore for unconventional resources.

North America has the highest percentage of depleted conventional resources, and about 30% of onshore US production is from unconventional sources, he says. He expects that figure to grow to 65% by 2017.

‘If cost can be controlled and the price of gas stays up, we think unconventional resources are going to be a focus in 2008 in the US. There’s one wild card. That wild card is LNG,’ Trammel says. ‘If gas falls below $5/mcf, we won’t see the kind of growth in unconventionals I just talked about. If it’s $4 or lower, all bets are off.’

Getting rusty

If the oil industry is feeling the pinch of too few personnel, Simmons says, it will soon realize rust is going to be the next big problem. He cites a recent UK report that shows over half of the structures in the North Sea are in poor condition.

‘The whole oil and gas infrastructure is too old; at least 90%. How did we let the industry get so old?’ Simmons asks.

Part of it is likely due to leaner times, when companies were tempted to let routine maintenance slide, Simmons says. He urges the industry to begin rebuilding the rusted out structures within the next five years.

‘How we let the North Sea rust away is really a profound question,’ Simmons says. ‘That was our Silicon Valley.’ OE

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