Archives for posts with tag: exploration

The AHTS spot market in the North Sea is notable for the speed in which rates can shift, responding rapidly to supply and demand pressures. In 2014 alone the spot charter rate for an AHTS 18,000+ bhp fluctuated dramatically from a high of £170,165/day in August to a low of £5,819/day in the last week of the year.

Blame It On The Weatherman

Rig moves are the key AHTS demand driver in the North Sea. Pressures that affect the volume of these, along with the supply of units in the North Sea, dictate the number of available units, which in turn determine AHTS spot fixtures rates.

The largest peak in spot rates in the last three years occurred in August and September 2014. It was the result of a temporary removal of some North Sea units for work on exploration campaigns in the Russian Arctic. This caused a drop in the supply of vessels, that was eventually compounded by numerous rig moves, dropping availability and lifting spot rates.

Conversely, during December, a short three months after the September peak, AHTS spot rates in the region had fallen below £10,000/day for the first time since 2010. During the month, North West Europe was battered by a large weather depression resulting in strong winds and high seas, suspending many rig moves and forcing AHTSs to compete with PSVs for supply duty charters, bringing down the spot rates for both AHTSs and PSVs.

Rollercoaster

The price of Brent crude has fallen over 50% since June 2014 to below $50/barrel at the time of writing. As oil companies seek to rebalance their budgets in a new oil price world, exploration budgets have been cut. One of the ways in which drill rigs are utilised is the drilling of exploration and appraisal wells, demand for which has suffered in Q4 2014, negatively impacting AHTS demand in this period.

The drop in oil price has also damaged hope that exploration campaigns in expensive, harsh, Arctic environments will take place. Previously, these campaigns have taken vessels from the North Sea fleet, protecting the market from oversupply. Notably, Statoil has handed back three licenses offshore Greenland and announced that it will slow Arctic and Barents exploration to control CAPEX.

Oversupply in the North Sea can be demonstrated by the increase in the average number of vessels available. This rose steadily in 2012 and 2013, and by 39% in 2014 to an average of 13.1 vessels. This increase in supply has contributed to poorly performing spot rates in most of 2014, aside from the late summer spike. Increasing levels of supply and weaker demand indicators have forced some vessel owners to lay-up more ships in an effort to prevent oversupply impacting spot rates further, even laying-up units built as recently as 2014.

C’est La Vie

Clearly the volatile North Sea AHTS market is highly susceptible to short term demand pressures such as the weather and the whim of oil companies that dictate when rig moves occur. However, there are longer-term supply and demand forces at work, which although often obscured by dramatic short-term changes, can influence spot rates just as strongly.

OIMT201501

As the recent plunge in oil prices sees some operators tightening their belts and their appetite for exploration seemingly diminishing, can development drilling provide alternative demand amidst the doom and gloom? The North Sea serves as an interesting example of an active drilling market throughout E&P cycles. Could this observation have implications for rig activity within other regions?

Playing The Risk

The assessment of “risk”, both financial and operational, is one of the most important factors for International Oil Companies (IOCs) when considering future projects. In periods of high oil prices, when company revenues are high and debts are low, operators are prepared to take on higher risk, lower margin projects, and are more comfortable in increasing their exposure to exploration. In a low oil price environment however, companies focus on low risk projects and increasing returns on investment, as opposed to riskier exploration operations.

Produce A Winner

This lower tolerance to risk often results in reductions to exploration budgets and activity, in particular drilling operations. In the last 12 months, global drilling rig utilisation has declined from 95% down to 89% as oil prices have declined to under $70/bbl. This trend has been typical throughout history. In 1985-87, historical reports show that global rig utilisation declined drastically from almost 90% to around 50%, following the oil price crash of the mid-80s. Despite this, some areas have fared much better than others through the bust periods

As the Graph of the Month shows, the number of wells drilled per year in the North Sea during the years 1980-98 increased from 335 to 618, despite the oil price declining to $18/bbl (inflation adjusted to 2013 $/bbl). As companies focussed on increasing production from their portfolio of newly discovered fields, increases in development drilling far outweighed declines in exploration work.
Over the same period, the share of development drilling increased from 68% to 86%, and by end-2002 over 90% of wells drilled were for field developments. This increase, throughout a period of depressed oil prices, highlights the need for development work following exploration.

Develop Your Game

In areas where the number of undeveloped fields is high (the North Sea reached an estimated peak of 583 by end year 1992), it is inevitable that development drilling becomes more prominent, as exploration operations become riskier and thus more expensive. Today, areas such as West Africa and SE Asia, where the current number of undeveloped fields total 379 and 506, are examples of this, and could witness an increase in development drilling similar to that seen in the North Sea during the 80s and 90s.

Whilst reduced exploration will likely result in short-term declines in rig utilisation and dayrates, other sources of demand could exist. Though wildcat spuds and discoveries may dwindle in the near term, areas of previously high exploration activity could see alternative demand for rigs through development drilling. After that? Well, perhaps the world will still have to go and find more oil.

OIMT201412

With the holiday season almost upon us, deliveries of many types are the focus of attention. In shipping, deliveries into the world fleet peaked a few years ago, and then the rate of capacity delivered from the world’s shipyards went on the slide. At some point this should have started to stabilize but, with output often fairly volatile from month to month, it needs some work to identify when.

Peaking Deliveries

In the years 2006-08 an unprecedented total of 646m dwt of vessel capacity was ordered at the world’s shipyards. Although, following the economic downturn, the delivery of some of this was delayed or cancelled, capacity delivered rose substantially in the years 2010 to 2012, and peaked on an annual basis in 2011 at 166m dwt (on a monthly basis, 12-month moving average deliveries peaked at 14.8m dwt in June 2012). Inevitably, following the downturn, a slowdown in ordering occurred, and after the peak in output deliveries started to slide. The question was how long would the slide in deliveries last, and how quickly would surplus building capacity exit the arena?

Sliding Then Flattening

Monthly delivery data provides some of the answer. Although this can be volatile, the 12-month moving average (a metric showing the average monthly output over the last 12 months) gives an idea of ‘annual’ output capacity at any point in time. The graph shows that this had dropped to 12.8m dwt by January 2013 and then to 10.1m dwt by July 2013. By January 2014, the 12-month moving average had reached 8.6m dwt, down 42% from the peak. Shipyard output, in dwt terms at least, had slowed perhaps more quickly than many had imagined.

But, has the rate of output stabilized since then? The graph suggests yes. In April 2014, the 12-month moving average reached 8.0m dwt, and since then has remained in a fairly narrow range between 8.0m and 7.4m dwt. Clearly the rate of output has flattened. The full year delivery forecast for 2014 stands at 7.8m dwt per month, with a not too dissimilar figure currently projected for 2015.

Covering Up

Meanwhile, the line on the graph highlights an interesting side effect. As deliveries have slowed, and the orderbook has started to grow again (at 316m dwt, it is today 18% larger than at start 2013), the orderbook expressed as years of ‘cover’ in terms of the 12-month moving average rate of deliveries has increased significantly, moving from 2.2 years in July 2013 to 3.5 years today. Not quite the 4.4 years seen in 2010, but substantially more cover than the 1.7 years when deliveries went on the slide in 2012.

Onward, Upward?

So, it looks like deliveries have stabilised, and this perhaps came around a little more quickly than some expected. Moreover, whilst the environment today is still challenging for yards, a side effect of the slowdown in output has been an increase in the level of cover. When output starts to increase again is open to question, but today’s orderbook for 2015 delivery (135.1m dwt) is a little bigger than that for 2014 delivery at the start of this year (133.8m dwt), so watch this space.

SIW 1150

Self-Elevating Platforms (‘SEPs’) are generally used to provide offshore support for construction and maintenance projects. These units fall within the wider ‘construction’ sector in the segmentation of the offshore fleet, and can generally operate in water depths of up to 120m. The key deployment areas for these structures exist in the US Gulf of Mexico (GoM), West Africa and the Middle East. Despite high numbers of shallow water developments in the North Sea and South East Asia, there has been relatively little deployment of SEPs in these regions, although recent contracting patterns within South East Asia suggest this may soon change.

Rising Above Regional Regimen

The Graph of the Month shows the regional breakdown of producing fields with a water depth of <100m, as well as the share of self-elevating platform deployment across these regions. South-East Asia contains the largest number of shallow water developments with 552 active fields, closely followed by the US GoM (508) and the North Sea (452). However, there is a large disparity between these regions in terms of SEP deployment, with the US GoM accounting for the deployment of 161 units compared to the North Sea and South East Asia where just 10 and 19 structures are deployed respectively.

Lower deployment numbers in these regions can be largely attributed to a major factor in each region. In the North Sea, self-elevating platform use is often restricted by harsh operating conditions. In South-East Asia an ample supply of support vessels has provided ships for use in construction and support duties in the region.

Jacking-Up Orders

The current SEP orderbook includes 24 units with a record combined contract value of almost $2bn, of which 13 are for South-East Asian owners. Of the 15 contracts agreed in 2014, 60% of these are for Asian owners. Although these units will be capable of operating internationally, indications from owners including Teras Offshore, Swissco Marine and East Sunrise Group hint at a South-East Asian target market. There is a large fleet of mid-sized supply vessels in the region and historically these units have worked similar roles to the SEP fleet. However, the mid-sized supply vessel orderbook has diminished from around 200 units in 2012 to the current total of around 70 vessels, potentially supporting future deployment of SEPs in the region.

Lifting Expectations

An abundance of shallow water fields and relatively benign conditions means that South-East Asia is a region with strong potential for the future deployment of SEPs. Despite a lack of historical deployment, the attraction of competitive day rates in comparison to support vessels has reportedly begun to attract interest, in turn leading to investment in newbuild units from Asian owners.

So, a reduced orderbook for mid-sized supply units and an expected increase in field developments within China and South-East Asia could be positive news for SEP owners. Whilst still way below levels of deployment in the Gulf of Mexico, this region could provide impetus to self-elevating platform demand in the future.

OIMT201410

The shuttle tanker fleet consists of a relatively modest 88 vessels, but is of critical importance to the offshore story. The sector has always played a key role in exports from fields divorced from established pipeline infrastructure. As the move offshore into deeper and more remote areas gathers pace, shuttle tankers will be required to support production, particularly off Brazil.

Exponential Growth

The fleet has a long track record of steady growth (it was just 19 vessels at the start of 1989), and has recently undergone another expansion phase, growing from 65 vessels at end 2010 to 88 currently (up 35%). There are 8 vessels on order: until the contracting of three specialised Arctic units at Samsung in July, no orders had been placed since January 2013.

This might appear, on the surface, to be a sign of a fleet sector with muted demand growth prospects, particularly when considered in conjunction with the decade-long decline in North Sea shuttle tanker transportation evident in the Graph of the Month. However, the outlook is actually somewhat brighter. Brazilian usage has gradually increased year on year. Brazilian fields are expected to be at the forefront of the sixty potential field developments identified globally which are likely to use shuttle tankers.

There are now 25 likely future field developments offshore Brazil, which are expected to need shuttle tankers, and potentially add 1.5m bpd to shuttle tanker movements off Brazil. In the pre-salt areas, pipelines are often not feasible due to deep water and long distances to shore, so fields need shuttle tanker offtake from FPSOs.

The North Sea is an established shuttle tanker region, and now one with much activity under way to halt production decline. There are 9 future start-ups expected to require shuttle tankers, including Bream and Johan Castberg. These are expected to help shore up North Sea oil transportation on shuttle tankers to above 1m bpd in the medium term.

Fleet Consolidation

Recent years have seen the fleet become more consolidated. At the end of 2004 there were over 10 companies with just one shuttle tanker to their name but as of September 2014 there are just two companies owning only a single ship. Teekay Offshore and Knutsen NYK continue to account for a large portion of the fleet, owning 32 and 25 units each. This year alone, Knutsen acquired Lauritzen’s fleet of 3 ships: these were the first recorded shuttle tanker sales for over 5 years.

Tread With Caution

Of course, shuttle tankers are not immune to the usual cyclic problems of the offshore industry. In the past 18 months, delays in field start-ups in Brazil and the North Sea have led some companies to let charter options expire or fail to renew existing timecharters. This may limit ordering (typically orders are placed with an initial charter in mind). Over the longer term, however, further fleet expansion will be required to service additional demand. Whilst the graph no doubt shows the ‘best-case’ scenario, and some field start-up slippage will no doubt intervene, the shuttle tanker sector looks positioned for a relatively bright future.

OIMT201409

‘Pre-salt’ is usually a term associated with Brazil, where giant offshore field discoveries in the Santos and Campos basins have been grabbing headlines since 2007. Now oil companies are looking across the ocean for their pre-salt game. Conjugate basins offshore Gabon, Congo and Angola could be as juicy as the Santos and Campos pre-salt plays have proved. Following a number of recent scores by Cobalt, Eni, Harvest, Maersk and Total, the hunt is on.

Gearing Up

As the Graph of the Month shows, 16 wells targeting West African pre-salt reservoirs have been drilled since start 2011 with a success rate of 75%: 9 offshore Angola, 6 off Gabon and one off Congo. Oil from West African pre-salt was in fact first found in 1968. Its prospective yield was not appreciated though, as only recently did seismic imaging become able to give an accurate picture of the pre-salt. The ultra-deepwater of Angola’s Kwanza Basin also inhibited pre-salt exploration before sixth generation floaters. But, as Brazil has shown, operators now have all the technology they need to pursue the pre-salt.

Hunting Elephants

Some 27 future pre-salt wells are reportedly planned by oil companies or are anticipated through to end 2015, as the Graph of the Month shows. Four of these wells have been spudded. Often smaller E&P companies play a vital role in opening up new frontiers. In West Africa though, supermajors and other large players are already loading up. Conoco has 4 planned wells; Repsol, 3; Eni, 2; Shell, 2; and Total, 2. Of the 27 wells, 70% are offshore Angola and will therefore be in water depths ranging from 800-2,000m. The remainder are to be spudded off Gabon, likely in water depths up to 300m. In either case, companies will be hoping to hit world-class finds, like Cobalt’s Cameia discovery, which is expected to be brought onstream at 80-120,000 bpd in 2017.

Fieldcraft

So, the West African pre-salt play is still in the early stages of exploration and appraisal. If it proves prolific though, and if operators can bring it to fruition, a pre-salt bonanza would more than offset production decline from West Africa’s mature fields. With less stringent local content requirements and more international oil company control, development may be less fraught than in Brazil. Cobalt have already announced plans for 3 multi-field pre-salt hubs centred around the Cameia, Lontra and Orca fields offshore Angola. Given that the average water depth of Angolan pre-salt wells is 1,274m, MOPU solutions are likely to be favoured. The previous caveats noted, the FPSO ordering boom in Brazil could be replicated in Angola, which already accounts for 23% of world FPSO deployment (second to Brazil). In the shallower waters off Gabon, fixed platform solutions are probable, if finds reach the development stage.

In the near term then, the pre-salt safari offshore Africa looks to be an exciting campaign, with potential to generate even more interest in the region and hence opportunities for survey vessel and rig owners. Out towards the end of the decade, Angola could be the new Brazil, with pre-salt development contracts abounding.

OIMT201406

Natural gas demand and onshore and offshore production data is now available in Offshore Intelligence Monthly, split out by region and country on pages 3, 6-7 and 20-25. Analysing this data, it is apparent that the offshore hydrocarbons cake just keeps on getting bigger.

Since 1993, world combined offshore oil and gas production has increased by 58%, to 43.7m boepd in 2013; and between 2013 and 2023, it is forecast to increase by a further 35%, to 58.9m barrels oil equivalent per day (boepd). While oil is playing its part in this, gas is proving an even more potent rising agent in the offshore mix, of which it is taking an increasing share.

Measuring the Ingredients

As the Graph of the Month shows, growth rates for offshore oil and gas production have moved more or less in line y-o-y, with gas consistently ahead of oil as hitherto undeveloped historical offshore gas discoveries are brought onstream. While offshore gas production grew with a 3.8% CAGR from 1993 to 2013, oil exhibited a 1.4% CAGR. The spread between gas and oil production is forecast to continue 2013-23, with gas and oil production CAGRs of 4.2% and 2.0% respectively. It is thus expected that offshore gas production will almost achieve parity in volume terms with offshore oil by 2023, accounting for over 49% of offshore hydrocarbons output (versus 32% in 1993).

Energy Hunger

The strength of gas in the offshore production mix in part reflects faster historical and anticipated growth in gas demand. Since 2009, oil demand growth has stagnated in OECD countries whereas gas demand growth has remained firm, averaging 3.0% p.a. 2010-13 with a rate of 2.1% projected for 2014. In non-OECD countries, gas demand growth averaged 4.7% over the 2010-13 period, compared to 3.9% for oil demand. Similarly, 2014 demand growth is forecast at 3.7% for gas and 2.7% for oil. As non-OECD countries continue to industrialise, demand growth for natural gas is likely to remain firm.

Let Them Eat Cake

Given this scenario, it is likely shale gas will meet only a portion of future demand. Conventional gas will still have a role in feeding world energy hunger, and the offshore gas element of this increasingly so. In 2013, 30% of world natural gas production was offshore; in 2023 this is forecast to reach 36%. Accordingly, the offshore gas field investment outlook is positive. Offshore field operators are initiating schemes to utilise associated gas at mature oilfields. Moreover, development of offshore gas fields is increasingly perceived as economic. Gas fields account for 51% of fields under development and 48% of undeveloped offshore discoveries.

More so than oil, offshore gas growth is driven by mega-projects. Current examples include nine South Pars phases off Iran, Leviathan off Israel and Shah Deniz II in the Caspian, due onstream in 2015-17, 2017 and 2019. Major LNG projects planned offshore East Africa and Australia, entailing extensive subsea production systems and deployment of the world’s first floating liquefied natural gas (FLNG) vessels (like Shell’s “Prelude”), are also responsible much of the forecast growth in offshore gas. All in all then, gas looks to be quite a tasty slice of the offshore cake. Bon appétit!

OIMT201407