Nothing at the moment can be written about the offshore sector that does not, in some way, take into account the current dramatic fall in the price of a barrel of oil which dropped close to the $50/bbl mark at this writing.

It is not possible to discuss technology, developments, sector economics, mergers and acquisitions, et al, without taking into account the more than 50% fall which has put a damper on every element of activity - from drilling to maintenance to new projects.

In fact, despite having worked through any number of price corrections over the last 30 plus years of reporting on the sector, it is hard to remember any event that has dragged the industry down so dramatically.

Who knows what?

And, of course, everyone has an opinion on what will happen. So there is no shortage of wisdom on why the Saudis and Russians continue to pump oil at full throttle.

In the past, there have been differing views on how to deal with similar price corrections. At one time, it was believed that price support was most important, while at others it has been market share. Now it seems to be the cost of production, ie can the price be driven down so low that all but the least expensive oil has to be shut in?

This is also linked the politics of oil. Most members of OPEC operate through government-controlled production with decisions made in what is perceived as national interest. This new big oil production in the USA is purely commercial particularly when the American producers begin to export.

In any event, the oil world is a much different place than it was three months ago. Nigeria, Brazil and the UK are three sectors where the cost of production and development is under fire.

Nigeria, a sector where companies find it challenging to operate and has already seen a number of majors dispose of onshore assets, is now facing a downturn. Assets attractive to the international community, those in the deepwater away from turmoil and threats to personnel and infrastructure, are the very ones which are high cost and must see significant work carried out in country as a result of local content requirements.

Also, new licencing has been delayed which has only highlighted the reduced government take from oil production and its exposure to reduced investments by major companies.

Pre-salt in the wounds?

Across the Atlantic, Petrobras only this week has had to defend its operations which are primarily in deepwater against suggestions that production in the important pre-salt areas is uneconomic.

The Brazilians’ response was robust. They are producing more oil from fewer wells, making the cost of production lower than forecast. It says that the cost of pre-salt production is around $45/bbl plus another $5-7/bbl on natural gas infrastructure.

Petrobras noted that it was achieving 120,000b/d at both Sapinhoá and Lula with just four wells on each field. In fact, as of mid December, it was producing 700,000b/d from just 34 wells in the pre-salt regions of Santos and Campos basins.

There were also notable benefits from two of its internally generated cost-reduction programmes - PRC-Poco on well costs and PRC-Sub on subsea. The former has resulted in a 60% cut in well construction capex on the two previously mentioned projects.

The UK sector is more problematic. A very mature basin with an apparently limited upside, the worst scenario has been a falling oil price as opex continues to rise. Just before Xmas, a director of Premier said that the sector was ‘close to collapse’ (SEN, 31/19) which raised the hackles of just about everyone, notably Sir Ian Wood who has spent the best part of the last year trying to boost the sector.

Sir Ian’s view is one that many who take the long view would concur with - the next year will likely be a slog for just about everyone, but activity is likely to pick up in 2016, most probably with a big slice of capex having been sliced off development budgets.

The problem here is that there is no government policy to cure the major ill - lack of exploration drilling. There are two examples of what can be done with the drillbit - in the Gulf of Mexico in the 1990's and in Norway recently. There are opportunities to drill virgin acreage here, but companies have to get rigs on charter and do the work, a problem in a sector dominated by midsized and small companies.

Technology flow

What will also be a problem, particularly for subsea, is how to keep a flow of new technologies, when new project capex will be constrained and the industry will likely be as conservative as ever.

Douglas-Westwood, amongst others, has speculated on how to keep the momentum on subsea processing, particularly in the brownfield context, when capex is high and potential rewards are problematic?

This issue and that of well cost has been addressed by Bente Nyland, head of the Norwegian Petroleum Directorate. Ms Nyland has voiced the long held concern, how is it possible to get the industry to change long ingrained habits?

The NPD head also threw out what is now seen as a serious case of Catch-22 - how do regulators get operators to drill more new wells and workover old ones, when the price of oil is low and drilling costs are on an upward spiral.

And finally...the next big crash is likely to be in rig rates. With large number of newbuilds coming onto the market - more than 50 floating units - the drilling contractors will find themselves chasing work which will be an about-face from the last half decade.