Despite long development times, multiyear contracts and its less cyclical nature, the offshore E&P sector is feeling the sting of today’s commodity prices as companies rein in spending.
Some international oil companies have cut exploration spending and moved frontier programs further down on agendas, while others have left areas altogether or renegotiated contracts, including newbuild delivery dates, to steady financial footing. Lower day rates along with reduced services and subsea costs, could push offshore spending down by 20% to25% in 2016, Barclays said in its global E&P spending outlook. This follows an estimated 16% spending decline in 2015.
The outlook, which predicts global E&P spending could fall by 20% this year, assumes $50 Brent oil and $45 WTI. However, if oil prices—which fell below $30/bbl this week—remain at current levels with spending down, “this will be the most severe downturn that we have seen in the financial recorded history of the oilfield service industry,” Dave Anderson, Barclays’ oilfield services analyst, said on a conference call Jan. 14.
Offshore well spend could fall to an estimated $72.3 billion in 2016, compared to an estimated $92.9 billion in 2015. The India, Asia and Australia region could see the biggest percentage drop—down 55% to an estimated $7.3 billion, followed by Europe and Africa. At an estimated $17 billion, Latin America is poised to spend the most offshore, with North America expected to spend about $15 billon offshore, down 11% and 12% respectively.
High costs and cost overruns were already a concern for some projects before market conditions worsened. “With this downturn already lasting 18 months with no end in sight, exploration budgets have ground to a halt, offshore developments aren’t being sanctioned, and rig contracts are being cancelled for the first time in our memory,” Barclays said.
In November, Diamond Offshore said contracts for two rigs with Petrobras ended ahead of schedule. In December, Transocean said Shell decided to end its contract for the Polar Pioneer semisubmersible before its July 2017 expiration date. The same month Statoil cancelled a contract with Transocean for the Discoverer America drillship.
BP, ConocoPhillips and Petrobras also terminated contracts for ENSCO floaters that were lined up for work in the Gulf of Mexico. The region, with Brazil, was still heralded for having the lowest percentage of uncontracted floaters at 9%.
But the financial health of Petrobras continues to be a concern, Barclays said. The report noted that Petrobras has cancelled four offshore rig contracts without compensating drilling contractors in the last six months. The company, which is still dealing with the aftermath of a corruption scandal, also dropped the number of contracted floaters to be built from 29 to six. With 44 contracted floaters, Petrobras, however, remains the largest offshore floater contractor in the world, the report said.
Seadrill Ltd. said Jan. 15 that it reached an agreement with Daewood Shipbuilding & Marine Engineering to push back delivery of the West Aquila and West Libra drillships to 2018 and 2019, respectively. The ultra-deepwater vessels were originally expected to be delivered by the end of second-quarter 2016 along with an $800-million-plus payment. Pushing back the deliveries allows Seadrill to “improve its near-term liquidity position,” the company said.
All of this comes as exploration activity slows to a crawl. In 2015, ConocoPhillips announced its planned 2017 deepwater exploration exit, while Shell decided to stop exploration activity offshore Alaska for the time being.
But deepwater offshore West Africa appears to have been hit the hardest, according to the report. The number of exploration wells drilled here dropped 70% in 2015, and Barclays believes the number will fall again this year.
The report, however, noted that IOCs are making progress. Offshore rig costs—day rates for which are down 44% since 2013—are having the greatest impact. Service prices is not expected to fall much this year, but savings could be realized in the costs of materials such as for fluids, steel casing and cement as well as completion parts and other equipment.
If FPSO standardization gains traction, the sector could also see hub costs fall, Barclays said; if not, reining in these costs will be difficult given engineering and construction risks.
“As of now most international oil companies are trying to get costs down by 30% on average to get the economics down to about $50 to $55 a barrel. Their view has been that in 2019 or 2020 when production comes on they are expecting oil prices to be closer to $70,” Anderson said.
However, he said, the fundamentals are changing daily. If oil prices need to be closer to $60, then the economics must drop to about $40/bbl, he said, noting the industry is a long way from that.
“Our concern is that offshore spending is actually going to continue to accelerate downward in 2017,” Anderson said. “That is the real risk.”
The outlook was based on information from 225 upstream oil and gas companies.
Velda Addison can be reached at firstname.lastname@example.org.