Doris Leblond
OGJ Correspondent
PARIS, Oct. 20 -- The global oil service and equipment (OS&E) industry is continuing to surf on the wave of high oil prices that are expected to push up 2006 exploration and production expenditures by 21% to $266.9 billion, reported Institut Français du Pétrole in a recent update. The irruption of new players attracted by high oil prices—national oil companies, Indian firms, and small independent companies— however, is making it difficult to reliably assess investments.
IFP Pres. Olivier Appert said half of the upstream investments do not translate into higher E&P expenditure but are absorbed by the higher cost of services and equipment due to high raw material prices and the shortage of trained personnel and available onshore and offshore drilling rigs. Also, overflowing order books are lifting prices.
Appert, who indicated that world oil production likely would increase to 98 million b/d by 2010 compared with International Energy Agency's estimate of demand at 92.5 million b/d, underlined that increased E&P investments are made primarily in areas where there are no barriers to entry. This is why the share of both North America and the North Sea in world E&P investments increased to 48% in 2006 from 45% in 2005, reaching $90 billion in North America and $36.7 billion in the North Sea.
In Latin America, 2006 investments should increase by 21% over 2005 to reach $35 billion. In Russia they should grow at the same world rate to meet the government's production target exceeding 10 million b/d. Investments in China, at 22%, are slightly below world average growth. Altogether, E&P investments this year are expected to amount to $266.9 billion.
IFP is more cautious about predicting 2007 investments because of the recent oil price stabilization and falling gas prices. But the institute believes growth will hover between 20% and 25% to $320-335 billion—almost twice as much as in 2004—with tensions on the service and equipment industry likely persisting until 2008.
All sectors of the OS&E industry are benefiting from the investment flurry, making it hard to manage overflowing order books. Seismic work has been on a growing trend since the 26% geophysics jump in 2005 over 2004 to $6.7 billion. Order books point to a 20% increase in 2007 to around $11 billion, with good prospects for 2008 as well. A new development in 2006 is China's BGP Inc. extending its seismic activity to the offshore sector.
The seismic upturn has pushed up OS&E prices and relaunched investments in acquisition vessels and seismic measuring equipment. But they fall short of actual demand, said IFP, which cautioned that geophysics is a cyclical sector and that increased availability of equipment in 2008 might lower the price of services.
Drilling levels high
All indicators for drilling this year are strong, reports IFP. There have been 120,000 onshore wells drilled—15% more than in 2005—and more than 35,000 wells drilled offshore. About 70% of 2005 activity was in North America, with China's 14% a distant second. This year the North Sea and the Middle East —with Saudi Arabia's 100 rigs this summer leading—should account for the highest increase in holes drilled, up 23%.
The utilization rate for offshore drilling rigs also kept climbing this year, reaching 91% over the first half. In the North Sea, the rate averaged 97% and in the Gulf of Mexico 85%. For very deep drilling, the rates can go as high as $465,000/day in the North Sea. This has led to an increase in the number of offshore rigs ordered or under construction, to 91 units from 41, between June 2005 and June 2006—a 120% increase
Accordingly, IFP sees the drilling market growing by 42% to $43.5 billion by yearend. In 2007, the number of wells drilled should increase 5-10% compared with 16% this year. The market should continue to grow in 2007 but more moderately, by about 25% to $54-55 billion.
In 2006, offshore construction soared in the first half to 184 units compared with 108 the previous year. Construction projects are also strongly growing, from 136 units in June 2005 to 297 in June 2006 opening prospects of a sustained market in 2007 and 2008.
