Offshore and on land, industry poised for cautious comeback

With recent improvements in commodity prices, the oil and gas industry is poised for a resurgence in exploration and development, both offshore and on land. However, several problems are holding back investment, particularly in the offshore segment of the market.

Sam Fletcher, Senior Energy Writer, OGJ Online

With recent improvements in commodity prices, the oil and gas industry is poised for a resurgence in exploration and development, both offshore and on land. However, several problems are holding back investment, particularly in the offshore segment of the market.

"Demand will hold up because economies are strengthening around the world," said Len H. Paton, managing director of Chase Securities Inc., at the recent annual marine and offshore industry outlook conference in Houston sponsored by the Texas Sea Grant Program at Texas A&M University and the National Ocean Industries Association (NOIA).

"The glass is half full, and the pitcher is still pouring," said Matthew D. Conlan of Prudential Securities Inc. at the land drilling seminar sponsored by the International Association of Drilling Contractors in late April. He sees a growing world demand for oil and gas that "will drive drilling demand to levels that will strain rig supplies. We project the land drilling industry is poised for the greatest increases in day rates in almost 20 years."

Investors, producers proceeding cautiously

But investors and producers seem to be taking a more cautious approach, so far.

"Oil companies were so bloodied by the last price collapse that they�re still set on being profitable with $11/bbl oil. They will be slow to come back," said Robert B. Stewart, who will soon retire as president of NOIA.

Both Royal Dutch/Shell and BP Amoco PLC, the two leaders in deepwater operations in the Gulf of Mexico, are still basing their plans on a maximum oil price of $14/bbl. However, a BP Amoco executive said his company�s projects "must be survivable at $11/bbl," while a Shell executive claimed, "We need to be robust at $10/bbl."

"No new investment is coming into the industry from Wall Street, which 15 years ago would have been funding limited partnerships to do projects based on $15-20/bbl oil," said Larry R. Dickerson, chairman and chief operating officer for Diamond Offshore Drilling Inc., at the Sea Grant conference. With fewer commercial banks interested in lending to energy companies, Paton said, "The cost of debt capital will be quite high for the next year or two."

Familiar offshore problems

Meanwhile, offshore industry workers are still struggling with familiar problems of low dayrates and future personnel shortages.

The supply boat industry suffers from "too many vessels and too little demand," with work contracts shortened to 1 or 2 years from previous 3-year terms, said Larry T. Rigdon, senior vice-president of Tidewater Inc., the largest operator of supply vessels with about 20% of that market. The oversupply of vessels is especially prevalent in the North Sea and Middle East, he said.

About 35% of Tidewater�s vessels are now employed in domestic waters, down from 45% 2 years ago. The company has about 40 inoperative vessels stacked in the Gulf of Mexico area. "It will be awhile before we see the Gulf of Mexico come back in balance," Rigdon said.

However, he expects the West African and Southeast Asian boat markets to approach a supply-demand balance within the coming year. Brazil also is near balance and should improve as international companies step up operations in those waters, said Rigdon.

Part of the problem is that the 1997 uptick in offshore operations prompted some contractors to reactivate some previously stacked vessels. The only way to get those surplus older vessels completely out of the market is to scrap them, Rigdon said.

He said there are some 700 offshore supply vessels 20 years or older that eventually will have to be replaced at a cost conservatively estimated at $10 million per vessel, or $7 billion total. "That�s two or three times the total equity of all the publicly-traded marine companies," Rigdon said.

Future personnel shortage

But while the recent downturn in offshore operations was complicated by excess vessels, Rigdon said, the market�s potential rebound might be hampered by a shortage of crews.

Lack of qualified marine personnel will be a major problem for the next 5 years, Rigdon predicted. With some 475,000 mariners employed worldwide, the industry is still short some 30,000 people, he said. That shortage is expected to grow to 42,000 in 2001.

"We would need 3,500 personnel in the Gulf of Mexico alone to activate the stacked fleet and man newbuilds," Rigdon said. Moreover, new licensing standards effective in February 2002 will complicate the personnel shortage with an additional lack of proper training facilities.

With a 40% annual turnover in its personnel, Tidewater is better than the industry average, Rigdon claimed. However, he said, "We must do a better job of recruiting and retaining personnel."

The offshore supply industry used to be able to recruit deckhands straight out of high school. But that�s no longer possible with the more stringent education and training standards that are being imposed, said Rigdon. As with many offshore jobs, he said, young potential employees are repelled by the prospects of hard�and sometimes dangerous�work in foul weather, schedules that keep them offshore for days at a time, and other "negative quality-of-life issues."

A recent NOIA survey of 300 industry workers in south Louisiana�"the heart of the shore base for offshore operations in the Gulf"�found not one who would recommend an energy industry career to his children.

Some say higher pay eventually will overcome the personnel shortage. But most contractors haven�t been able to afford significant pay increases for years, with offshore wages now lagging significantly behind less demanding onshore jobs in other industries.

"We�re losing our skill levels to all other industries. It�s a serious problem," said Drew L. Michel, vice-president of deepwater technology at Global Industries Ltd. To combat that, he said, the offshore industry must "make room for mentoring, make room for training, make room for extra people on the job."

Deepwater rigs

Demand for new mobile offshore rigs has been driven primarily by the industry�s move into ultradeep waters, Dickerson said. The number of drillships and semisubmersible rigs capable of working in water depths greater than 5,000 ft has jumped to 52, including those scheduled for delivery in 2001, from 7 in 1995, he said. That includes 19 drillships and 12 semis able to work in water depths beyond 7,000 feet.

The number of floaters able to perform in 3,001-5,000 ft of water also has grown to 39 from 14. But the number of those units designed for operations in 400-3,000 ft of water has fallen to 121 from 148 in 1995, primarily as a result of 28 upgrades to deeper-water operation. The number of available jack ups has increased only marginally to 396, 6 more than in 1995.

The industry won�t get a true reading on future day rates for deepwater rigs until those units come off the long-term contracts that most are now under. For those capable of working in depths of 7,000 ft or more, Dickerson said, "It will be 2003-2004 before we get a view of where that market will go."

However, he said drilling contractors have seen huge drops in day rates for other rig categories. "Ultimately, it�s all driven by supply and demand," Dickerson said. Judging from cost overruns on some recent rig constructions and upgrades, he said, the cost of future new-builds will probably be more than expected.

Moreover, rig-construction yards are facing strong pressures for unionization, said Donald T. (Boysie) Bollinger, chairman and CEO of Bollinger Shipyards Inc. "Unions have been very active in south Louisiana lately in the whole supply industry."

Oil market pressures

Despite the economic stumble that triggered a lag in world demand for oil in 1998-99, oil production capacity and demand have been fairly closely aligned in recent years, Paton said.

With OPEC�s new agreement to boost production, he said, spare production capacity is at a minimum worldwide. "Until we perfect just-in-time delivery, it�s hard to picture how we can get along with less spare capacity than we have today," Paton said.

Because of "a paradigm shift in efficient use of energy," Paton said, the world economy is no longer as sensitive to high oil prices as in the 1980s when prices in excess of $25/bbl were expected to result in loss of customers.

"We spent the first quarter of this year with oil at almost $30/bbl, and the world economy never even sputtered. Economists still are worrying how to slow things down," Paton said.

OPEC�s new stability in the price range of $22-25/bbl signals is a sign of "rational behavior in a group that previously has been irrational," said Paton. Still, he warned, "We�ve got to avoid gut-wrenching price adjustments."

More in Exploration & Development