UPSTREAM NEWS

Gulf of Mexico drilling sale

Forty-two companies pledged $583.2 million bidding on 169 central Gulf of Mexico tracts during a government auction that took place on March 18. The government is set to collect approximately $538.8 million in expected winning bids, down significantly from a March 2014 central Gulf of Mexico auction that raked in $850.8 million in winning bids from 50 companies.

2015 world oil demand up slightly

OPEC adjusted its 2015 world demand forecast slightly higher, to 92.32 MMbpd. Demand by developing countries is expected to outpace growth rates from China, which is expected to experience another round of decelerated demand growth. OPEC is forecasting 820,000 bpd of YoY growth in oil demand from developing countries in 2015, well ahead of the 310,000 bpd growth expected to be seen by China.

Douglas Westwood: UK Offshore Oil & Gas - What Next?

The low oil price is expected to dramatically impact O&G activity on the UKCS. Most notably, the number of wells drilled will decrease - particularly E&A wells. In 2014, drilling campaigns were significantly smaller than forecast - only 14 exploratory wells were drilled from an anticipated 25. This is the lowest number since 1970 and with the current oil price an increase is highly unlikely. However, production is expected to be maintained over the short to mid-term, bolstered by sanctioned projects. Meantime operators are seeking to control costs - BP and Talisman have recently announced large job cuts and many high CapEx developments will face delays.

Despite the downturn, the 28th licensing round (Nov 2014) appears to indicate continued Operator interest. DECC awarded a total of 134 licenses - fewer than the record 27th round in 2012 - but still demonstrating the ongoing attractiveness of the region. This does not mean drilling will return to higher levels: the majority of licenses were awarded on the basis of further analysis of seismic data. Overall, oil companies committed to just five firm wells and four contingent wells. Given the declining oil price and current unattractive fiscal regime, a lack of commitment from oil companies is to be expected. However, the lack of drilling activity still represents a significant concern for the UK industry and encouraging companies into drilling will require careful restructuring of both the fiscal and regulatory framework.

Chancellor George Osborne, in his Autumn Statement, announced plans to revise the fiscal regime and appoint a new regulator. However, given the steep decline in oil price, more needs to be done, particularly on taxation - indeed Lord John Browne recently suggested cutting through the tax complexity and putting it onto a corporation tax basis. However, much depends on the outcome of the general election - anything but a win for Conservatives may delay much needed reforms and suppress the UKCS O&G industry further.

Mexico's bidding round for shallow water kicks off

The Mexican National Hydrocarbons Commission recently published the bidding and contract terms for the first 14 oil and gas areas in shallow waters, kicking off the first phase of Mexico's bidding round for exploratory oil and gas blocks in the Gulf of Mexico.

However, with the recent plunge in oil prices, many are speculating whether major international oil companies will continue to show interest in the initial phase of the bidding round. Mexico took note and revised its initial offering by eliminating a few costly shale fields from its private oil tenders.

"In the past week, the government has admitted that it may need to further delay high-cost areas, such as unconventionals," stated Adrian Lara, GlobalData's senior upstream analyst for the Americas, in a released statement. "On top of this, the new schedule appears ambitious for a regulatory agency organizing its first-ever licensing round."

Despite these delays, the lower oil price should not affect the competitiveness of bidding on the shallow-water exploration blocks where production costs are less than $20/bbl, remarked Juan Carlos Zepeda, head of the National Hydrocarbons Commission. NHC is the regulatory overseeing Mexico's "Round One."

Several major companies, including ExxonMobil, Chevron Corp., Shell, Ecopetrol SA, and BG Group have paid a $350,000 fee (on top of a $18,600 registration fee) for access and authorization to the data room that houses seismic and geological data that has been the exclusive preserve of state oil company PEMEX for nearly eight decades.

Companies are slated to review the material which will open up to the bidding and contract terms for the first 14 oil and gas areas in shallow waters in the first phase of round one. According to a recent Mayer Brown report, these exploratory areas, located off the coast of the states of Veracruz, Tabasco, and Campeche in southeast Mexico, hold prospective resources that are expected to contain light crude oil with low production costs. Each contract area is subject to different minimum investment obligations.

In the first round, the bidding process is divided into the following five different phases: Shallow waters, extra-heavy oil, Chicontepec Basin and unconventional resources, onshore deepwater.

PEMEX, like other companies, can bid on no more than five of the 14 areas on offer in the first tender. But with the depressed oil prices, authorities were "redefining what can be offered," stated Zepeda. The Eagle Ford shale has geological continuation of formations that cross into Mexico, but technical challenges, including lack of infrastructure and water and swift production times correlate to costs that are not attractive during a down cycle. The commission along with the Energy Ministry will decide by 2Q 2015 which areas will be trimmed.

The first deepwater Mexican prospects due to be auctioned later this year remain attractive even in the current environment because production is at least eight years away, meaning current prices are less relevant to exploration budgets for companies assessing their existing portfolios.

Moreover, in 2015, Mexico plans to award permits for companies to conduct seismic studies, including an assessment of presalt prospects. Two-dimensional and 3D studies conducted by outside parties will be a first for the country.

"I think what Mexico has accomplished recently is outstanding for two reasons: a) the number of years that the Mexican industry has been closed and b) the emblematic nature of oil in Mexico," stated Gabriel Salinas, associate, Mayer Brown, to Offshore. "In one year, a major reform occurred with new energy laws and regulations set in place. They've done their homework and I'm excited to see this process begin." -Robin Dupre, Offshore

IEA raises forecast for oil demand

Having bottomed‐out in the second quarter of 2014, global oil demand growth has since steadily risen, with year‐on‐year gains estimated at around 0.9 MMbpd for the final quarter of last year and 1.0 mb/d for the current quarter, said the International Energy Agency's (IEA's) Oil Market Report for March. The forecast of demand growth for all of 2015 was raised by 75 kb/d to 1 MMbpd, bringing global demand to an average 93.5 MMbpd.

Global supply rose by 1.3 mb/d year‐on‐year to an estimated 94 MMbpd in Feb., led by a 1.4 MMbpd gain in non‐OPEC output. Declines in the US rig count have yet to dent North American output growth. Final Dec. and preliminary current-quarter data show higher‐than‐expected US crude supply, raising the 2015 North American outlook.

OPEC crude output edged down by 90 kb/d in February to 30.22 mb/d, as losses in Libya and Iraq offset higher supply from Saudi Arabia, Iran, and Angola. The slightly higher demand forecast has raised the "call" on OPEC crude for the second half of 2015 to 30.3 MMbpd, above the group's official 30 mb/d target.

Global crude refinery throughputs estimates have been raised to 77.8 MMbpd for the current quarter and 77.3 MMbpd for the second quarter on sustained high margins and a slightly more robust oil demand outlook. Annual gains are forecast at about 1 MMbpd for the first half of 2015, down from a sharp 2.2 MMbpd the final quarter of 2014 and in line with projected oil product demand growth.

OECD commercial stocks rose by a weaker‐than‐average 23.1 MMbbl in Jan. US crude stocks rose to a record 72 mb surplus.

WoodMac: Oil sands cash flows to fall by $23B in next two years

The operational cost of extracting bitumen from Canada's oil sands tops out at $37 per barrel for in-situ projects and $40 per barrel for mining projects, according to Wood Mackenzie.

Callan McMahon, principal analyst Wood Mackenzie, says this is among the highest of all project types globally. "With low oil prices, the oil sands region's cash flows will fal l by $23 billion in 2015 and 2016 combined," he said.

The firm forecasts that capital spend in the region will fall by $1.5 billion over the next two years (4% from 4Q14 assumptions), but it sees limited impact on production.

"Even if projects temporarily operate at a loss, shut-ins are not expected; and with the costs sunk, projects totaling 458,000 b/d of bitumen are set to start production in 2015-2016," McMahon said. In addition, the analysis highlights that decreased investment will show post-2017, and the 4 million b/d peak bitumen production previously expected in 2020 by Wood Mackenzie has now been pushed out to 2024.

The oil sands remain viable long-term: An average point forward breakeven for an onstream in-situ project is $41/bbl and the average point forward breakeven for an onstream mine is $47/bbl (WTI indexed), but full-cycle breakevens can exceed US$100/bbl for both project types.

Larger and diversified companies better positioned to weather the storm: Imperial, CNRL, Suncor, and Shell each still hold over $20 billion in post-tax remaining NPV10 in the region.

To date, over $35 billion of value has evaporated from the region. If prices stay low, at a $60/bbl real flat price deck, the firm calculates that another $121 billion could be at risk, which equals with the Eagle Ford's remaining value. Companies looking for the exit might find limited options: The large amount of investment made in the past decade by the potential suitors and the unique expertise required to develop this high-cost resource are both significant headwinds.

Bottom for oil service stocks

In a February report, Sterne Agee analysts looked at rig momentum as a factor to help indicate where the oil service industry would hit bottom. One key factor historically linked to the bottom for oil service stocks has been a slowdown in the pace of the drop in rig activity. "Owing to the historically sharp decline in activity, this point will likely arise sooner in this downturn than prior drops," the analysts noted. At the time of the report, the industry began to see signs of deceleration in the pace of the rig count decline.