For months, the North Sea has been teetering on the edge – $40 oil isn’t enough to sustain the flow of mini-projects needed to assure reasonable health, though large developments and cash-cow production appear secure.
The current situation is worrying everyone, not least Ian Burdis, vice-president of well management at AGR Petroleum Services. This company, founded on the former Peak Well Services, has become something of a barometer on North Sea drilling/well construction activity because of its now substantial market share.
“This is the first time that we’ve seen a general recession coinciding with a fall-back in oil price. It’s usually counter-cyclical, so we’re in uncharted territory,” Burdis told Energy.
“We’re going to get rained on, I think.”
By that, Burdis means more rigs are likely to be stacked and/or migrate elsewhere; rig rates are likely to fall further, and fewer exploration and appraisal wells will be drilled. He sees AGR’s E&A well count dropping to about 12 – less than half 2008’s tally.
That said, his view is that the North Sea market is a bit different to others, largely because it is “isolated” by tougher regulation (especially Norway) than elsewhere.
“There are high barriers to the cost of entry here, more so in Norway. So we’re kind of left with the units we’ve got for the most part, or something that is returning … rigs that have been here previously.
“Over the past couple of years, we’ve seen a net decrease of about four rigs, though there are a couple of Maersk units coming in to replace them, plus there are new-builds coming into Norwegian waters this year and next.
“What we’re seeing in Norway is that there’s still reasonably strong demand for the existing fleet, and we’re seeing potential for perhaps another jack-up and another semi-submersible there to cope with what has really been a huge unsatisfied demand in the last few years.”
Turning to the UK sector, while E&A is set for a dip, Burdis sees “fairly consistent” activity in the development and workover segments, with companies such as Fairfield and Taqa among the leaders in that regard.
“What appears to be suffering is the discretionary work, but it’s not consistent. There are people with money and are prepared to go to work; there are those who have it but are preferring to conserve cash, and there are people who really want to get on with it but, until they have farmed out and brought in someone with money, they’re not going to do anything at all.
“I think the UK sector, from an exploration perspective, is characterised by everyone running full pelt to do nothing. That’s largely due to uncertainty over where the oil price is going to bottom out and, until such time it does, people will tend to hold back.
“Similarly, on the rig front, people are saying that if rig rates were $400,000 per day before Christmas, $350,000 in January, $300,000 last week, and I’m now hearing that one can get them for $250,000 this week, what will the rates be next week or the week after?
“So nobody’s signing anything up. However, it’s a bit like falling house prices. They’re dropping, but no one is buying, so how do we know they’re falling? It’s the same with rigs.
“There are five rigs in the UK North Sea that don’t have sub-let opportunities from primary contract holders like BP, Nexen and Talisman. Such companies are trying to offload capacity.
“Initially, they were offering them at the contracted rate; we’re now seeing that operators are trying to offload at subsidised rates, yet there are still no takers.
“The two rigs that fell out of Oilexco are still in limbo as far as the administrators of Oilexco are concerned, but they would like to market them if they were free to do so.
“They’re coming out with tentative rates … they can’t offer them officially … significantly below what they were contracted to Oilexco … around $365,000 per day.
“They’re believed to be on offer at somewhere around $280,000-300,000. I’ve heard as low as $225,000 for one of the units, but again, no takers.”
What Burdis says is hardly surprising. Even the well heeled are playing a waiting game to get rigs cheaper; which means the situation for oil minnows must be awful. A number of those smaller companies are/have been AGR clients and have helped make the company a leading well construction management contractor.
Clearly, if such firms are in distress, they won’t be handing out work to anyone, let alone AGR.
One result of the current worries is that AGR Petroleum Services will take a hit this year. Burdis reckons 2009 will probably be similar to 2007 for the company, but that the firm will be able to jog along.
Burdis: “We have managed to move from a purely exploration-based portfolio through 2005-06 to a more appraisal and development balanced portfolio, so we are engaged in engineering work and procurement of subsea equipment for fields.
“We may not be actually going out and completing the wells until such time as rig rates are more settled, but we’ve got reasonably strong revenue streams from engineering. We have a full programme in Norway, also Australia, South-east Asia, and we’re still pretty busy in the US Gulf of Mexico.
“What we’re seeing is a dip in the UK North Sea, but not necessary across AGR as a whole.
“I think we’ll be looking at 10-12 (UK North Sea) wells this year … less than half what we did last year. That’s today’s view. Some of that is secured work, but we’ve still to secure rigs for it; the remainder is better than speculative.”
So what drilling commitments are live for AGR?
“We’ve got Serica, OMV, Antrim, subject to being ready, Dana … those are some. But we have just one drilling unit on contract for the UKCS … the Ensco 100, which is currently farmed out to Conoco. There are no slots booked with any other rigs on the UKCS at this time.
“We think that’s the prudent thing to do in this market; go short on rigs while rates are fluctuating rather than risking a rig on long-term contract and then all the clients trying to bail out.
“There is interest from people who want to do things. But they’re waiting for the ideal opportunity. We saw at the prospects fair in December that the client base is really polarised into two groups. There are those that will likely perish and there are hyenas, jackals and vultures with money that clearly won’t do anything until such distressed firms or their assets can be picked off cheaply.”
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