Drilling analysts at RS Platou believe oil & gas companies will start to see offshore spending in a more positive light over the coming years
Oil markets started the year in crisis mode; US oil production was soaring and Opec continued to defend market share rather than cut output to bolster prices.
Prices thus were in a free fall and, with no anchor, there was no shortage of dire predictions.
However, drilling analysts at RS Platou have come to the view that, looking back, price performance has not been as bad as expected, the low point was seen in January when Brent prices touched $45, a $75 decline from the peak last summer. Since then, Brent prices have rebounded some 50%, to the current level of around $65.
RS Platou’s rigs team asks how oil prices have apparently settled where they are.
“Production statistics, generally considered the more reliable part of the statistical complex, clearly show that there has been precious little help in restoring balance from this side of the equation.
“According to the IEA, world oil production rose by 3.3% (3.0million barrels per day) through May. The US continues to lead global production growth.
“This year’s increase of 1.5million bpd so far is little changed from last year, albeit a touch slower in percentage terms.
“The difference with last year, however, is that Opec production is expanding strongly this year, growing at about half the rate of the US (in million barrels per day terms).
“Accounting for where this increase in production has gone, is where the difficulties start, however. Oil demand forecasts from leading forecasting agencies have been rather static, until recently.
“Even as forecasts have come up from 1% to 1.4%, it is still well below the 3%-plus increase in supply.
“Commercial inventories have indeed increased, but at a rate far below the IEA’s implied 2.0million bpd surplus in the first half of the year.
“In contrast to the aftermath of the Financial Crisis, however, relative oil prices are not signalling any acute indigestion, so far.”
They say the so-called “forward curve” is rising, creating contango in the market, yet the forward premium is no higher than at the start of the year.
Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity.
Furthermore, they point out that refiners globally are experiencing higher margins than for many years, even as they are pumping as hard as they can. And they argue that these are hardly signals consistent with a market “filled to the brim”.
From the offshore industry’s perspective, the key development is obviously the performance of the US shale oil industry.
The response to the price collapse has been strong in terms of drilling activity, more than half of the country’s oil and gas drilling rigs have been idled.
And yet production continued to rise through Q1. Much has been said about the industry’s large gains in productivity, which could explain the resilience in production.
The full answer depends on how effectively production companies have been able to maintain well inventories, which over time will become producing wells.
“Base case forecasts from the IEA is that growth will slow to half last year’s rate in 2015. The EIA is forecasting a 0.2million bpd decline next year,” says the RS Platou team.
“If these scenarios are correct, and shale oil output indeed proves vulnerable to price volatility, we believe oil & gas companies will start to see offshore spending in a more positive light over the coming years.”
That in turn will create a more positive drilling market.
That said, activity beyond the current year is difficult to predict, with few if any oil companies not looking towards adding rig capacity at this point.
There are some long-term tenders out in the harsh environment part of the offshore drilling market and contractors expect to see some tenders awarded during the coming months. However, there is increased competition for what might be tendered.
Overall utilisation in Norway and UK is currently at approximately 93%. But it is likely that this will decrease during this year as some units are rolling off contract and being stacked.
North Atlantic Drilling observes in its Q1 results commentary: “Although the near-term outlook remains challenging, the market could rebalance the marketed supply, taking into account the newbuild-orderbook, if scrapping activities continue to increase.
“The global drilling market has seen 14 rigs scrapped in 2014 and 12 already in 2015. This represents the highest level of scrapping activity seen since the early 1990s.
“The total marketed supply of floaters in UK and Norway currently stands at approximately 46 units. Even though there have been two floaters in the UK announced to be scrapped, we expect this trend to increase over the next two years.
“A significant number of units rolling off contract are older than 25 years and need to complete a SPS and/or repair and upgrades in order to re-enter operation. This will not generate cash positive returns or meet internal return requirements.
“There is a high likelihood that a number of these units will be either scrapped or stacked leading to limited fleet growth.”
North Atlantic Drilling notes that falling rig rates might attract smaller oil companies back to drilling, notwithstanding $65 oil.
As for its own position, the Norwegian driller is notably bullish about working in the Russian Arctic.
“The company continues to be constructive on its agreement with Rosneft to pursue opportunities in the Russian Arctic. By extending the agreement we remain in the best position possible to move a significant number of the company’s units to the region when opportunities materialise.”
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