Offshore production will fall

[dan_s]

Last Thursday, Baker Hughes reported that the active rig count in the Gulf of Mexico dropped to 10. This compares to 31 a year ago and over 50 two years ago. Stop drilling and production falls. Significant offshore oil projects have been put on hold or cancelled all together all over the world.

High Cost Drilling

Offshore drillers have faced a double whammy of collapsing demand amid crashing oil prices and a wave of new rigs, widening oversupply. Contract awards are at their lowest level since the 1980s. Offshore drillers are now accepting “survival rates” well below $200,000 per day for floating rigs. That compares with fees that went as high as $650,000 per day at the peak of a boom in 2013.

The dayrates associated with offshore drilling are substantially larger than onshore drilling, making offshore drilling a more significant capital expenditure than onshore. With companies cutting capital expenditure budgets, new exploration and drilling has been shelved by a lot of companies in favor of increasing production from legacy wells.

Increasing the stress on the offshore drilling companies is the supply glut of rigs. As more companies lay down rigs and cease expenditures in offshore drilling, dayrates have suffered and the rig glut will keep them low for the foreseeable future. The utilization rates for drilling companies have taken a significant hit, with some companies choosing to retire rigs and cold stack them. Transocean Ltd. (ticker: RIG) Chief Executive Officer Jeremy Thigpen expects it will have to wait at least another three years before his company can begin charging higher rates for offshore rigs.

In an industry report, Moody’s said, “With so many newbuilds on the horizon, rig companies will have to cold-stack or scrap substantially more rigs over the next several years.”

“Oil and gas producers are still cutting rig exposure to preserve liquidity and will defer most exploration and appraisal drilling as well as high-cost early-stage development projects at current oil prices as they reassess project economics, development timing, and long-term strategies,” Moody’s says. “Without a significant, sustained recovery in oil prices, it could be difficult for oil companies to maintain even today’s reduced drilling levels through 2017.”