WOW!! SAY ITS NOT SO!! DAMNED OIL DEBT!!! OFFSHORE OIL IN DEBT CRISIS!

[ceo_energemsier + 1,818]

While the media is often focused on how multibillions are being poured into energy transition projects worldwide (usually focusing on solar and wind), global oil and gas is busy wooing financial investors--some of which seem wary to stay linked to hydrocarbon projects. The potential problem will not bet be related to a lack of investments in renewables but the reduced availability of available financing for existing and future oil and gas projects. The influx of cash into U.S. shale oil and gas may be hiding the real situation on the ground, which may be bleaker than we realize.

Conventional oil and gas projects are lacking mainstream finance options it seems, countering the prevailing media reporting about the majors' high-profile multibillions in profits and increased dividends for shareholders. The media reporting about Shell’s decision to handout more than $125 billion to its shareholders during the next couple of years, which has made headlines, is distracting focus from the situation of the majority of the smaller operators and oilfield service companies.

The total oil and gas sector is far from out of the woods, as debts have become a real burden for many companies. When looking at the offshore sector, the situation has become dire. Debts are staggering, while investments in offshore upstream projects have been faltering. The latter has resulted in a severe liquidity crunch, hitting offshore drillers and oilfield services companies. The latter situation has been discussed at a oil and gas conference in Oslo, Norway recently, where offshore bankers painted a dire picture. Hit by high debt levels and low dayrates for vessels and rigs, companies are struggling to refinance operations. At the same time, the current volatility in the oil and gas markets has constrained major investments into offshore developments during the last few years. The only current bright spots are in the Arabian Gulf, the Red Sea and East Mediterranean.

Offshore service companies such as Seadrill, Solstad Offshore and DOF are still worried about the future, as the market's slow recovery has not yet resulted in better financing options. Globally, analysts are not expecting a real improvement before 2021. The main issue for most service companies is debt being too high, which could result in restructuring or even bankruptcy. As Bloomberg reported earlier this month, “the global offshore drilling outlook remains bleak, with contract coverage expected to be below 55 percent for the rest of 2019, amid a net rig supply increase of 54 rigs year-to-date.”

Some companies have been able to get loans lately, but the majority are still hunting for cash. With institutional investors and banks mainly looking at developments in the U.S., it may be time to restructure or re-educate financial advisors too. The future may not revolve around U.S. shale and gas, as investments there are going to be very high risk. At the same time, U.S. operators are already struggling to meet their debt reduction goals. Some relief has come from the OPEC+ oil price strategy, but the debt is still suffocating.

Western capital discipline is now a potential threat. If banks are not willing to provide adequate financing, operators increasingly will have to look for alternative financing options. The latter could also lead to a fire sale of assets or companies to incumbents from other regions. Looking at the current developments in the Middle East, North Africa and Africa, it would not come as a surprise if Arab investment funds or “private” oilfield service companies are going to hunt for opportunities that emerge in the West. Some acquisitions have already have been made, but no major offshore oilfield services companies have been targeted yet. Looking at some of the key names in the space and their financial situations, it doesn’t take a rocket scientist to see the opportunity on the horizon.

 

Edited July 2, 2019 by ceo_energemsier

[ceo_energemsier + 1,818]

 

[ceo_energemsier + 1,818]

WOW, so offshore operators should be forced to shut in their wells too? because costs overruns will create more debt? industry segment will not be profitable? offshore running on the hamster wheel?

________________

Cost Overruns Threaten Offshore Development

The prospect of oil prices remaining at about $60 a barrel, combined with impressive cuts in development and operational costs since 2014, have encouraged E&P companies to accelerate development of their offshore projects including Mad Dog Phase 2 in the Gulf of Mexico, the Azeri–Chirag–Gunashli in the Caspian Sea and the Tortue and Bonga Southwest field off the coast of West Africa.

Indeed, Rystad Energy expects sanctioning of offshore field projects to rise to around $100 billion a year over the next four years, or double the annual average of 2015-18. But, rushing the final investment decision, especially for tailor-made designs, can increase uncertainty over the final cost by as much as 20 percent either way. Consequently, “for offshore operators, that means the expected variation for projects to be sanctioned during the period from 2019 to 2023 could be as high as $220 billion” according to a June 2019 study by Rystad Energy.

The need for good planning

Quite naturally, the success rate of sanctioned projects around the world varies widely. As Rystad Energy demonstrates, even taking into account funding based on a thorough engineering definition, operators could still see a cumulative $111 billion cost overrun. Indeed, Rystad has found cases in which accelerating a sanctioning decision without proper engineering definition can often result in actual costs exceeding target costs by up to 50 percent.

The $60 a barrel challenge

Matthew Fitzsimmons, VP, Cost Analysis at Rystad Energy, notes that “even if oil prices stay above $60 per barrel over the next five years, final investment decisions could take longer to reach” to allow for sufficient time to mature the engineering definition and “ this will lower the uncertainty that their funding estimates will carry.” He warns that “failure to do so will not only have an adverse impact on the operator’s ability to control cost overruns but also the minority share owners of the field.”

Recent well-publicized cost overruns are a wake-up call and signal the vital importance of proper project planning and implementation. For example, the cost estimate for Shell’s huge Prelude FLNG project was $11 billion back in 2011. Nonetheless, due to the unforeseen mega engineering and fabrication challenges posed by this pioneering venture, development costs ballooned to around $15 billion – an increase of more than 36 percent. The scale of this cost overrun caused the major to cancel its order for another three FLNG units worth around $4.6 billion from Samsung Heavy Industries.

Impact on oilfield support companies

Since the oil price debacle of summer 2014, oil producers have become even more cost conscious and have imposed strict controls over their capital expenditures. This has been achieved largely in-house, with many operators opting for fewer, but better drilled wells, alongside more phases per development, whilst employing the latest technology, modularization and standardization of equipment and parts. The drive to reduce costs has inevitably had a knock-on effect on the profitability of major oilfield service companies including Schlumberger, Halliburton, Transocean and Norway’s Aker solutions, which competed for work in the downturn and temporarily reduced their fees. Indeed, the major oil companies have been remarkably successful in driving the average pre-final investment decision break-even point down to US$49 per barrel of oil equivalent compared with a pre-crisis $78 in 2014, according to a Wood Mackenzie report released November 2018.

While break-even costs of deep-water projects have fallen and industry profits and confidence are up, the supply chain and oilfield service companies will once again try to raise fees as demand for their services rises with increased activity. Simultaneously, industry insiders doubt whether the oil majors have fully factored in Rystad Energy’s findings on likely cost inflation in forthcoming projects.

[fozzir + 68]

This is why we drill in Texas! 

[Douglas Buckland + 6,308]

On 6/27/2019 at 7:14 AM, ceo_energemsier said:

While the media is often focused on how multibillions are being poured into energy transition projects worldwide (usually focusing on solar and wind), global oil and gas is busy wooing financial investors--some of which seem wary to stay linked to hydrocarbon projects. The potential problem will not bet be related to a lack of investments in renewables but the reduced availability of available financing for existing and future oil and gas projects. The influx of cash into U.S. shale oil and gas may be hiding the real situation on the ground, which may be bleaker than we realize.

Conventional oil and gas projects are lacking mainstream finance options it seems, countering the prevailing media reporting about the majors' high-profile multibillions in profits and increased dividends for shareholders. The media reporting about Shell’s decision to handout more than $125 billion to its shareholders during the next couple of years, which has made headlines, is distracting focus from the situation of the majority of the smaller operators and oilfield service companies.

The total oil and gas sector is far from out of the woods, as debts have become a real burden for many companies. When looking at the offshore sector, the situation has become dire. Debts are staggering, while investments in offshore upstream projects have been faltering. The latter has resulted in a severe liquidity crunch, hitting offshore drillers and oilfield services companies. The latter situation has been discussed at a oil and gas conference in Oslo, Norway recently, where offshore bankers painted a dire picture. Hit by high debt levels and low dayrates for vessels and rigs, companies are struggling to refinance operations. At the same time, the current volatility in the oil and gas markets has constrained major investments into offshore developments during the last few years. The only current bright spots are in the Arabian Gulf, the Red Sea and East Mediterranean.

Offshore service companies such as Seadrill, Solstad Offshore and DOF are still worried about the future, as the market's slow recovery has not yet resulted in better financing options. Globally, analysts are not expecting a real improvement before 2021. The main issue for most service companies is debt being too high, which could result in restructuring or even bankruptcy. As Bloomberg reported earlier this month, “the global offshore drilling outlook remains bleak, with contract coverage expected to be below 55 percent for the rest of 2019, amid a net rig supply increase of 54 rigs year-to-date.”

Some companies have been able to get loans lately, but the majority are still hunting for cash. With institutional investors and banks mainly looking at developments in the U.S., it may be time to restructure or re-educate financial advisors too. The future may not revolve around U.S. shale and gas, as investments there are going to be very high risk. At the same time, U.S. operators are already struggling to meet their debt reduction goals. Some relief has come from the OPEC+ oil price strategy, but the debt is still suffocating.

Western capital discipline is now a potential threat. If banks are not willing to provide adequate financing, operators increasingly will have to look for alternative financing options. The latter could also lead to a fire sale of assets or companies to incumbents from other regions. Looking at the current developments in the Middle East, North Africa and Africa, it would not come as a surprise if Arab investment funds or “private” oilfield service companies are going to hunt for opportunities that emerge in the West. Some acquisitions have already have been made, but no major offshore oilfield services companies have been targeted yet. Looking at some of the key names in the space and their financial situations, it doesn’t take a rocket scientist to see the opportunity on the horizon.

 

You seem to be confusing offshore drilling contractors with offshore operators.

With the present slump and the recent perceived over-supply, the multinationals (the only players with deep enough pockets to play in the deepwater arena) essentially stopped exploration in deepwater as the risk vs reward wasn't conducive to spending the money.

As the number of offshore wells being pursued dropped and operators began demanding price concessions, the dayrate for the rigs has fallen with many offshore rigs being stacked. This is common during slumps.

The irresponsible production of US shale oil exasperates the situation by keeping the price of oil low, depressing exploration. In an effort to reduce costs the entire exploration,appraisal and development drilling players hammer the service companies and drilling contractors for 'deals'. This weakens the drilling contractors + service companies and causes an exodus of experienced personnel as well as makes it unattractive for new blood to enter the industries.  

Kep in mind that NO operator can drill a well themselves, they do not own rigs, casing running companies, cementing companies, wireline logging companies, etc....

[Rasmus Jorgensen + 1,169]

On 6/27/2019 at 1:14 AM, ceo_energemsier said:

Some acquisitions have already have been made, but no major offshore oilfield services companies have been targeted yet. Looking at some of the key names in the space and their financial situations, it doesn’t take a rocket scientist to see the opportunity on the horizon.

This very much depends on how you believe the market will develop. The thing about offshore oilfield service assets is that they have huge runnning costs; and most oilfield service companies require a lot of working capital. reducing capex is not enough - many deals are starting to look pre-mature reference SD Standard drilling, Solstad, Bibby, DOF. I am even starting to hear talk that Tidewaters massive debt / equity swap was pre-mature. 

You seem to be hinting at China. And China does own a lot of debt that is secured against assets. But they have yet to collect this. Why do you think that is?