It is easy to underestimate the impact of oil going below the $30 a barrel barrier, a crash of 30 per cent just since the beginning of this year.
Even Reuters has admitted that the price has crossed “the fuzzy line separating a rational response to fundamentals from an irrational fear where the only way forward is down, down, down”.
Its descent from $100 a barrel since mid-2014 was explained away as a reaction to factors of supply and demand, but things have now gone too far, many say. Is oil sustainable at below $30?
It is certainly spurring a period of consolidation. Local operator Bluhull Group believes that onshore and offshore drillers that are able to adapt to low oil prices by maximising efficiency will survive the downturn.
“The low oil prices today are the result of an oversupply. Oil production levels globally are greater than consumption. Various factors such as the slowdown in economic power houses such as China, increase in oil production from shale formations in the US, and even the anticipated ramped up oil production in Iran results in downward pressures on the oil price,” managing director Jonathan Borg said.
“Eventually, irrespective of the oil price on the market, oil in storage must be sold, as storage costs weigh on the economics, resulting in a buyer’s market, and a vicious cycle of declining oil prices.”
He also look a long-term perspective of the current crisis, pointing out that between 1986 and the end of 2003, oil prices hovered largely between $20 and $45 per barrel.
He was upbeat, saying that the effect on the Maltese economy can only be seen in a positive light.
“Primarily, this is due to the fact that Malta is not an oil producer and therefore consumers will benefit, once low oil prices trickle through the economy.
“Secondly, Malta’s oil and gas service industry is based on services rendered to the oil and gas industry in North Africa, much of which is now attracted to Malta’s stability as a base for storage and logistics, and who therefore may choose to operate from here,” he said.
Even the decommissioning of rigs (see graph) provides opportunities. Malta’s growing importance as a rig stack location is a substantial boost to the local economy, Mr Borg said. A rig stack location is one that essentially allows for the “parking of rigs” in ports or near-offshore locations either to effect repairs or to wait out until contracts are won.
“The excellent service and professionalism that offshore drillers received from our local port authorities and service companies has made Malta an internationally renowned location in the oil and gas industry.
“Despite low oil prices therefore, the oil and gas service industry locally is performing well. Indeed, never have there been so many rigs in Maltese waters as today, with five currently present and more on the way,” he said.
Neil Patterson, Medserv’s chief strategic development officer, explained why the crisis is not hurting the company in Malta as much as others elsewhere.
“The types of services that Medserv provide – the loading and discharge of vessels, the storage of materials – is largely independent of the price of oil. It is more affected by the volume of materials handled and transhipped.
“As Medserv is supporting mainly producing assets/fields, we are largely immune from the worst of the effects of this oil price fall,” he said.
Another aspect of the oil and gas industry is exploration, and Mr Patterson explained that as the price of oil drops the first casualties are the more exotic exploration projects, usually offshore and in new locations or where there is a higher risk of not finding oil.
“Wells offshore are significantly more expensive than land wells to drill, and thus they tend to be delayed or deferred first,” he said.
“Secondly, gas is much more difficult to monetise than oil. Gas requires a pipeline to market or liquefaction to LNG and sea transportation to market. These development projects have been badly affected. This is despite the flight to gas from coal and oil for the generation of power.
“This is why you see Shell pulling out of the Alaskan Arctic Chukchi Sea exploration play and little activity offshore Tanzania (gas), and Mozambique (gas),” he added.
Of course, wells and gas fields cannot simply be put on hold. Oilfields and gas fields lose pressure over time as the hydrocarbons are extracted. Fields in production require a steady stream of activity to maintain production flows and reservoir pressure. This includes infill drilling, water injection drilling and other activities to ensure wells continue to produce at optimum rates.
“Without this constant support, the field will decline rapidly and become uneconomic. Production support is what Medserv provides for the offshore Libya fields. The work we are doing today will ensure the output of the fields through 2018 and beyond,” he explained.
Projects to install new platforms or purchase new drilling rigs have been put on hold or cancelled
Another major area of cost-cutting in a low oil environment is the construction of additional oil facilities – onshore and offshore – which affects some sectors of the industry quite badly.
“Projects to install new platforms or purchase new drilling rigs have been put on hold or cancelled. The oilfield construction companies are feeling the pain much more than many other service companies.”
Mr Patterson picked up on Mr Borg’s point about Malta’s advantage when it comes to reduced activity levels.
“One opportunity resulting from the downturn and the laying up of many floating rigs, jack-ups and offshore construction vessels is the need to find a parking space for all this floating hardware. Many of these specialised vessels are very large and require deep water anchorage.
“The area designated for this type of vessel in the Grand Harbour is currently full of an assortment of rigs, parked awaiting the call for work. In the past rig owners took this opportunity to carry out maintenance work or upgrades, but in today’s environment they are just as likely to take the decision to scrap the older, less well equipped rigs and slim down their fleets.
“Medserv has suitable anchorages offshore Filfla island and additional anchorages in Greece and Oman for the parking of these vessels. We envision that there will be more opportunities like this in 2016,” he said.
Of course, it is not all rosy. The production support that Medserv provides from its base in Malta to the offshore Libyan platforms and drilling rigs has seen a decrease in activity, but the strategic importance of these Libyan fields output to the European Union, and Italy in particular, means that activities to maintain output have been kept in place.
One exception to the slowdown has been the major gas find by ENI offshore Egypt.
“The Zohr gas field is being fast-tracked for development through a relatively simple subsea pipeline tie-in to the existing pipeline network and brought onshore. Egypt has a ready market for this gas and its economy will benefit from being self-sufficient in energy once the gas is brought ashore. This development activity makes Egypt an important place to be located in order to provide the additional logistics services required,” he added.
“The cost of drilling is particularly affected by the day rate of the drilling rig. Offshore deep water Egypt requires the largest modern drill ships such as the Saipem 10000. These ships are expensive to hire. The rates for these ships has dropped from around $600,000 to $350,000 per day as a direct result of current oil pricing. Where possible, contracts have been terminated or at the very least renegotiated. There is a similar pattern of day rate reductions for supply boats and anchor handling vessels – the two workhorses for the offshore marine support.
“During any downturn, companies that are well-established, and have already invested in facilities, equipment and personnel are much better able to withstand the effects of the downturn. New entrants to the market will face severe pressure on pricing, and entry costs and thus significant financial pressure to survive.”
Angelique Maggi, the deputy chairwoman of Ablecare Oilfield Services Group, pointed out that Malta was benefiting on another front: while drilling assets are being cold stacked and older assets decommissioned, training cannot be put on hold.
“This downturn gives all an opportunity to stop, reflect but most importantly ‘do’,” she explained.
“We have invested heavily in training equipment, including a drilling simulator, so as to provide for an immersive training environment. This offers the opportunity for qualitative training rather than a ‘butts on seats’ approach. During the second quarter of this year, besides providing tailor-made training solutions to targeted clients, we will be also delivering accredited IADC and IWCF well control courses.
“This investment in oil and gas career training, coupled with the maritime hub facility, will keep Malta in the high ranks of professional service facilities to the oil, gas and maritime industry,” she said. (Additional reporting by Reuters)
Rig count overview & summary count
Area | Last count | Court | Change from last year |
US | January 15, 2016 | 650 | -1,026 |
Canada | January 15, 2016 | 220 | -213 |
International | December 2016 | 1,095 | -218 |
Source: Bakee Hughes
Oil sector by numbers
26
Offshore rigs in the Mediterranean out of worldwide total of 1,500
Source: Statista
258,000
Global layoffs from oil and gas sector in 2015
Source: Graves and Co.
$522 billion
Investment by oil and gas companies in 2016, down 22% on 2015 total
Source: Rystad Energy
1,457
Decommissioned rigs (onshore and offshore) 2015/16 leaving 1,965 active
Source: Baker Hughes
96.49
Demand in million barrels per day by end of 2016, up from 94.69 mb/day now. Supply stood at 96.88 mb/day at the end of 2015.
Source: International Energy Agency