Deepwater drilling

Those who saw the ‘Capex Compression’ road show back in the summer will recall that Douglas Westwood expressed concern that oil prices would not rise to cover rising exploration and production costs, and that this would force the operators to cut Capex. Shortly after the presentation, the oil majors posted dreadful Q2 results, prompting Shell CEO Peter Voser to declare Shell would discontinue production guidance to focus on quarter by quarter cash flow growth. Moreover, the investment banks began calling for the oil majors to cut Capex. Goldman Sachs singled out Shell for excessive investment in low return assets, although the investment bank had indicated that deepwater should be spared. Nevertheless, during the presentation, the possibility had been raised that the oil majors would ‘walk back’ their rig needs in the Gulf of Mexico, just as Petrobras had done in Brazil. In the spring, Petrobras had announced that it would only need 42 deepwater floaters, rather than the 65 it had called for just months earlier. 

It seemed possible that such pressures would also manifest themselves in the US Gulf and indeed, Shell has decided not to extend an ultra deepwater 6^th generation rig contract in the US Gulf of Mexico. How to interpret this event? Perhaps this is a one-off as most of the deepwater fleet in the US Gulf of Mexico is contracted for a long time, it is a question of ‘wait and see.’ However, the fact remains that it is time OEMs and service companies to start considering seriously the impact of Capex compression on their strategic outlooks. Those companies who fail to understand the relative developments of operator revenues and costs over time are likely to find their existing strategic plans are providing poor guidance.

Steven Kopits, Douglas-Westwood New York

Adapted from a press release by David Bizley

Read the article online at: https://www.oilfieldtechnology.com/exploration/25112013/deepwater_drilling/