Record rig costs will jeopardise deepwater oil projects

Martyn Wingrove - Tuesday 28 October 2008

Abdalla Salem El-Badriof .

OWNERS of offshore vessels and rigs will be put under pressure to reduce their prices to prevent delay or cancellation of deepwater oil projects, as developers see their profits fall this quarter.

Leading oil and gas producers are already shelving some high-cost onshore energy projects as oil prices have fallen 60% from $147 per barrel in mid-July to nearly $60 this week, and next in line are most expensive offshore developments.

With oil at $60 per barrel, some deepwater projects in Brazil, the Gulf of Mexico and West Africa are looking uneconomic in a market when drilling rig and offshore vessel rates are at record levels, so something has to give, said Matthew Simmons, chairman of investment group Simmons & Co.

“Oil sands and gas shales in North America and deepwater projects do not work at $60 oil. The problems are oilfield service costs are too high and we need to change this for projects to go ahead,” Mr Simmons told Lloyd’s List at the Oil & Money Conference in London on Tuesday.

“Rig costs are so high and we cannot get enough spare capacity to lower costs. Even if more rigs are built, it is hard to recruit people, so crew costs are high.”

Deepwater-capable drilling rigs are being hired out at $600,000 per day and oil companies are willing to pay more than $130,000 per day for subsea support vessels and $300,000 day rates for rig towing anchor handlers.

The price of subsea equipment such as the flowlines and wellheads needed for deepwater projects have also soared, but equipment and service prices will soon come under pressure.

“When oil prices increase everything goes higher including oil services and when oil prices fall service costs will decrease, so at $65 per barrel we expect costs will also go down as well,” said Paolo Scaroni, chief executive of Italian oil firm Eni.

The oil price fall and tight financial markets have prevented companies from finding credit to undertake their oil and gas field development plans.

Brazil has already acknowledged that the lower oil price is delaying its plans to develop the deepwater pre-salt discoveries, which would require new fleets of offshore vessels, drilling rigs and oil producing ships.

Qatar Energy Minister Abdulla Bin Hamad Al-Attiyah said no banks were offering finance for energy projects any more, whereas even four months ago they were jumping over one another to give out their cash.

“I see that a lot of projects will not be taken on and some in the downstream and upstream will be postponed,” Mr Al-Attiyah said.

United Arab Emirates Minister of Energy Mohamed Bin Dhaen Al Hamli said that if low oil prices persist, them “there will not be enough investment for the future”.

“It is very difficult to find finance to help invest in large projects, its especially true for gas projects,” he said at the London conference.

There is also concern that a cut back in project developments will in the long-term lead to less stability in energy markets, more volatile prices and potential for energy shortages.

Organisation of Petroleum Exporting Countries secretary-general Abdalla Salem El-Badriof said: “We want to invest, but at these oil prices we will not be able to invest and there will be shortages in supplies in the future.”

The fall in oil prices is good for consumers in the short term as energy costs are lower, but there may be problems in the long term.

“We need to get investment in energy now, otherwise we will have a tough mid-term situation and a supply crunch might come sooner and will be more acute. Supply may not catch up when demand is recovering,” said International Energy Agency executive director Nubuo Tanaka.

To prevent projects from being delayed, oil prices need to rise or service costs have to fall. Mr Al-Attiyah said oil prices of $70-$80 per barrel would be good for producers in Opec.

International oil companies would be able to undertake most of their existing projects at current prices as their budgets are set on average at $40-$50 per barrel, but they would like to see higher prices. Mr Scaroni said $70-$80 would ensure deepwater projects go ahead.

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