Offshore Operators Shed Costs, But Can They Keep Them Off?

Abstract

Offshore Cost Cuts Offshore drillers have been battered by the plunge in oil prices with falling day rates and a growing number of older rigs headed for demolition. Lower oil prices added to the pain of a down market due to a glut of drilling capacity. A wave of new, efficient drilling rigs coming into service created an oversupply that has been magnified by more productive drilling operations, said Bob Fryklund, chief upstream strategist at IHS Energy. He said day rates for new contracts are off by more than 50%, with rigs once commanding day rates of USD 650,000 now leasing for USD 250,000, he said. For oil companies, “it is a good time to renegotiate contracts. It is a bad time to be on the other end,” Fryklund said during a presentation at the 2015 Offshore Technology Conference (OTC). Drilling rigs are the highest profile target for cost cuts, but “operators are seeking reductions in the cost of most things,” said Andrew Meyers, a manager at Douglas-Westwood, which provides market data and consulting services for companies working offshore. This low-cost environment is expected to linger. It could take until 2018 for the rig market to tighten enough for rates to recover, said Thomas Shattuck, a research analyst at Wood McKenzie. But when the oversupply passes, the cost of offshore services will rise again. Lasting cost control will require companies to rethink how projects are run to eliminate inefficient methods that add to the cost of the complex multibilliondollar developments. “You can cut costs a certain amount but efficiencies that increase productivity are likely to have a benefit that lasts into the next up cycle,” Fryklund said. There is fat to cut. Even when oil was still selling for USD 100/bbl, operators were saying fast-rising costs were eroding margins. “There have been a lot of inefficiencies in the market for a long time,” Meyers said. The problems include soaring project management costs. Multiple design teams can create incompatible systems requiring costly changes. One sign of the times is the rising number of joint ventures between large offshore service companies that promise to bring together a wider range of experts into teams that look at the larger picture. “There is a little rethinking of project development,” said Imran Khan, a senior research analyst covering the Gulf of Mexico at Wood Mackenzie. “It is a challenging environment economically and technologically. Low oil prices offer a strong argument for doing things differently, but are not the only motivation for change,” he said. It is still too early to know if things will change, but the record of past costcutting efforts have been spotty. “What I understand is with every downturn, the major operators talk about savings (on project development), but they never materialize,” Khan said. “This time, they say it is different. Time will tell.”