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India’s oil demand is set to reach 30.21 million bbl/day by 2014, and the estimated figure for the region in natural gas consumption is 625 bcm for 2014. Here, too, India’s share in gas consumption in 2010 is close to 12.78% while its production capacity is estimated at 10.84%. This trend of difference between the demand and supply is expected to continue, unless and until some meteoric rise is seen in drilling activities; particularly in the deepwater and ultra-deepwater regions.
Land reserves have almost reached its saturation point, with only few reserves left to be completely sucked dry. With such an impending development, companies are left with no choice but to extend their search to the offshore avenues - ocean floors of the world. In fact, of the blocks yet to be offered under the NELP policy, more than 50% of these blocks are present offshore. Today, offshore oil production constitutes 60% of the overall world oil production. The global capital investment in the E&P industry is estimated to be more than $ 300 billion per annum. Operators are increasingly looking at offshore opportunities in the deep waters of the Gulf of Mexico, West Africa, Latin America and in the Asia Pacific Region.
Offshore drilling typically refers to extraction of underground resources, which lie underwater near the shoreline. Most commonly, offshore drilling is used to describe oil extraction off the coasts of continents, though offshore drilling is also referred to drilling in lakes and inland seas.
By the end of 2009, the global jack-up market comprised of 386 jack-ups, with the top six drilling firms accounting for more than half of the market. In India, the chief player in the offshore drilling is ONGC (Oil and Natural Gas Corporation), which owns 6.89 billion tonnes of in-place hydrocarbon reserves; more than half of the exploration area. Private players like Reliance, Cairns, etc. are also beginning to gain a foothold in the offshore sector; thanks to the NELP block auction programs. The main rig providers in India are ONGC, Aban Loyd, GE Shipping, Jagson international, etc.
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Drilling Scenario: Pre and Post Recession: |
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A couple of years prior to the downturn, the oil industry witnessed a spiralling rise in oil prices, inadequate drilling capacity the world over, dearth of skilled resources and escaqlating E&P costs. Outside US, the competition was cutthroat, on account of limited availability of land rigs. Aggressive explorers like Saudi Arabia made the competition even stiffer, with their bullyish bidding up costs. As a result, global drilling outside the US rose by 2.3% (pegged at 52,614 wells) in 2006, following a sustained rise in global demand and political instability in the key supplying regions. Wells drilled outside the US increased about 3%, to just over 54,000 wells during 2006, the highest growth in 20 years. Offshore drilling activity increased around 9% to more than 3,800 wells spread across the Far East, as well as the South Pacific.
The recession had an impact on the rig day rates that were required for offshore drilling. There was a steady fall in the Rig Day rate index. The worst hit region was the US Gulf of Mexico, where the index was at its lowest since 2005. It has remained at this low level for the last 2 months, and only 42% of the rig fleet here is being currently utilized.
Currently, there's an abundance of rigs, with a possibility of oversupply. During recession, rigs were reduced to mere cold/warm stack-ups; add to that, companies had ordered new-builds rampantly during boom time, thus translating into the current oversupply situation. Even non-trade players wanted to get into the new-build action, without any intention of actually putting their vessels to its required use. The supply equation in India is evenly balanced and is poised to see a steady activity in the drilling sector.
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Now that the market has started to see better days, the combination of the existing rigs and the new-orders would be flooding the drilling market. Add to that, the infeasible nature of shallow-water exploration and drilling activities, rigs meant for such reserves (jack-ups) will have a tough time staying afloat. Deepwater floaters, on the other hand, will see a resurgence of sorts; what all with the renewed interest in this region and the tremendous promise these territories hold for E&P players. So, in a way, the old assets will be making way for the new ones. The offshore recovery that began in West Europe a couple of years ago is expected to continue.
Demand for 6th generation drill-ships capable of drilling in harsher environments has increased due to oil findings in harsh environments like the Arctic region, deepwaters, etc. This demand for offshore activity is not being met currently. Shipyards constructing such offshore deepwater rigs are fully booked and the lead time for a new build is between 3-4 years.
Despite the rising oil prices prior to the recession, the numbers of offshore discoveries made were actually falling. This is probably due to the exhaustion of the shallow water basins. Thus, the only way forward is going into deeper waters for oil exploration.
With recession remotely fresh in mind, companies are still willing to go the extra mile for their E&P activities; as can be seen in the results of the U.S. Minerals Management Service Central Gulf of Mexico Lease Sale No. 213 in March 2010. In this sale of blocks, around 70 companies purchased blocks, with the total investment being $949 million. Out of these, more than 38% of the blocks sold were deeper than 5250 feet (1600m).
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Future Outlook: |
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E&P activities weren’t too affected by the recession. Crude oil prices which had fallen to about $40/barrel, due to a weak dollar, resulted in great losses for oil drilling firms. The E&P activities, which seemed justified and lucrative at a per barrel selling price of $140 or $200 (as forecasted during the peak in oil prices), were no longer viable at $40 a barrel.
However oil price has been teetering above $70/barrel mark, and is expected to stabilize here. Oil demand from India is expected to be around 4.7 million bbl/day in 2030, and China is estimated to consume about 15.3 million bbl/day of oil during the same period. In fact, it’s estimated that by 2030, more than 50% of global oil consumption would be directed to meet the demands of None OECD nations. To meet the inflating demand, oil production by OPEC nations is expected to increase, provided their expectation of oil price (at least $60/bbl) is met, which the present situation sure has the capacity to deliver. This will make offshore drilling in deep sea exploration viable.
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The average age of the existing fleet is about 24 years; hence many rigs will need to be replaced, which the current supply situation would take care of. Due to added focus on deepwater exploration, demand for jack-ups may see a dip, especially when the rigs and its assets come out of their present contract term. It’ll be a tad difficult for them to acquire new contracts, since most of the operators would be looking to satisfy their deepwater exploration demands, which rigs like jack-ups are inadequate to deliver. Hence, deepwater floaters and the related assets will be seeing good times ahead, and their demand would only increase.
Till such demand is met, there is expected to be 100% rig utilization and high rig day rates. Thus, the future for offshore oil drilling and related activities looks positive despite the current downturn.
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