A new industrial revolution…

Pessimism has been the usual response to the Industrial Revolution.

Robert Allen

Tell me there isn’t a new industrial revolution happening in the US at the moment (from The Houston Chronicle)?

U.S. oil production surged to a 46-year record in October.

The Energy Department said the nation’s output of crude oil jumped 1.8 percent to 9.64 million barrels a day. Morgan Stanley said shale drillers pumped at the fastest rate in nearly three years.

And they did it with half the rigs they had in the boom times

I have said many times here I don’t think offshore oil and gas production is going away… but when was the last time someone showed you a project that could be constructed with 50% less boat days? I have seen day rates go down 50%, but that just means once the equity of a boat owner has been lost the bank is taking a hit. I have seen project costs reduced markedly, and some of this is down to standardisation and better scheduling, but much of it is just down to better procurement in an industry plagued with overcapacity. Vessels are running into productivity improvement limits and this has a bearing on costs, which cannot easily be reduced, whereas shale seems to be at the beginning of its technological and productivity journey (see also this post)).

On a volume basis offshore has advantages but the pace of technological improvement here, as the US turns oil and gas production into a manufacturing process, cannot be underestimated. This is turning into a positive feedback loop of increasing profits feeding increasing investment and further productivity improvements for E&P companies investing in shale.

There is a link between these sorts of productivity improvements and declining investment in offshore, especially the high cost UKCS/ Norway. Another good article here on declining investment in the Barents region from the most recent Norwegian licensing round:

“It’s a warning and a cause for reflection,” said Stale Kyllingstad, chief executive officer of IKM Gruppen AS, one of the biggest suppliers to Norway’s oil industry. “The Norwegian shelf isn’t as popular anymore. It’s a concern.” An historic three-year slump in the industry has seen Exxon and BP Plc relinquish their role as field operators in western Europe’s biggest producer. The landscape is changing in the aging North Sea basin in Norway and the UK as companies search for higher margins in projects such as liquefied natural-gas or US shale. Smaller, more specialised companies, some backed by private equity, are stepping in.

The fact is of the 11 companies who bid only 1, Statoil, has both the balance sheet and the technical capability to develop multiple fields in the region, and of a scale and complexity comparable to Africa and the Gulf of Mexico sanctioned projects, and it can’t do everything. The lack of super-major support, and their massive concomittant increases in shale investment is an important market signal.

Long gone are the days when ExxonMobil used to take its PSVs up to the Barents in April so they would be early in case weather conditions were favourable early. I still don’t think the offshore industry is being real about how an increase in the oil price and E&P investment will play out.

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