How much more recovery can the industry handle?

Results from HugeStadSea for Q4 were predictably dire. I like the line “project to spin off non core fleet initiated – no transaction concluded so far“. That would be like the entire DeepSea Supply fleet they merged with a year ago? This is rapidly turning into a huge embarrassment for the companies, directors, and advisers involved in this: it was obvious at the time it was a terrible idea, and it is even more obvious, and cash depleting, today.

To be clear: SolstadFarstad made NOK 741m from operating its vessels in the quarter, and paid interest of NOK 1.1bn (and made a debt repayment of NOK 1.4bn). A giant restructuring beckons here when a) someone figures out how to break it to the banks and bondholders that they need to take a 30-50% haircut on their debt; and, b) the investment bankers and lawyers are sure the company has enough money to make it worthwhile to tell the balance sheet banks and bondholders this.

I recently spoke with a shipbroker who assured me that Reach had chartered the Normand Vision for their most recent job for between NOK 275-325k a day. That included 50% Oceaneering ROV crew and Proserv survey, Reach supplied the rest of crew. SolstadFarstad are desperate for other offers of work and longer term work could be had potentially cheaper. That’s for work in 2018. So much for the Vision being a strategic asset for OI… Banks looking at those sorts of numbers must realise the game is up.

Siem Offshore also came out with a loss and said:

Although we expect an uptick in the activity level during the summer period, we believe that the market rates will remain volatile and generally low in 2018.

Despite indications of increased activity, the timing of a significant sustainable improvement in utilization and rates is uncertain and this situation will continue to put financial pressure on owners and lenders.

And DOF, where the real takeaway is the business is substantially smaller in revenue terms than 2016, but with just as many assets and as much debt:

DOF Subsea Q4 17

And in case you think that is because DOF is a supply heavy company look at the DOF Subsea results:

DOF Subsea Q4 2017

I get that the recovery may in 2018… but why is backlog down then? When the DOF Subsea IPO  was pulled an offshore publication and consulting business, with a strong track record in music, announced it as a sign of confidence from the shareholders… I hope no one brought DSVs based on their advice?

I don’t have a magic solution, but I would say that reports of a general market recovery seem somewhat premature. Some segments of the offshore market are doing well and growing again, but those that are asset heavy, and leverage high, are unlikely to see a recovery for the foreseeable future.

Industry consolidation and market power… Is consolidation really the solution?

Last week the creation of a new offshore company was announced: Telford Offshore. I presume financially related to Telford International. The company has purchased the four Jascon vessels for USD 215m and looks to be setting up a UAE/ Africa subsea construction and IMR business. I know one of the guys there and wish them all the best of luck, they are a strong team and seem likely to make it work having both financial backing, local connections, and managerial skill.

From an industry perspective though it is a microcosm of why I think industry profitability will elude those long on vessels for a prolonged period of time without a significant change on the demand side. Telford isn’t taking capacity out of the market, it is merely recapitalising assets at a lower valuation level, and giving them the working capoital to operate, and it will compete with other existing companies for work in the region. That excess capacity competes on price is as close to an iron law as you can get in economics and something everyone in the offshore industry knows intuitively to be true at the moment.

The talk in the industry at the moment is all about consolidation and how that will save everyone… but I don’t see it? Consolidation is only beneficial if it generates maket power and therefore some ability to charge higher prices to E&P companies: A bigger company in-and-of-itself is of no economic benefit unless it can generate economies of scale or scope i.e. a) lower unit costs, or, b) lower integration costs of supplying a range services . At the moment, in both subsea and supply, there is no evidence that this is the case.

The large subsea companies are currently all reporting book-to-bill numbers of less than 1 (apart from maybe McDermott), that means they are burning through work faster than they are replacing it, and this is consistent with the macro numbers. This is happening because the market is contracting in both volume, and especially, value terms. Simply adding another UAE/ West African contractor to the mix will only prolong this problem in the region. Not that it is unique to the region, as the industry grew up until 2014 a host of tier 2 construction companies grew their geographic footprint and asset base as well. Now they are committed to those regions because they have no economic option but to stay. Over time, as all the companies compete against each other for minimal profits, not everyone will be able to afford to replace their asset base, that is how capital will leave the industry and how it will rebalance on the supply side; but when you have gone long on very specific 25 year construction assets it takes a long while!

It is a fundamental tenent of ecoomics that industry profits, outside of firm specific events, is a function of industry concentration. Every person who has done a ‘Porter’s Five Forces’ analysis is actually using a microeconomic model that has a deep intellectual heritage in examining if the structure of markets drives profitabilty. More recent research has highlighted firm specific factors in determining profitability, but market power, firm concentration, normally the result of consolidation, is always crucial. That is why competition authorities focus on market power when looking at whether they should allow transactions that heighten market power to progress: because scale allows firms to drive pricing power.

A normal threshold for competition authorities to get concerned about market power is ~40% market share level for any one company, and often they like to see 3 or more companies in total, below this level it is understood that consumers have options and companies will compete on price to a certain extent. While Technip and Subsea 7 dominate the market for subsea installations they have nothing like that level of market share. Any large project could theoretically go to Saipem, McDermott as well at a minimum, and below large projects an E&P company is spoilt for choice. In other words there is no pricing power at all for offshore contractors, and as all they have all committed to assets with high fixed costs, and low relative marginal costs, vessel days are essentially “disposable inventory” that must be sold or paid for anyway (just like a low-cost airline) and have no other uses.

The scale of consolidation that would have to occur in order to generate any pricing power for the contracting community defies any realistic prospect of execution for the next few years. It will happen, and slowly, but the scale of the change will be enormous, and as it nears its final stages expect the E&P companies to protest vigorously to competition authorities. Instead of the vessel companies and the subsea production system companies getting closer, eventually, the vessel companies will start to be acquired or merge. But until savings in replacement capital can be made, a while away given the huge new building programme we have had in the vessel fleet between 2010 and 2014, then it will not make sense for an acquisition premium/ nil premium merger to unlock these cost savings. One day it will be cheaper, for example, for Subsea 7 to buy the Saipem business than set out on a new build programme (through both cost savings and reduced CapEx)… but we are some way from that point and a long way from the institutions themselves accepting this.

It is even worse in offshore supply. A measure for assessing market power in economics is the Herfindahl-Hirschman Index (also used widely by competition authorities) to assess if markets have concentration levels that would allow their participants to extract excess profits through concentration. I went to calculate this quickly (the math is not difficult) based on this data from Tidewater:

Tidewater scale and scope.png

The US Justice Dept gets concerned if the HHI number comes in at 1500-2500 and is likely to take action if the number is above 2500 and there is a 200 point movement based on anyone transaction. The supply industry has an HHI well below 1000. Bourbon, the largest company with a 6% market share, only has an HHI score of 36! All the named companies on this slide could merge and chances are the DOJ would wave the deals through because it wouldn’t think the enlarged mega company would still have any pricing power (this is a reductio ad absurdum here and clearly a real situation would be more complicated) and would therefore be able to extract excess rents.

Not only that entry costs/barrier in offshore supply are nothing which just dilutes any possible positive effects consolidation could bring: Standard Drilling can buy supply vessels for $12m and park them in a reconstructed North Sea operator and compete against SolstadFarstad and Tidewater? So how does merging all of the PSV assets that makeup HugeStadSea make any difference?

In offshore contracting it is not just construction assets like Telford, a host of ROV companies now don’t need to buy or charter vessels but merely pay on use allowing a host of small companies to enter the industry. ROVOP, M2, Reach, and a host of others have entered the industry and kept capacity (or potential capacity) high and margins low with vessel operators supplying vessels below economic cost while the ROV contractors make a margin on equipment they brought at 30c in the $1 and well below replacement CapEx levels. MEDS despite defaulting on a number have charters have been given the Swordfish to operate on charter!

The high capital values of these assets encourages investors to supply working capital to keep the assets working knowing they are competing against others who paid a higher capital value. It is a very hard dynamic to break and I don’t see a huge difference between offshore supply and subsea in economic structure which is why I deliberately merged the industries here.

Part of the reason consolidation doesn’t work is because the costs of the fixed assets, and the costs to run them, are so high in relation to the operational costs. The fixed costs of the vessels, and the non-reducible operating costs dominate expenditure, getting rid of a few back-office staff, who represent less than a few % of the day rate of a vessel just doesn’t make a big enough difference overall.

Another reason is the banks are still pretending they have value way above levels where deals such as Telford are priced at. No amount of consolidation to remove some minor backoffice costs can make up for the scale of capital loss they have in reality will solve this. If Standard Drilling is buying large Norwegian PSVs in distress for $12m, and SolstadFarstad has similar vessels on the books for $20m, then you can’t consolidate costs that would be capitalised at $8m per vessel no matter how many other companies you buy. The same goes for subsea only the numbers are bigger and more disproportionate.

So when someone tells you the answer is consolidation the real question is why?


That consolidation is the answer is simply an economic myth. Gales of Schumpterian creative destruction are the only real solution here barring some miraculous development on the demand side of the market.

Market equilibrium…

The graph above comes from a recent Tidewater presentation. There is also this slide from the same presentation:

OSV Business Drivers.png

Now Tidewater is a global supply vessel company, rather than a subsea player, but the data cannot be ignored: it is the Jackups and Floaters that generate future demand for the industry. The subsea vessels may not be quite as dependent as the supply vessels on the ratios of JU/Floaters to vessels, but it will be close and directionally similar. There is simply not enough front end work being done for a realistic scenario where anything like the current fleet is saved. Any realistic scenario of market equilibrium involves and increase in demand and a large adjustment in supply.

Demand does appear to have hit rock bottom. However, market equilibrium, which I would define as a situation is which those operating vessels covered their cost of capital, appears to be a long way off.

I would urge you to read the whole of a conference call Hornbeck gave recently (courtesy of Seeking Alpha):

Todd Hornbeck:

Beyond a doubt in nearly every category 2017 was the most challenging year we ever have confronted in our 20-year history. We experienced the full force of the offshore meltdown in all of our core operating regions and across our vessel classes. In the Gulf of Mexico an average of 21 deepwater drilling units were working during the year. We started and finished the year with almost zero contract coverage for our vessels meaning there are financial results reflect a true market conditions with little residual noise from day rates contracted in better times…

So where are we today and what do we believe 2018 holds in store for us?

To begin with, we think that the conditions for recovery offshore will begin to gel and that the necessary elements for improvement in our core markets maybe taking shape. Improved oil prices reflecting a more balanced oil market, improved global economic conditions, and healthy global demand for oil cannot be ignored nor can the significant under investment in deepwater over the last several years by our customers. While we think weak market conditions shaped by a low offshore drilling rig activity at OSV overcapacity will continue in 2018. We also think this year could mark the beginning of the end of this downturn.

Current healthy production from the Gulf of Mexico is unsustainable absent new investment by our customers. Depletion is real. The same is true in Mexico and Brazil. Consider this in 2014 there were 114 floaters under contract across our three focus areas of operation in this hemisphere plus 45 jack-ups in Mexico. Today there are 57 floaters and 20 Mexican jack-ups under contract in our core markets. So the contracted rig counts have been cut in half…

That said, we still expect OSV demand in 2018 to resemble 2017 in which we saw only 21 floating drilling units working in the Gulf of Mexico on average. We can even make a case that the drilling rig count to fall into the teens. As a reminder, there were 39 active floating rigs working in the Gulf of Mexico in 2015… [emphasis added]

James Harp (CFO):

In fact, our effective day rates thus far in 2018 are down substantially for both our OSVs and MPSVs…

Hornbeck is a Gulf of Mexico focused operator with both subsea and offshore vessels. The Gulf of Mexico is still regarded as one of the major investment growth areas in subsea, but it shows off what a low base this is, and how unevenly an industry “recovery” will be spread.

Basically what I am saying is  we are in a recovery phase (and you can agree with analysts who argue this), but as Todd Hornbeck states, it is off such a low base, and with such a vast amount of oversupply in vessels and rigs, that the industry will face low profitability for years. It is clear day rates in some markets and segments will be higher over the summer, some PSVs are being bid at £25k per day in June/July/August, but these rates need to be averaged over a year not a few months.

Any OSV/rig/subsea company strategy that doesn’t reflect the fact that the market will be significantly smaller than it has been previously, and the “recovery” level will be smaller than 2014, just isn’t realistic. Just buying boats and hoping for mean reversion seems to ignore the  data presented above. This time it will not be like the dip of 2009.

New ship Saturday…

Yet again UDS seemed to have pulled off an amazing feat, right after becoming the greatest DSV owner and charterer in the world, with a record 4 out of 4 (or maybe 5) DSVs on long term charter, they appear to have Technip, McDermott, and Subsea 7 quaking with fear as they look at helping a company enter the deepwater lay market:

UDS Lay vessel.png

This is a serious ship. Roughly the same capability as the Seven Borealis.

Seven Borealis

Although the Seven Borealis  can only lay to 3000m, not the 3800m UDS are looking at. As depth is really a function of tension capacity then I guess they will have a significantly bigger top tension system than the Seven Borealis as well?

I can see why you would go to UDS if you wanted to build a pipelay vessel significantly more capable than any that the world’s top subsea contractors run. Sure UDS may never have built a vessel of such complexity, and actually haven’t even delivered one ship they started building, but they have ambition and you need that to build a ship like this. Not for this customer the years of accumulated technical capability, knowledge building, and intellectual competency, there is nothing an ex-diver can’t solve.

UDS is building vessels the DSVs in China. The closest the Chinese have come (that I know of) to such a vessel is HYSY 201:


But that only has 4000t system? No wonder this new mystery customer, who I assume is completely independent of the other customers that have chartered their other vessels, wants to up the ante. The HYSY 201 cost ~$500m though, which is quite a lot of money to everyone in the subsea industry, apart from UDS.

The last people I know who went to build a vessel like from scratch were Petrofac. There is a reason this picture is a computer graphic:

Petrofac JSD 6000.jpg

To do this Petrofac hired some of the top guys from Saipem, a whole team, with years of deepwater engineering experience… And when the downturn hit Petrofac took a number of write offs, and even with a market capitalisation in the billions, didn’t finish the ship. To be fair though, they hadn’t engaged UDS.

But I think the reason you go to UDS “to explore the costs”, you know instead of like a shipyard and designer who would actually build it, is because they appear to have perfected the art of not paying for ships. So if you go to them and ask for a price on an asset like this chances are you get the answer: the ship is free! It’s amazing the yard just pays for it. Which is cheap I accept but ultimately the joy-killing economist in me wonders if this is sustainable?

Coincidentally I am exploring the costs of building a ship. I have just as much experience in building a deepwater lay vessel as UDS. On Dec 25th 2017, with some assistance from my Chief Engineer (Guy, aged 9), we completed this advanced offshore support vessel, the Ocean Explorer,  from scratch!

Ocean Explorer.jpg

Ocean Explorer Lego.jpg

Not only that I had take-out financing for the vessel in place which is more than UDS can claim at this stage!

Now having watched Elon Musk launch a car on a rocket into space (largely it would appear to detract some appalling financial results, although far be it for me to suggest a parallel here) we (that is myself and my Chief Engineer) have designed a ship: It will be 9000m  x 2000m, a semi-sub at one end to drill for oil, a massive (the biggest in the universe) crane to lay the SPS,  j-lay, s-lay, c-lay, xyzzy lay in the middle, and two (Flastekk maybe?) sat systems at the other end in case we forgot something, and to make it versatile. Instead of launching a car into space we are having a docking station for the space shuttle in order to beat the Elon Musk of Singapore. It is also hybrid being both solar powered and running on clean burning nuclear fusion. Not only that the whole boat works on blockchain and is being paid for with bitcoin. The vessel is also a world first having won a contract forever as the first support vessel for Ghawar field. We are also committing to build a new ship every week forever.

I expect to bask in the adulation on LinkedIn forever once I announce this news, and it will feel like all the hard work was deserved at that point. I am slightly worried about the business model as my Chief Engineer asked “Won’t we have to get more money in for the boat than we paid for it?”. When I have an answer for that trifling problem I will post the answer.

The drawdown on offshore… My views on shale and offshore…

A friend asked me this week what my view on the graph above was (courtesy of Sparebank1  Markets) given my views on shale? I have been pretty consistent here that shale isn’t going to displace offshore, but it doesn’t need to in order to have a major impact on the economics offshore: It just has to take demand at the margin.

There are many graphs floating around like the one above. The Seadrill restructuring presentation contains this:

Seadrill offshore gap.png

Oceaneering had this graph recently:

Oceaneering Deepwater Demand.png

Ocean Rig has this one (while I agree with the headline the logic and data supporting this don’t make sense to me as the sanctioning replacement ratio has been historically over 100% for meaningful periods so a drawdown as firms pay down debt in a low price environment is logical):

Ocean Rig Industry Demand.png

You get the idea.

Schlumberger recently put the scale of shale production into perspective:

2017 Oil Supply

So to be clear: all tight oil had to do was add ~5% to the global supply and it has turned the entire offshore industry into a financial mess. Now it isn’t a strict causation, offshore has suffered a severe financial bubble based on oversupply as well as a demand crisis driven by the speed of change in the shale industry, but still it shows how finely balanced things were.

And indeed if you look at all the stories of hope and recovery that aim to recreate the world cast in a 2013 shadow they all profess unrealistically high utilisation and day rates at their core. The reason is obvious: the industry from 2007 was built on very high day rate levels and utilisation figues and any small change in those realities, given the very high fixed cost base, causes financial chaos.

A few percentage points in utilisation and day rates is all it takes to massively swing profitability in such a high fixed cost industry. Economic change happens at the margins.

Look at this chart from HugeStadSea which sums up the dominant thinking in the market (Q2 2017):

HSS Market Assumptions

Back to a cheeky 90% utilisation from 60%. Nice… what could go wrong?

Seadrill has the same:

Seadrill RP day rates

Everyone has the same story. But the problem is unless everyone is at very high utiilisation then day rates won’t pick up as the economic incentive for anyone with idle tonnage is to bid it cheap. Rowan in their latest results stated that they believed the market had to hit 85% utilisation before day rates improved.

So shale has an importance on the economics of offshore far beyond it’s output in the physical market displacing offshore oil as a source of supply. Shale only needs to reduce the utilisation of the offshore fleet by a few percentage points and that fundamentally changes the economics of rig and vessel companies. Seadrill, Solstad, Bibby, Technip DOF, in fact EVERYONE in the industry, is a completely different financial proposition at 51% utilisation compared to 91% with concomittant increases (or decreases) in day rates.

You also get an idea how large the investment in shale has been (Source: Schlumberger) since 2008:

Shale CapEx.png

25% investment since 2008 has gone into tight oil and it has seen productivity improvements like this (although the presentation highlights these rates are slowing):

Shale productivity.png

So I repeat again that that shale will not displace offshore as a source of supply. But it doesn’t need to in order to completely upset the economic structure of the offshore industry by lowering the amount of marginal demand generated where offshore service companies made profits above their fixed costs. By that I mean if your rig/vessel covered its costs and overheads on 85% utilisation and profits came after that (i.e. at 86% utilisation and above you started to be profitable), and the impact of tight oil is such that you only ever get to 85% for ever, then shale will have managed to removed excess profitability from the industry by ensuring a drop in demand at the margin. All shale needs to do is meaningfully alter the global fleet utilisation, and win a significant amount of E&P CapEx share, both goals shale has achieved, to have a massive impact on the offshore industry.

In economic terms this is what looks likely to happen:


The Demand (for offshore services) = the extra unit of revenue firms get for selling (Marginal Revenue) which matches the point where the extra costs of supply (Marginal Cost + Average Total Costs) balance. So yes, there will be more work, and assets may well be busier than they are now, but it could be just enough to keep everyone in the industry cash flow positive but making zero economic profit. I am not saying there won’t be accounting profits, that all firms will all be loss making, and all shares will go to zero, but I am saying firms will find it very hard to earn returns above their cost of capital.

The one prediction I will make is that any business model in this industry that just relies on an increase in day rates and utilisation is doomed unless it has a massive cash pile (because getting there is going to take a very long time) or you are buying assets at distress prices. But most of the distress investors have moved far too early and there is so much money floating around from these funds I think the distress funds are killing the price discovery mechanism in this market.

It is clear that the quantative deployment of capital in large E&P companies will have a significant portion focued on tight oil as well as offshore. A few percentage points, that could go either way in many companies, collectively have a huge impact on the global offshore fleet utilisation (and therefore dayrates) and that is the core impact shale has.

North Sea DSV update… Has the Vard vessel been sold? Will IMR save the world?

We’re eyeball to eyeball, and I think the other fellow just blinked.”

Secretary of State Dean Rusk, during the Cuban Missile Crisis, 1962

It was a little windy (80-100 mph) up the mountain today as you can see from the photo… I thought it was a good metaphor for offshore at the moment anyway…

So in clearing out my emails I have now been told Technip have reached a deal with Vard on the 801. A price of ~$100m, but with no delivery risk and commissioning liability for Vard, has apparently been agreed. Technip is large enough for that to be a sensible risk to take as the Wellservicer needs to be replaced at some point. Unless ordered by SS7 or Technip I think this will be the last North Sea class DSV built without E&P company contract coverage for at least 10 years, maybe ever,  barring some unheard of change in the market. (This isn’t the place to get into why I don’t think any of the UDS vessels will end up North of the Med).

We are watching how an extremely illiquid and asset specific market clears in a huge market downturn. The interesting thing is that Technip and Subsea 7 seem to be making a renewed commitment to IMR having really lost focus during the construction boom, this graphic from Technip makes clear:

Technip Market Growth.png

If you are a smaller IMR contractor expect Technip to come up more often on tenders you are spending money on bidding. A near new DSV fleet fits this theme. It also shows you what sort of percentage/revenue increase on IMR a market leading company thinks it can get and how it is planning on taking market share. Smaller companies should be worried and anyone who publishes documents claiming they can grow organically at 50% in this market just isn’t serious.

I find the pricing of this asset fascinating: to Technip and Subea 7, taking a 25 year asset view it is an asset you could spend some real money on. One needs to replace the Wellservicer and the other the Pelican. But outside of those two companies the asset is almost unsellable at anything like it’s build cost. If you can’t operate that vessel in the North Sea (and it’s not even NORSOK) then it’s just an ROW DSV and you would be lucky to get $50-60m… and only then if you could find a bank to lend against it. So really they are just bidding against each other to take on the asset (not that I think Subsea 7 were)? How long do you make Vard sweat or risk seeing a really good vessel go to a competitor? Other vessels could also have been purchased from distress sellers e.g. How much better is the Vard vessel to the Toisa Pegasus (currently in lay-up)?

Both sides blinked at 100m if you ask me. More compromise than Mexican standoff.

The Seven Kestrel is arguably the best DSV in the world and as soon as construction work starts to pick-up SS7 will just ask the Koreans to build a replica (for less) if the need to relace the Pelican. And at that point that will be the last North Sea class DSV built for a very long time.

Both Technip and SS7 have some pretty new DSVs and both have an old (fully depreciated) one that operates when the market peaks… But as I wrote earlier the only realistic scenario for 2018 is for North Sea day rates to stay low for DSV work, and in this market making a trade off against a low capital cost to lose money on OpEx for a bargain purchase is getting ever harder to make? The lower than expected contract size for the Snorre Extension for Subsea 7 shows how low margins are for awarded work at the moment and how long it may take for day rates to recover. And if, as looks likely,  Boskalis and Bibby start a brutal price war to gain or keep market share, then dropping $100m on a vessel to go out at $100k a day (a cash loss amount in the North Sea) doesn’t seem that clever at the moment. Go back $10m a year for a few years on a DSV, easily possible in this market, and savings in CapEx were illusory.

Optimists point to graphs like this:

North SEa SAt MArket.png

But this ignored Boskalis taking the Nor vessels and Vard vessel replacing the Rockwater 1. [As a methodological point it is also worth noting that each movement on the vertical axis represents 3 DSV vessel years! showing you how easily the forecast could be out here]. It is also worth noting that if those Decom figures are wrong, and they look agressive, the market imbalance is illusory. No one in this market is going to force E&P companies to pay divers to remove mattresses etc off the seabed.. its just not going to happen. Just as importantly, a modest increase in day rates, which would see the DSV fleet operating at below economic cost, could curtail IRM or EPIC project demand as this graph seems to assume constant demand. There is a large amount of latent supply in the market that will come into the market as rates increase (which happened in 2014)… economic change happens at the margin… which is not reflected in a static graph like this.

Ultimately running vessels, even for companies the size of Subsea 7 and Technip, is a utilisation game as the fixed costs are so high that a small drop in utilisation and day rates /project margins can lead to a massive drop in profitability and cash losses. Shareholders would not welcome a cash call if it means they have overpaid for vessels and ultimately been diluted in a down market, and a North Sea class DSV is a very expensive vessel to have underutilised. I am always reminded mentally that Technip looked seriously at acquiring CGG not that long ago… in which case this would be a great bargain…

Let’s wait and see…I still have my doubts… but if the Vard 801 rocks up to the North Sea in April/May under Technip control for the North Sea summer my photo above will be a good reflection of economic conditions for North Sea DSV owners in 2018…

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.