Daily Archives: April 5, 2017

New Bills Take Aim at Offshore Tax Haven Abuse Common Dreams WASHINGTON - Congressional lawmakers introduced two measures Wednesday to close a number of offshore tax haven loopholes in a move welcomed by the Financial Accountability and Corporate Transparency Coalition (FACT Coalition), a non-partisan ... New Bills Introduced To Curb Offshore Tax Avoidance, End Tax GimmicksState PIRGs all 3 news articles »

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New Bills Take Aim at Offshore Tax Haven Abuse - Common Dreams

One of the things that I have always appreciated about the quarterly reports of sister companies Seadrill Ltd. (NYSE:SDRL) and North Atlantic Drilling Ltd. (NYSE:NADL) is the in-depth way in which the two companies discuss the conditions in the offshore drilling industry. In general, the two companies have historically made somewhat congruent statements. In the latest quarter, however, this was not the case. In this article, I will discuss what the two companies have to say and attempt to make sense of it all.

As any long-time follower of my articles, or indeed of the offshore drilling industry in general, is already well aware, the market has been oversaturated with drilling rigs for just over three years now. When combined with the strained cash flows that most exploration and production companies have suffered from since oil prices declined sharply in 2014, these rigs have seen their competitive new contract dayrates decline as this large number of rigs competes for those few contracts that are actually being awarded. Unfortunately, this situation is unlikely to change in the near future. As both Seadrill and North Atlantic Drilling state:

The short to medium term outlook for [the] chartering market continues to be extremely challenging. While tendering activity has continued at increased levels over the past few months, especially in the North Sea, near term drilling programs continue to be largely based on opportunistic spot market activity and a number of oil companies continue to have excess rig capacity on contract. Available work is fiercely competitive with drilling contractors bidding below cash breakeven in some instances in order to keep rigs active.

Interesting, however, and perhaps counter to some media reports, both companies note that tendering activity has begun to increase. For those who are unfamiliar with the industry, that means that the number of contracts actually being awarded has begun to increase. This is a positive sign, as it indicates that oil and gas companies are once again interested in developing their offshore oil fields, although thus far this increase has not been sufficiently large to offset the glut of available rigs.

However, things could certainly improve for the industry over a longer time period, particularly for those companies like Seadrill and North Atlantic Drilling whose fleets consist almost entirely of new, modern drilling rigs. The reason for this is rig scrapping. As I have discussed in previous articles, a large percentage of the currently in service floating rig fleet is either over 25 years old or close to that milestone and will be due for their five year special surveys within the next few years.

When we consider that such surveys can cost in excess of $100 million to perform, it may make more economic sense for the rig owner to scrap the rig rather than spend the money to perform that survey. This will result in a gradual shrinkage of the oversupply of floaters, although Seadrill believes that a meaningful increase in demand will be needed before the industry fully recovers and that is not expected to occur until the end of the decade.

North Atlantic Drilling expects that this broader trend will also apply to its more focused market. In the next six months, a total of fourteen floating rigs and eight jackups currently in operation in the Norwegian North Sea and United Kingdom will be completing work on their current contracts. Of these, twelve, or 54.5%, are at least 25 years old. When added to the already idle units, there will then be a total of 33 idle rigs in this one market alone that are 25 years old or more. Although thus far, few contractors have been scrapping their harsh environment rigs, North Atlantic Drilling expects that scrapping activity will increase due at least in part to the age of these rigs and the costs involved in bringing them back to service. If the company is right, this scrapping will eventually return balance back to the North Sea market.

The market for jack-up rigs is perhaps more dynamic than the market for ultra-deepwater rigs. This is because of the relatively short-term nature of jack-up contracts. During the most recent industry upcycle that ended in the latter stages of 2013, the longest jack-up contracts that were being awarded were approximately one year in length. Meanwhile, floating rigs were routinely getting contracts of three to five years in length or longer. As a result of this, jack-up rigs are more exposed to changes in the marketplace. Therefore, the jack-up market typically bottoms out earlier and recovers faster than the floating market.

Unfortunately, Seadrill does not expect the market for jack-up rigs, at least the market for benign environment jackup rigs, to recover within the near- to medium-term (North Atlantic Drilling is somewhat more optimistic about the market for harsh environment rigs, as already discussed). One reason for this is that the supply glut in the jackup market is greater in scale than the one present in the floating rig market.

In addition, the company expects that a smaller proportion of the jackup fleet will be scrapped in the coming years compared to the floater fleet. This is at least partly due to the fact that the supply glut was exacerbated by offshore drilling contractors aggressively building up their jackup fleets during the last industry boom. It is unlikely that the industry will scrap brand-new rigs in aggregate or en masse. Thus, Seadrill expects that it will take longer for this segment of the industry to recover than the floater segment.

Interestingly, Seadrill expects that the jackup market will be more stable than the floating rig market going forward. There are two reasons for this. The first is the driving factor of oil company spending on jackup rigs. While exploration and production companies largely contract floating rigs to explore for new sources of oil and gas, an area in which spending has all but dried up, jackup rigs are generally contracted to develop resources located in shelf regions.

Oil companies are still willing to spend money to develop these resources, albeit perhaps not as much as they were a few years ago. A significant factor in the dayrate decline in this market segment comes from the supply side of the market: The oversupply of rigs has resulted in contractors aggressively bidding against each other to secure contracts and thus driving prices down.

A second reason why the jackup market s somewhat stable is economics. Unlike deep- and ultra-deepwater production, shallow-water shelf drilling is profitable with oil prices at today's levels. Here is a chart showing the approximate cost of producing a single barrel of oil in each of the environments being exploited today:

Sources: Seadrill, Morgan Stanley Equity Research.

Admittedly, this chart is a few years old at this point and technological improvements made since 2014 have brought down some of these costs. For example, several North American shale plays can produce oil for under $40/barrel. However, as is clearly shown, the costs of shallow-water shelf production are below today's oil prices. Therefore, it is still economically viable for an oil company to develop these fields. Thus, the jackup market remains relatively stable even though dayrates are unlikely to improve anytime soon.

In conclusion, North Atlantic Drilling appears to see the overall drilling market recovering somewhat faster than Seadrill does. However, it is worth considering that North Atlantic Drilling operates in a much more focused segment of the drilling market than Seadrill itself. It is certainly possible that the harsh-environment segment will recover faster than the industry as a whole. Regardless, it appears certain that dayrates will not recover anytime soon, and thus drilling contractor cash flows will be challenged over the near to medium term.

Disclosure: I am/we are long SDRL, NADL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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Seadrill And North Atlantic Drilling Discuss Conditions In The Offshore Drilling Industry - Seeking Alpha

4/5/2017

SAN DONATO MILANESE, Milan -- Eni has made a new discovery of gas and condensates offshore Libya in the Gamma Prospect, in the Contract Area D, 140 km offshore from Tripoli, in Libya. The discovery, made through the well B1 16/3, is located 15 km south west of the Bouri field and 5 km north of the Bahr Essalam field. The drilling of the Gamma prospect is part of the near-field exploration strategy of Eni, targeting opportunities, that in case of success can exploit synergies with existing infrastructures reducing the time to market and providing additional gas to the local market and export.

The well, drilled in 150 m of water depth, reached a total depth of 2,981 m and encountered gas and condensates in the Metlaoui Group of Eocene age. The well has the capacity to deliver, in production configuration, in ecxess of 7,000 boepd and represents a further discovery made by Eni in Libyan offshore Area D, following the discoveries made in 2015.

Eni, through its subsidiary Eni North Africa BV, is operator of Contract Area D with a 100% working interest in the exploration phase. Eni has been present in Libya since 1959 and currently produces 350,000 boped in equity in the country.

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Eni discovers gas, condensates offshore Libya - World Oil - WorldOil (subscription)

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GE completes first offshore nacelle for 396MW Merkur Recharge (subscription) GE Renewable Energy has finished assembly of the first of 66 nacelles for the 396MW Merkur offshore wind project in the German North Sea, with the wind farm on track for a late-2018 completion. The nacelle will be stored at GE's facility in Saint ... GE unveils first Merkur nacellereNews all 2 news articles »

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ExxonMobil and Qatar Petroleum have signed an exploration and production (E&P) sharing contract with the Cyprus government and will start drilling in a block offshore Cyprus in 2018, Qatar Petroleum saidon Wednesday.

At the end of last year, Exxon and Qatar Petroleum wonthe right to negotiate E&P terms for block 10, in the third licensing round for offshore hydrocarbons exploration in blocks 6, 8, and 10 in the Exclusive Economic Zone of Cyprus. Back then, Cyprus said that it would start negotiating with the selected partners for the blocks to set terms and conditions for E&P sharing contracts. A consortium of Italys Eni and Frances Total won the exploration license for block 6, and Eni won the license for block 8.

Now, executives from Exxon and Qatar Petroleum and the top Cyprus government officials discussed cooperation and set the terms for the contract.

A 3D seismic survey is already being carried out in block 10, and the partners are getting ready to start exploration drilling next year, Qatar Petroleum said in its press release.

This agreement expands our international upstream footprint into the eastern Mediterranean for what we hope is one of the most promising opportunities in the area, Qatar Petroleum president and chief executive Saad Sherida Al-Kaabi said.

Exxon is a long-term partner of Qatar Petroleum in various ventures around the world, including in partneringwith the Qatari state-run company to develop the North Field, the worlds largest non-associated natural gas field, through the RasGas and Qatargas joint ventures.

Related:Why An OPEC Deal Extension Wont Lift Oil Prices

The E&P exploration drilling deal offshore Cyprus is the latest of the flurry of deals and sanctioned projects in the eastern Mediterranean, following Enis discoveryof the Zohr field offshore Egypt in 2015, the largest gas field ever to be discovered in the Mediterranean. Plans are that production would start by the end of this year.

In addition, the giant Leviathan natural gas field offshore Israel is also getting ahead with its development, after the partners recently ratified the final investment decision for the first phase of development which entails gross capital investment of $3.75 billion.

By Tsvetana Paraskova for Oilprice.com

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Exxon, Qatar Petroleum Sign E&P Deal To Drill Offshore Cyprus - OilPrice.com

By Randall Luthi

Companies that work in any offshore industry understand the seriousness of their work and take extra precautions whenever possible to preserve the waters they do business in. Thats why its frustrating when environmental activist groups attempt to mislead the general public about offshore industries and the important business they do. It has become common practice for environmental non-governmental organizations (ENGOs) to distort small events in an attempt to convince people that all offshore activity is unsafe.

No one is more familiar with such tactics than the offshore energy industry. ENGOs frequently target offshore oil and gas operations and use minor incidents as justification for why the offshore energy industry should be stopped entirely. One such example is currently taking place in the waters of Alaskas Cook Inlet.

An independent operator, Hilcorp Alaska LLC, detected a small natural gas leak in one of its 8 pipelines in the Cook Inlet and immediately reported it to the appropriate regulators. Due to the current ice conditions, the company cannot safely send divers to repair the leak at this time. The company has stated that their actions are dictated by safe operations and environmental considerations. In the meantime, the company has lowered the pressure of the line and is conducting a variety of monitoring activities to ensure that the leak has minimal impacts to the environment.

Unfortunately, activist organizations are seeking to use this Cook Inlet incident as justification for why the company should not be allowed to operate in other offshore areas and attempting to convince the public that any form of offshore energy development is hazardous. Nothing could be further from the truth.

These overzealous recriminations are hollow, but dangerous; especially when they catch the attention of large ENGOs who exploit the incidents to achieve their national goals. In this case, the Cook Inletkeepers dramatic over-exaggeration of the incident has caught the attention of national groups such as the Wilderness League and Inside Climate News. These organizations have now inserted themselves into public discussion of the incident and are attempting to influence the regulatory outcome. Groups such as Greenpeace and the Sierra Club use these devious playbooks as well both groups have highlighted minor local incidents in an attempt to achieve wider objectives and incite regulatory change.

Make no mistake, incidents of any size should be avoided and given immediate attention. Thats why response plans are imperative for companies who work in the offshore energy industry. The company being targeted by activists in the Cook Inlet had a response plan in place, and carried it out immediately upon discovering the leak. Unfortunately, not one ENGO has mentioned this in their coverage of the incident or the operator. Instead, they have chosen to call out other projects the company is working on, in attempt to sway the public and regulators.

These national activists consistently fail to tell a more complete story, when it doesnt fit their narrative. Important details like a successful record of safe operations, rigorous adherence to regulations, job creation numbers, and tax dollars paid to local and state governments are always ignored when ENGOs attack the offshore energy industry.

Accidents happen, but how an operator responds to them often says more about the company than the actual incident. In order to evaluate and report an incident, the public needs facts and perspective. There is no place for overblown panic in the offshore energy.

Randall Luthi, is president of the National Ocean Industries Association.

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Commentary: Activists distort events to thwart offshore development - FuelFix (blog)