Category Archives: Offshore

By Robert Borlick By Robert Borlick June 30 at 4:00 PM

In May, the Maryland Public Service Commission approved electricity-rate increases to fund two wind projects off the Ocean City shoreline. Over their 20-year life spans, these projects will cost Maryland electricity consumers more than $2 billion. Will they deliver economic benefits that justify their costs? Almost certainly not.

The Maryland Offshore Wind Energy Act of 2013 created a 2.5 percent set-aside in the states renewable energy portfolio for offshore wind energy. The Offshore Wind Energy Act also authorized the Maryland Public Service Commission to raise electric rates to support offshore wind projects but exempted large industrial and agricultural customers from such rate increases. Consequently, Marylands residential and smaller business electricity customers will be forced to subsidize these offshore wind projects.

The Offshore Wind Energy Act includes two important consumer protections. One prohibits the commission from approving any project that does not demonstrate positive net economic, environmental and health benefits to the State based on a cost-benefit analysis that includes any impact on residential, commercial, and industrial ratepayers over the life of the offshore wind project. The other protection caps the combined costs imposed by all approved projects at a maximum of $1.50 per month (in 2012 dollars) for residential customers and at a maximum of a 1.5 percent increase for business customers bills.

The commissions outside consultant estimated that the two approved projects, on average, will raise residential customers bills by about$1.40 per month and raise business customers bills by about 1.4 percent, starting in 2020. Although these increases appear small when viewed on a per-customer basis, their total cost over 20 years will exceed $2 billion (in todays dollars).

The consultant also estimated that these projects would create about 9,700 one-year full-time-equivalent jobs over 25 years. Thats $200,000 per job. Yes, these projects will stimulate economic activity and create jobs in the state, but Maryland residents money could be better spent on other projects producing greater economic benefits and creating more jobs at lower costs.

Despite the Offshore Wind Energy Acts clear language requiring each project to pass a cost-benefit test, the commission never compared the ratepayers costs to support either project with the monetary value of the benefits that project is expected to deliver. Instead, the four commissioners interpreted the language as allowing them to consider only the economic, environmental and health benefits without comparing these benefits with the ratepayers costs.

Because these offshore wind projects will produce energy costing three to four times as much as renewable energy produced by onshore wind or large-scale solar, it is inconceivable that either project would pass a bona fide cost-benefit test. Interestingly, the Maryland Public Service Commission staff did not recommend approval of either project, stating only that: The issue of cost should be of paramount consideration in the determination the Commission must make in this proceeding.

The commission appears to have telegraphed its agenda when it said, the State has already made the policy decision to authorize OSW development and the ratepayer impacts that may result from it. Then why did the Offshore Wind Energy Act include the cost-benefit analysis requirement?

The commissions decision is appalling. Marylanders deserve better.

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Offshore wind energy is wrong for Maryland - Washington Post

BBC News

GMB members vote for industrial action in offshore dispute BBC News GMB members working offshore have voted to take industrial action. The union, along with the Unite union, is in dispute with the Offshore Contractors Association (OCA) over pay. The GMB said it was time for the OCA and its client employers to get ... and more »

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GMB members vote for industrial action in offshore dispute - BBC News

By Dave Forest - Jun 29, 2017, 10:30 AM CDT

Oil prices have been a big item lately with crude plunging below $45 per barrel in recent weeks.

But quiet reports across the industry show costs for oil and gas drillers may be falling even faster than that. With recent studies showing that offshore oil projects may actually be feasible at or near current prices.

That sentiment appears to be trickling through to project activity on the ground. With one first-of-a-kind exploration project announced this week showing that E&Ps are once again going big for offshore targets.

That project is in the Caspian Sea of central Asia. Where an international consortium of companies signed a historic deal this week to drill the deepest exploration well ever attempted by the global petroleum industry.

The so-called Eurasia project will be attempted by Chinas CNPC along with Italys Agip, Americas NEOS GeoSolutions, Azerbaijans state oil firm SOCAR, and Kazakhstans RN-Exploration and KazMunayGas-Eurasia. With those partners having been cooperating for several years already in compiling data and geophysical studies on the play.

Heres the plan: the partners will now prepare to drill an exploratory well up to 15 kilometers depth targeting oil under the Caspian depression. A feat that would eclipse the previous-deepest well ever drilled, the 12.3 kilometer Kola Bore Hole at Murmansk, Russia.

This will obviously be a massive technical challenge. But the consortium says the prize could be worth it with estimates suggesting the deep basin here could hold up to 60 billion tonnes (429 billion barrels) of crude. Related:Goldman Sachs: Oil Crash Unlikely To Continue

Interestingly, the consortium is moving ahead with this target without the aid of any major names in the Western international E&P business. Meaning that a success here could mean a major shift in power away from the big names in the industry to rising players like CNPC.

No timeline was given for the drilling watch for further announcements from the consortium on when exactly this record-breaker will come down. It wont be immediate, but this is a potential gamechanger worth keeping an eye on.

Heres to going deep.

By Dave Forest

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The Deepest Exploration Well Ever Signals A Return For Offshore Oil - OilPrice.com

The Sequoyah Nuclear Plant.

President Trump gave a speech about energy in the US today, highlighting six policy issues that willdirect his administrations energy policy for the time being.

The new initiatives Trump did talk about included reviving and expanding the nuclear energy sector, reducing barriers to financing coal plants in foreign countries, opening up a new petroleum pipeline to Mexico, pushing more exports of natural gas, opening a natural gas export terminal in Louisiana, and relaxing restrictions on offshore oil and gas drilling.

Bloomberg noted this morning that Trump would order a complete review of policies to pinpoint where the US government could roll back nuclear energy regulations. The nuclear energy industry is facingconsiderable hurdlesthese days; nuclear energy is more expensive than cheaper natural gas, and the US still hasnt made any decisions on where waste from the plants will go. Trumps statements today echoed comments by Energy Secretary Rick Perry earlier this week, who said he wanted the Department of Energy to make nuclear energy cool again.

Trump specifically mentioned expanding coal trade in Ukraine by making it easier to finance foreign coal plants (although the Washington Postwrote that the US doesnt have any prohibitions on private financing of foreign coal plants. Instead, the Obama administration said in 2013 that it would oppose using multinational bank fundsto invest in coal plants.) Trump also said he would approve building an oil pipeline to Mexico thatll go right under the wall, allowlicenses to export liquified natural gas from Lake Charles, Louisiana, and support the export of natural gas to South Korea. CNBC notes that President Barack Obama paved the way for Trump by lifting a 40-year ban on exporting US crude oil and by approving about two dozen liquefied natural gas export licenses.

Finally, Trump pointed to efforts toroll back restrictions on offshore drilling. Back in April, the president instructed the Interior Department to come up with plans to roll back Obama-era rules that would prohibit new drillingon federal offshore areas.

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Trump talks increasing fossil fuel exports, relaxing offshore drilling rules - Ars Technica

The federal government has announced its intention to launch an offensive cyber capability to fight cyber criminals and thwart attacks against Australia.

Anticipating cybercrime to cost the Australian economy at least AU$1 billion per year, Prime Minister Malcolm Turnbull has directed the Australian Signals Directorate (ASD) to use its offensive cyber capabilities to "disrupt, degrade, deny, and deter" organised offshore cyber criminals.

By using the intelligence agency's cyber capability, which Turnbull said is currently used to help target, disrupt, and defeat terrorist organisations such as Daesh, Australia is expected to have a stronger arsenal to prevent and shut-down safe-havens for offshore cyber criminals.

"The recent WannaCry and Petya ransomware attacks have affected governments, businesses, and individuals around the world," Turnbull said on Friday.

"Cyber criminals continue to adapt and evolve their methods and tactics, increasingly employing new methods to gain access to a victim and extort funds. As their level of sophistication has improved, cyber criminals are increasingly targeting businesses directly.

"Our response to criminal cyber threats should not just be defensive. We must take the fight to the criminals."

It is expected the ASD will be tasked with defending Australian military targets from cyber attacks and preparing to launch its own assaults on foreign forces, and that it will comprise of specialists staff with a mixture of defence personnel and public service employees, the ABC reported.

"We are using the offensive cyber capabilities against terrorists, and what we are announcing today is that this now will also be used against cyber criminal networks operating offshore," Australian Minister Assisting the Prime Minister for Cyber Security Dan Tehan said on Friday.

"We have to make sure that we are keeping the mums and dads, the small businesses, large businesses, government departments and agencies secure, and that is why we've made this direction to the ASD."

Addressing the National Press Club in November, Tehan warned of the devastation a "cyberstorm" could have.

"All of us must be on notice -- it is not a case of if but when government, businesses, or individuals will be hit," he said.

"When it comes to cybersecurity, being prepared isn't just having a wall that will block and protect from attacks. Instead, being prepared means minimising risk and having the ability to recover, to remediate, and to respond.

"No police force can guarantee that they will eradicate crime completely. But we can make it a lot harder if the windows aren't open, the doors are locked, and there is a strong cop on the beat."

Turnbull launched the country's AU$240 million cybersecurity strategy in April last year, which is aimed at defending the nation's cyber networks from organised criminals and state-sponsored attackers, and sits alongside the AU$400 million provided in the Defence White Paper for cyber activities.

Since its inception at the end of 2014, there have been over 114,000 reports of cybercrime registered with the Australian Cybercrime Online Reporting Network (ACORN), and, according to Turnbull, 23,700 incidents have been reported over the last six months.

"The government will target criminals wherever they seek to hurt Australian citizens but every Australian has a role to play in ensuring our cybersecurity," the prime minister added. "We must work together to share threat information and learn from each other about the online threats that seek to do us harm."

Also announced on Friday was the transition of the Australian Internet Security Initiative (AISI) from the Australian Communications and Media Authority (ACMA) to the Computer Emergency Response Team (CERT) Australia, which sits within the Attorney-General's Department.

The move comes in response to a recommendation made last month by the Department of Communications after it probed the functions under the ACMA.

The transition will take effect on Saturday, with the ACMA noting it has been working closely with the CERT for a number of months on transferring select cybersecurity functions over.

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Australian military cyber warriors authorised to target offshore criminals - ZDNet

Beaufort Mayor Billy Keyserling and other state municipal leaders were successful in their first effort to oppose offshore drilling, but now they are preparing for another fight.

President Donald Trump on April 28 instructed the Department of the Interior to lift offshore drilling restrictions that former President Barack Obama put in place for the Arctic and Atlantic oceans.

Trumps executive order calls for the administration to fast-track permitting to test for oil and natural gas deposits using seismic air guns off the Atlantic Coast.

We won the first battle to stop offshore drilling along our coast, but dont know what the new battle is just yet, Keyserling said last week.

We havent seen anything specific yet from the new administration under President Trump, but the number of businesses in opposition of offshore drilling is now in the thousands and we also have been informed that Gov. Henry McMaster is opposed to the drilling.

While things are changing under the new administration, the resolution against offshore drilling that multiple municipalities passed during the Obama administration would only require some updating for another round of opposition, Keyserling said..

At this point, we need to see where the current administration is coming from in terms of the new developments about this issue, Keyserling said. Everyone who worked with us before is ready to get back on it.

Keyserling said it is important to wait and see what happens next.

Lets wait and see the cards we are dealt, he said. We all have learned to work together and have a strong grassroots impact when it comes to opposing the drilling.

Keyserling said there are many reasons Beaufort County would not be an appropriate location for offshore drilling.

One reason is because so much of our economy depends upon tourism and the quality of life is what the coast is about, he said. If they were to drill, where you do have a port or community? Who wants to become an oil town?

Keyserling also said testing or drilling for oil could disturb marine life.

We dont have the infrastructure here in Beaufort County for offshore drilling, he said. Weve spent hundreds of millions of dollars to refurbish beaches, and to rebuild bridges and communities all along the coast. That tourism could be wiped out if the drilling should move forward.

No matter what, we have to be aware of whats happening and you always want to keep your guard up to protect what you have.

While Keyserling and others wait to see what their next move will be, he said citizens can contact their representatives to voice their concerns.

NOAA Fisheries is accepting public comment through July 6 on incidental harassment authorizations that allow companies that propose seismic testing to incidentally, but not intentionally, harass marine mammals by using the air guns.

They can write their senators, Sen. (Lindsey) Graham or Sen. (Tim) Scott, and simply state they are opposed to seismic testing and drilling, Keyserling said. We are going to continue to work on this issue, and wait and see what comes next in our battle.

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Beaufort mayor ready for another offshore drilling fight - Bluffton Today

When it comes to offshore rig companies lately, you really need to grade on a curve, because the entire industry is suffering. With that in mind, Diamond Offshore Drilling's (NYSE:DO) results lately have been surprisingly positive. It has been able to keep its earnings afloat with some steep cost-cutting, but it has also been able to find work for rigs. That's something we haven't seen much in this industry lately.

On the company's most recent conference call, management tooted its own horn a bit thanks to those new contracts, but it also provided some interesting insights into what the market for offshore rigs will look like in the coming years. Here's a selection of quotes from Diamond CEO Marc Edwards that will help investors better understand the offshore industry today.

Image source: Getty Images.

Probably the hardest thing for offshore rig companies right now is finding new work for their respective rigs. While some companies have been able to tout a few small and short-term contracts, Diamond has been able to secure several long-term contracts. Using this conference call to take a victory lap, Edwards highlighted the contracts Diamond secured in the first quarter of the year:

[W]e commenced two new contracts for our sixth-generation assets, the Ocean GreatWhite and the Ocean BlackRhino, and additionally, we secured a new term contract for our third generation asset, the Ocean Patriot, as well as securing 2 new short-term contracts for the Ocean Monarch. Overall, I'm pleased with these results as it demonstrates our ability to employ all of our sixth-gen assets and find new work for a variety of asset classes while at the same time maintaining a relentless focus on cost management and increased operating efficiency.

Some of these contracts won't be showing up in current results because they are either extensions for rigs already working, or they are in the yard for maintenance work. What is more important is that it extends the time that Diamond's current revenue is protected by long-term contracts. That in and of itself is something few rig companies have today.

The woes of deepwater drilling have been almost exclusively been blamed on the advent of shale drilling and how quickly the latter has moved down the cost curve. Some financial pundits have declared offshore drilling is dead. While the evidence seems to support this idea -- shale drilling in North America has been going like gangbusters, while deepwater drilling has ground to a near-standstill -- Edwards gave a more nuanced approach that should give investors some comfort:

[F]ull life cycle project [net present values] can in many circumstances deliver better returns offshore than onshore, and the real issue here is the timing of the cash flows. While oil prices languish at their current levels, we spend direct investments onshore. However, we are now seeing many [integrated oil companies] rehabilitating their deepwater portfolios and options with a view as to when to bring sanctioning back over the horizon. Nonetheless, it is important express caution here due to the time lag from project sanctions to the actual commencement of drilling activity. But when current industry investment is at such unsustainable levels, we are finally starting to see discussions in relation to deepwater portfolios. It is clear that deepwater economics continue to improve through project standardization and simplification while competing [shale] costs are now trending back up.

For cash-strapped producers, the choice today is pretty obvious. A 10% return you can get three weeks from now is much more attractive than a 30% return you won't get for another three years. Once their balance sheets are in better shape, though, chances are they will start to swing for those greater returns that can be found in the offshore environment.

Up until a few years ago, the drilling industry in general suffered mightily from an old-school, heuristic approach to the entire business -- from rig design and construction to repair and maintenance schedules. Thankfully, though, this trend is starting to come to an end. By now, just about every company has started using a more standardized design for rigs that makes replacement parts that much easier. According to Edwards, Diamond is taking the next logical step and updating the way in which it handles maintenance and replacing parts through data analysis:

[W]e began implementing our new risk-based asset management system, which enables predictive maintenance. This system has been under development for over 18 months, and we are now ready to implement it fleetwide. And with this solution, Diamond Offshore will utilize data analytics to manage rig maintenance across our entire fleet for improved reliability and lower operating costs. This approach moves away from the drilling industry's traditional reliance on time-based rig maintenance and embraces leading practices often found in high-reliability industries such as aerospace and power generation.

This isn't the first stab at new thinking for Diamond when it comes to a more advanced approach to equipment maintenance. Last year, Diamond signed a deal with General Electric (NYSE:GE) where Diamond sold its blow-out preventors back to GE and now leases them back from General Electric with incentive bonuses for less maintenance downtime. The idea is that it puts more skin in the game for General Electric, which motivates it to use a more data-driven approach to repair and maintenance. Diamond benefits because a rig works more days within the duration of a contract, and makes it more likely to receive performance bonuses from the producer. Hopefully, it will be able to do something similar with this new asset management system.

Diamond has been one of the companies that aggressively scrapped or sold older rigs that were less relevant in today's offshore drilling market. As a result, it has one of the more capable fleets -- which explains why it is getting work while others struggle to get contracts. Even after all of the rig scrapping that has gone on in recent years, Edwards thinks that a lot more will be done:

So there's generally a reluctance, I think, to actually grasp the nettle and start scrapping some of the early generations sixth-[generation] rigs, the ones that came out in '08, '09, '10, for example that are sitting at the back of the deli line in terms of desirability and many of our peers simply just can't afford to take the impairment of those rigs due to, as I mentioned, breaking their debt covenants and as a result they're just sitting out there. I think ultimately, however, if we truly take a look forward to this recovery, which will be somewhat drawn-out, I think that many of those sixth-generation rigs that are cold-stacked today, that are of the early generation of the sixth-gen category will not see the light of day again simply because as each year passes, your activation costs come up too high and therefore, they will effectively be de facto scrapped.

This is bad news for companies with lots of these sixth-generation rigs that were made in the past 10 years, but can't find work. One of the reasons they have been hesitant to scrap these newer rigs is many of them are still held for a high value on balance sheets, and to scrap them would involve even more asset impairments that could make some rig companies violate their debt covenants. Eventually, these rigs will either go away, or the market will eventually rebound enough that even these rigs will find work. Whatever the case, those companies with these kinds of rigs in their fleets are likely to suffer for a while.

Tyler Crowe owns shares of General Electric. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy.

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4 Things Diamond Offshore's Management Thinks You Should Know - Motley Fool

The same day that President Donald Trump touted new energy policies during a speech at the U.S. Department of Energy that he said were part of a golden era of American energy, Rep. John Rutherfords office released a letter signed by him more and than 100 other members of Congress that voiced opposition to the use of a controversial oil and gas exploration technique off the Atlantic Coast.

We are writing in strong opposition to your recent secretarial order to move forward with offshore oil and gas exploration in the Atlantic Ocean, the letter, signed by members of both parties and addressed to Department of Interior Secretary Ryan Zinke, began.

Offshore oil and gas exploration, the first step of which is seismic airgun testing, puts at risk coastal economies based on fishing, tourism, and recreation, it said before asking Zinke not to issue any permits for the surveys.

Rutherford, a Republican, represents Floridas 4th District which includes parts of Nassau, Duval and St. Johns counties. Republican Ron DeSantis, who represents the southern portion of St. Johns County, also signed the letter.

Seismic airgun testing is used to map potential drilling sites, but many say the airguns, which blast intense pulses of compressed air at the ocean floor, are so loud they can disturb or injure endangered right whales and other marine mammals and increase the risk of calves being separated from their mothers.

Rutherford had voiced opposition to the testing earlier this month when the Trump administration, through the National Marine Fisheries Service, made its first move toward oil exploration by requesting permits under the Marine Mammal Protection Act for five companies to use airguns for seismic surveys in the mid-Atlantic, from Delaware to Central Florida.

Rutherfords office released a brief statement at the time saying that he was working to build a coalition in Congress opposed to opening up the Atlantic to drilling activities and share with the administration how offshore oil and gas exploration threatens our coastal economies based on fishing businesses, restaurants, and the visitors that flock to Northeast Florida.

The letter dated June 28, but released Thursday said that those who signed have heard from countless business owners, elected officials and residents along our coasts who recognize and reject the risks of offshore oil and gas development.

The Interior Department, though, is rewriting a five-year drilling plan established by the Obama administration, with an eye toward opening areas in the Arctic and Atlantic oceans that now are off-limits to drilling. Its one of six initiatives that the president unveiled Thursday in hopes of generating more energy exports and jobs.

Trump and other officials say they are confident the country can pave the path toward energy dominance by exporting oil, gas and coal to markets around the world, and promoting nuclear energy and even renewables such as wind and solar power.

Zinke says increased offshore drilling could provide more than enough revenue to offset an $11.5 billion maintenance backlog in national parks.

Theres a consequence when you put 94 percent of our offshore off limits, Zinke said in a speech this week. Theres a consequence of not harvesting trees. Theres a consequence of not using some of our public lands for creation of wealth and jobs.

Oceana, an environmental group that has been at the forefront of the opposition to seismic testing, issued a news release Thursday about the letter.

In it, Oceana campaign director Nancy Pyne praised Rutherford and Democratic Rep. Don Beyer of Virginias 8th District who helped form the coalition of lawmakers that signed the letter.

Reps. Rutherford and Beyer should be applauded for their leadership in working to protect the Atlantic from loud and dangerous seismic airgun blasting, she said.

The groundswell of opposition to these dirty and dangerous activities continues to grow every day, she continued. Currently, 126 East Coast municipalities, more than 1,200 local, state and federal officials, and an alliance representing over 41,000 businesses and 500,200 fishing families from Florida to Maine, publicly oppose seismic airgun blasting and/or offshore drilling. The risk to marine life, coastal communities and economies is just too great.

This story contains reporting from The Associated Press.

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Rutherford, others sign letter opposing seismic testing offshore - St. Augustine Record

While all eyes are riveted on how much U.S. shale output is undermining OPECs production cuts and any oil price gains, other non-OPEC producers are also increasing crude production, and most importantlyexports. Rising supply from non-OPEC countries other than the U.S. adds yet another headache to the cartel as it continues to try (with little success so far) to kill the glut and lift the price of oil.

One of those non-OPEC deal producers is Brazil, which is not only growing its production, but is also seeing a surge in crude oil exports.

South Americas biggest economy is trying to emerge from a two-year recessionthe worst in its history. Falling commodity prices and a series of corruption and political scandalsincluding a scandal at state oil firm Petrobrashas crippled the economy and undermined investor confidence in the past few years.

Brazils worst recession on record has led to a slump in domestic oil and fuel demand, and a rise in crude oil exports. Moreover, the country is trying to lure international oil companies to its offshore pre-salt fields with amended legislation, and is launching new projects and tenders. Analysts and international agenciesas well as OPEC itselfsee Brazil as one of the biggest contributors to growing non-OPEC supply this year, albeit at a distant second or third behind U.S. shale.

Brazils oil exports jumped by 94 percent on the year in February this year, beating the previous record from January. In the first quarter of 2017, oil exports jumped by 56 percent compared to the same period last year.

The Q1 2017 surge in Brazils oil exports came after state-controlled Petrobras reported a 6 percent rise in exports and a 30 percent decline in imports for 2016, moving it into net exporter territory. In Q4 2016, Petrobras oil product production in Brazil dropped 3 percent to 1.8 million bpd. Domestic oil product sales decreased 4 percent to 2.0 million bpd, while oil and oil product exports jumped by 13 percent to 634,000 bpd, Petrobras said. Related:Shale Rebound Runs Out Of Steam At $40 Oil

In Q1 2017, Petrobras oil and oil product exports soared 72 percent compared to Q1 2016.

Wood Mackenzie has estimated that Brazilian exports this year will rise to almost 1 million bpd, compared to 798,000 bpd last year.

While exports could improve Brazils foreign trade balance, this is bad news for OPEC, which is trying desperately, and so far not very efficiently, to draw down the global oversupply and prop up oil prices.

Brazil becoming a relevant exporter is complicating OPECs efforts to control prices through supply cuts, former oil regulator Helder Queiroz, a scholar at Rio de Janeiro Federal University, told Bloomberg by telephone.

OPECs latest Monthly Oil Market Report estimated that non-OPEC oil supply in the second half of this year will increase by 500,000 bpd compared to the first half, to average 58.4 million bpd. The U.S. is the main driver behind this higher growth, contributing 760,000 bpd, followed by Brazil and Canada with 120,000 bpd and 60,000 bpd, respectively. On a country-by-country basis, the main contributors to growth in 2017 are expected to be the U.S. with 0.80 mb/d, Canada with 0.26 mb/d, Brazil with 0.21 mb/d and Kazakhstan with 0.13 mb/d, OPEC said.

The June Oil Market Report by the IEA said that Non-OPEC output is seen rising by 660 kb/d this year, a slight upward revision from last month's Report. In 2018, growth will accelerate to 1.5 mb/d, driven by strong U.S. crude production and further gains from Brazil and Canada.

In projections for oil supply until 2022, the IEA expects the countries other than the U.S. with significant growth to be Brazil, Canada, and Kazakhstan, which will see their cumulative output rising 2.2 mb/d by 2022, reaping the rewards of investment decisions taken before oil prices declined. Related:$30 Oil Could Spark Contagion In Energy Markets

Moreover, Brazils pre-salt basin is adding new production, with international oil and gas majors participating in the consortia developing the fields.

The hot oil plays will be U.S. tight oil (the Permian Basin again to the fore) and Brazil pre-salt, both of which have materiality and among the lowest development breakevens globally, Wood Mackenzie said at the beginning of this year in its 2017 global upstream outlook.

Analysts concur that Brazils crude oil production will increase over the next few years. In the short term, Brazilian exports and outputcoupled with U.S. shale and Canada gainsis offsetting a large part of the OPEC cuts.

By Tsvetana Paraskova for Oilprice.com

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The Offshore Boom To Break The OPEC Deal - OilPrice.com

The sixth month of this year ends in a few days and I feel its high time to look at the results of the offshore drilling sector and where it is headed. Heres what I believe are major highlights of the first half together with my thoughts on the future.

Oil prices drop and postpone recovery

It is now a fact OPEC failed to lift oil prices, at least in the short term. Both Brent (BNO) and WTI (USO) trade at about the same levels where they traded before the first announcement of the OPEC decision to cut production. The prolongation of the deal did not inspire the market and led to a downtrend in oil prices.

In my view, oil prices continue to trend in a wide range, which is roughly $44-58 for Brent and $42-55 for WTI. To get out of this range, oil prices will need strong upside catalysts. So far, the effect of the OPEC/non-OPEC deal was not sufficient enough to push oil prices to the desired $60+ range, which will create a meaningful uptick in the contract activity in the offshore drilling space.

The effect of the recent drop is really negative for the potential recovery. There is little reason to rush into offshore drilling spending for most oil companies. In all likelihood, they will continue to prioritize short-cycle investments like shale over offshore drilling in the second half of this year.

Day rates reach bottom and wont recover in H2 2017

As those who follow the industry regularly know well, many contracts now come at undisclosed day rates. Its not hard to decipher what undisclosed means the rate is so low that a company does not want to show it to both investors and competitors.

For day rates to increase, utilization should increase significantly. I do not see it happening in the near term. New contracts are scarce while many rigs roll off their previous contracts. Scrapping could have helped, but accounting consequences of scrapping (the necessity to take impairments which could lead to problems with credit covenants) prevent many drillers from retiring their rigs.

Offshore drilling is getting more competitive? Too early to celebrate

Here and there we can read that offshore drilling is getting more competitive and that the sole obstacle in its competition with shale is the necessity to make big upfront investments. There is no surprise that offshore drilling becomes more attractive as offshore drillers agree to contracts at cash breakeven rates! This is not sustainable and everyone understands it. Offshore drilling will be competitive with shale when it will be able to operate with same costs while all companies involved get rational rates, allowing them to profit and invest for the future.

M&A begins

Two major deals were announced (and one already executed) in the first half of this year. Transocean (RIG) sold its entire jack-up fleet to Borr Drilling. Ensco (ESV) announced a merger with Atwood Oceanics (ATW). It is not yet clear whether Ensco shareholders will vote for the merger with Atwood.

The necessity for consolidation in the industry has been discussed many times. Currently, it looks like smaller companies dont have a good place in the future of the industry as clients prefer stable companies with solid finances. However, potential acquirers themselves are not in their best shape. First, companies like Ocean Rig (ORIG) and Pacific Drilling (PACD) have to go through restructurings and get rid of debt, and only then deals similar to Ensco Atwood could be considered.

Among U.S.listed stocks, its difficult to find a company which looks ready to grab another driller right now. Frankly, Enscos move was a surprise to me. Nevertheless, I do not anticipate that other companies will immediately follow Ensco's steps. Neither Rowan (RDC), Diamond Offshore Drilling (DO), Noble Corp. (NE) nor Transocean looks ready for a deal, especially now, when the more obvious target has been approached by Ensco.

In my view, the EnscoAtwood deal will be positive for the industry if it goes through shareholder votes as it will likely lead to rationalization of Ensco's fleet. At the same time, the recent Transocean sale led to an increase in competition. The net result of these two deals is hardly positive as Borr Drilling emerged as a new competitor with a significant fleet.

Offshore drilling stocks trade near yearly lows

The direct consequence of the recent drop in oil prices is the price action in nearly all offshore drilling stocks. In case oil is really in a range and it will rebound from current levels, offshore drilling stocks will also experience a rebound. However, I do not think they can reach highs of the beginning of this year unless oil breaks out of this range and trades above $60. Current range has already proved insufficient for meaningful recovery, so each month oil stays in $50 whereabouts the fundamental situation gets a bit worse for the industry. Thus, its hard to expect that drilling stocks will react to oil upside with the same enthusiasm as at the beginning of this year, when the market implied that OPEC/non-OPEC deal will provide big support for oil prices.

In my view, the safest play from the long-term perspective is Rowan. However, it does not mean that this stock will be the best from the trading perspective in the shorter term should oil prices rebound from current levels.

H2 2017 will be very interesting and volatile

Im expecting that more contracts will surface in the second half of this year as oil companies will prepare for their drilling programs in 2018. Despite all the current attractiveness of shale and all the fuss about the end of the oil age, offshore drilling is a huge part of the world oil supply and oil companies will start locking cheap day rates after a few years of hiatus.

However, until the real, tangible signs of offshore drilling recovery materialize, offshore drilling stocks will remain more suited for trading than to be longer-term holdings. Timing of the recovery is uncertain and drilling stocks may experience many local up and down cycles before establishing an upside trend in case of oil price recovery.

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Originally posted here:

Offshore Drilling: Discussing First-Half Results - Seeking Alpha