By Linda Hsieh, Managing Editor
A recovery in global oil prices will come down the road, but the deepwater sector –which was challenged already at $100 oil, never mind $50 oil – must make changes now to prepare for that next upturn. In particular, the industry must work to reduce the cost of deepwater projects and shorten deepwater cycle times, Marc Edwards, President and CEO of Diamond Offshore Drilling, said. “There is an opportunity for us collectively to look at how we deliver offshore projects,” he said, indicating that he’s referring to everyone from offshore drillers to operators to OEMs that supply SURF equipment. “Our industry has always been great at innovating when times are hard,” Mr Edwards said during a panel session at the 2015 IADC Annual General Meeting in San Antonio, Texas, on 5 November.
Times are hard right now for deepwater drillers, however, and more pain is likely to come in 2016. Mr Edwards noted that with the current level of global inventories and with OPEC refusing to cut production, the industry is unlikely to see the same type of recovery that it has seen with previous downturns. “This downturn has elements that we really haven’t seen for a very long time,” he commented. “Things are very different, and the methodical recovery that we usually see is not transpiring this time around.”
OPEC is widely expected to vote to maintain production levels steady at its upcoming December meeting, and Mr Edwards said he believes the organization – dominated by a Saudi Arabia intent on preserving market share – will still hold out for some time to come. Still, a lack of action by OPEC means that its member countries are not maximizing near-term revenues. “If (Saudi Arabia) fritters away their sole strategic asset – oil – in the long term they will face other issues which would then push up the price of oil,” he said.
Another factor at play is production declines. When operators cut back on spending during a downturn, they don’t just cut back on exploration and development, Mr Edwards pointed out. “If we look at the financial crisis in 2008-09, we actually saw that you get an accelerated production decline because people aren’t doing in-field drilling or workovers to maintain production from mature fields.” Coupled with increasing global energy demand, he said he sees the potential for a price recovery in the 2017-19 time frame.
At that time, shale is likely to recover first because drilling and production can both be ramped up quickly. This is in stark contrast to the long lead times and large investments required for deepwater projects. Other challenges include high maintenance and reinvestment costs, as well as environmental risks and a high technical complexity. “So the challenge we have as stakeholders in deepwater drilling is how do we further reduce the costs and long cycle times?”
The current approach to cost reduction – primarily by slashing service prices – is not sustainable, he pointed out. Contractors realize they face significant pricing pressures due to the growing number of rigs – very capable rigs – sitting idle. And, yet, current dayrate levels are simply not sustainable, and Mr Edwards said rates must get back closer to $400,000 at some point in time. “We’ve really got to look at how we deliver moving forward,” he urged.