A teapot recession
There is a recession in the offshore oil and gas business, and it is confined to one small area of the world - the continental shelf of the US Gulf of Mexico. Drilling activity on the shelf is almost nil, and exploration activity just does not exist. Shelf development is confined to cheap well workovers and deepening, but that activity has dropped precipitously with US gas prices. By contrast, deepwater activity in the US Gulf remains very strong. Drilling numbers tell the tale.
Compared to last year at this time, 45-50 fewer rigs are working worldwide. That is not a precipitous number. However, over this same period, 55-60 rigs stopped working in the Gulf of Mexico, and most are jackups with shelf-only capability. This rig utilization collapse would have been in the 70-80 range, if contractors had not moved idle rigs to other areas of the world. The only other area of the world suffering similarly was Latin America, which idled 15-18 drilling units over the one-year period.
Compare this with what occurred elsewhere: 10-14 additional rigs went to work in the North Sea; 14-16 additional rigs went to work in the Middle East; rig activity went up slightly in West Africa, the Pacific Rim, and Eastern Canada, and down slightly in several other areas.
This industry 'recession' is a tempest in a teapot, and doesn't exist anywhere else. The key to a utilization recovery on the Gulf of Mexico shelf rests heavily with US gas prices and greater royalty relief, and to a lesser extent, stronger oil prices. Even though utilization is down, a signal that oil and gas producers are prepared to go in any direction is that 2002 E&P budgets haven't changed much from 2001. While oil and gas prices may remain weak through 2002, given the way supply and demand moves, wait five minutes and all that will change.
Wall Street's 'darlings'
When oil and gas commodities are in recession, equity investors and debt merchants take a high interest in a few small producers that possess an unusual niche or a salable business strategy. All too often, that business strategy depends heavily on acquisition of 'under-valued' producers that have attractive prospects or positions in interesting plays.
As the selected producer's capital grows through debt (largely convertible), equity, or both, the acquisition strategy goes forward. Of course, what's missing from the strategy is any sort of geological or drilling insight. The attitude of Wall Street's 'darlings' toward E & P activity can best be described as 'I'll drill - if I have to.'
Debt among these 'darlings' can rise to enormous proportions. Eventually, the strategy stalls out for lack of cheap acquisitions, leaving a debt-ridden enterprise with a grab-bag of over-valued reserve assets. These 'darling' producers linger for a while as the surviving owners try to dispose of the carcass, but new 'darlings' are already on the horizon.
While appearing to be fast movers in the market, the 'darlings' contribute little to exploration or reserve development activity. Such business churning isn't illegal or improper, just irritating.
Leonard Le Blanc
No One Answer
One sign that the new technology driving deepwater E&P is maturing can be seen in operators' holistic approach to these solutions. Gone are the days when any one solution is considered a cure-all for taming deepwater. Now individual "game-changing" technologies are considered as part of a bigger picture. No one touts riserless drilling, expandable tubulars, or subsea separation as the answer to all of deepwater's problems. Rather there are bundles of these emerging technologies that would be combined to address individual field needs.
Part of this shift in thinking can be attributed to the costs involved in applying innovative technologies. There must be a substantial step change in capabilities, reduction in rig time, or increase in early production to justify such outlays. However, the real driver is a better understanding of how such new technologies will play out in the real world. As new concepts like expandable tubulars, riserless drilling systems, and subsea separation units come on line, two things are apparent. No one technology is going to answer all the challenges of these deeper environments, and it is only through a careful combining of these innovations that operators will find the technical and economic advantages they seek.
William Furlow
