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-- Published: Thursday, 26 October 2017 | Print | Disqus

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By Steve St. Angelo

The U.S. Deepwater Adopted Oil Industry is a trainwreck in the making. The low oil bulk continues to sack an industry which was booming aloof a few abbreviate years ago. The canicule of spending billions of dollars to acquisition and aftermath some of the best technically arduous deep-water oil deposits may be advancing to an end sooner then the bazaar realizes.

Drilling action in the Gulf of Mexico hit a aiguille in 2013 aback the bulk of oil was over $100 a barrel. However, the accepted cardinal of rigs conduct in the Gulf of Mexico has collapsed to alone 37% of what it was in 2013. This is assuredly bad account for an industry that fetches advancement of $600,000 a day for leasing these massive ultra-deepwater rigs.

One of the bigger adopted conduct rig companies in the apple is Transocean, headquartered in Switzerland. They charter ultra-deepwater rigs all over the globe. Aback the industry was still able in 2014, about bisected of Transocean’s fleet of 27 ultra-deepwater rigs were active in the Gulf of Mexico. Alike admitting Transocean was absolutely active that year, its ultra-deepwater rig appliance was 89% during the aboriginal bisected of 2014, bottomward from an absorbing 95% in 1H 2013.

The appellation appliance represents the absolute cardinal of alive rigs in the fleet. So, in 2013, Transocean had 95% of its rigs active conduct oil wells. But if we attending at the afterward chart, we can see the adversity that has taken abode at Transocean aback the oil bulk fell by added than 50%:

Currently, Transocean’s ultra-deepwater rig adding has alone to a low of 12 against 27 in 2014. And it’s alike worse than that. Aback 2014, Transocean added three added new rigs for a absolute cardinal of 30. Thus, Transocean’s ultra-deepwater rig appliance is bottomward to a beauteous 37% compared to 95% aloof four years ago. So, aback a rig isn’t working, it’s not authoritative revenue.

The accident of acquirement from these ultra-deepwater conduct rigs actively hurts the company’s basal line. According to Transocean’s Q2 2017 Report, they absent $1.7 billion in one quarter. However, the majority of that accident was due to a ample asset disposal. Regardless, alike if we go by adapted assets and abolish the ample auctioning writeoff, Transocean still alone fabricated a whopping $1 actor adapted accumulation on absolute revenues of $1.5 billion.

To accord you an abstraction of the admeasurement of one of Transocean’s rigs lets takes a attending at its Sedco Express ultra-deepwater conduct platform.

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The Sedco Express deepwater is semi-submersible that is best than a football acreage (364 ft) and weighs 38,000 bags aback operating. The Sedco Express rig has a aggregation of 184 bodies and can assignment a able-bodied 35,000 anxiety deep. Aback these ample rigs were in aerial demand; they were apprenticed to assignment oil and gas wells all over the world.

For example, the Sedco Express was assassin by Erin Activity Corp (formerly Camac) to assignment oil wells off the bank of Nigeria. Transocean accustomed $300,000 a day for leasing Sedco Express to assignment these wells. At about a $10 actor a month, it doesn’t booty connected for these rigs to acquire some austere revenue.

Unfortunately for Sedco Express, its conduct canicule are numbered. How numbered? Actually, its conduct canicule are over for good. Why? Because Sedco Express is now actuality beatific to the junkyard to be “environmentally scrapped.”

You see, Sedco Express is an earlier rig that is no best advantageous or commercially viable, abnormally in the depressed ultra-deepwater conduct industry. As I declared above, Sedco Express did accept that $300,000 per day to assignment oil wells off the Nigerian coast, but that was aback in 2014. If we booty a attending at Transocean’s Agile Status Report, we can see Sedco Express at the bottom:

Here we can see that Sedco Express entered account in 2001. Thus, Sedco Express is alone 16 years old. Again, if we attending at the account above, Transocean had best of its rigs in account at the alpha of 2014. Furthermore, bisected of the rigs were active in the U.S. Gulf of Mexico. Now, let’s attending at a added contempo Transocean Agile Status Report:

Please apprehension the cardinal of STACKED rigs on the account (right-hand ancillary of the table). Transocean now has 11 rigs working, 16 ample and 3 idled. However, the rigs accent in chicken represent the rigs branch to the junkyard. Transocean is auctioning these 5 ultra-deepwater rigs added accession deepwater rig alleged the Transocean Marianas. Instead of advantageous the $40,000 a day to balmy assemblage or $15,000 a day to acute assemblage these rigs, Transocean absitively it was a bigger banking accommodation aloof to abolish them from their fleet. I would brainstorm if Transocean believed the bulk of oil would balance to $80-$100 quickly, they ability accept captivated off this decision.

Unfortunately, boilerplate activity analysts do not accept the ultra-deepwater rig industry will balance until at atomic 2020 or added realistically by 2024. While the boilerplate activity analysts accept the ultra-deepwater conduct rig industry will advance aural the abutting 6-7 years, I don’t anticipate it will anytime recover. Rather, I see a connected abrasion of this HIGH COST, LOW EROI activity industry (EROI – Activity Returned On Investment).

Before we get into the final allotment of the article, I capital to explain the accent RED rig. The Discoverer Clear Leader rig active to Chevron was apprenticed to end in October 2018. However, Chevron afresh appear an aboriginal abortion of that arrangement to end in November 2017. Chevron will pay Transocean $148 actor for arrangement abortion fees. Aback this was appear in the media, Transocean’s banal fell 5% that day. Lastly, at its aiguille of 95% appliance of its ultra-deepwater rig agile in 2013, Transocean’s banal bulk was trading in the mid $40’s. Today is it trading beneath $10.

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An commodity appear in 2011 titled, Ultra-Deepwater Gulf of Mexico Oil and Gas: Activity Acknowledgment on Banking Investment and a Basic Assessment of Activity Acknowledgment on Activity Investment, declared the following:

The basic EROI based on banking costs and consecutive acuteness assay application three altered activity acuteness ratios. ranged from 4:1 to 14:1 for 2009 absolute GoM ultra deepwater oil assembly while the EROI for absolute oil added accustomed gas assembly in the ultra-deepwater GoM in 2009 was hardly college at 7:1–22:1.

We accept that the lower end of these activity acknowledgment on invested (EROI) ranges (i.e., 4 to 7:1) is added authentic aback these ethics were acquired application activity intensities averaged beyond the absolute calm oil and gas industry.

The two analysts that put calm the abstraction believed that the EROI of Gulf of Mexico ultra-deepwater oil assembly was at the lower end of the range, 4 to 7:1. However, this abstraction was done application 2009 data. For example, they were artful their Gulf of Mexico EROI ethics on the following:

The banking bulk per butt of ultra-deepwater oil in the GoM at the well-head ranged from $71/barrel to $86/barrel.

Today, the bulk of oil trading afterpiece to $50, not the $71 or $86 acclimated in the analysis. Thus, the lower oil bulk translates to a lower EROI. Also, the analysts additionally fabricated the afterward important comment:

The EROI ethics of this abstraction were based on financially-derived activity costs of assembly at the well-head only, and did not accommodate all of the aberrant costs of commitment to end use. Thus, these estimates are conservative.

If all aberrant costs were included in the EROI calculations, EROI would decrease.

Moreover, one cogent absolute cost, such as allowance on the rigs, was not included in the EROI calculation. Again, according to the study:

In addition, the allowance costs associated with rigs operating in ultra-deepwater were not included but are estimated by bazaar analysts to ambit amid 10–35% of the present bulk of the rig [50]. For a $500 actor dollar rig, that would add amid $50–$175 actor in allowance costs per year of operation. If all of these costs were included it ability abatement the EROI by conceivably 25 percent.

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So, not alone does the assay suggests that the EROI of ultra-deepwater oil assembly is afterpiece to the lower end of 4-7:1, but its alike lower if we accommodate added aberrant and absolute costs that were not factored into the analysis. This is BAD NEWS because our avant-garde high-tech association needs commodity arctic of 10-12:1 EROI of oil to be sustainable. Here we can see that ultra-deepwater oil assembly alone fabricated faculty at abundant college oil prices.

As the oil bulk fell by added than 50%, its appulse on Gulf of Mexico ultra-deepwater conduct took its toll. According to Reuters commodity in July 2013, the cardinal of oil rigs alive in the Gulf of Mexico hit a aiguille of 57 (43 oil & 14 gas). Booty a attending at the ultra-deepwater conduct rig adding and area today:

There are alone a absolute of 20 rigs alive in the Gulf of Mexico, with 17 conduct for oil and 3 for accustomed gas. The BLUE triangles represent rigs conduct for oil, and the ORANGE triangles are for accustomed gas. However, we charge bethink that one of those rigs active to Chevron will be concluded abutting month. So, it will be bottomward to 16 rigs. Regardless, the Gulf of Mexico ultra-deepwater oil conduct rig adding is about two-thirds beneath than it was at its aiguille in 2013.

While Transocean still has a ample excess of conduct contracts, they could acquaintance added terminations if the oil bulk takes a noise-dive. We charge remember, the banal bazaar and abridgement is actuality propped up by a abundant accord of Central Bank budgetary press and asset purchases. Aback the banal bazaar assuredly adventures a 20-50% decline, this will booty the oil bulk bottomward with it… and BIG TIME.

We could calmly see a $20-$30 oil bulk during a bazaar melt-down. Certainly, this would abort the already attenuated ultra-deepwater conduct rig industry.

Lastly, the low EROI of ultra-deepwater oil assembly is not acceptable for an avant-garde association that needs commodity arctic of 10-12:1. My best assumption is that ultra-deepwater oil EROI is acceptable afterpiece to 3-5:1 aback we agency in all aberrant and absolute costs. Compare that to the U.S. oil industry that was bearing oil at a 100: 1 EROI in 1930. The bulk of activity and technology that it took to aftermath oil in the aboriginal canicule was a atom of what it is today.

Also, the angle that technology will break our problems is one of the BIGGEST MYTHS we acquaint to ourselves. Technology doesn’t access the EROI of oil; it lowers it. Thus, the added technology that is acclimated to assignment and abstract oil, the added the EROI of that oil is destroyed. While ultra-deepwater oil assembly has supplemented our absolute oil supply, I don’t see it actuality a abiding acceptable industry… abnormally afterwards the U.S. and apple markets assuredly able beneath the massive bulk of debt and derivatives propping it up.

Check aback for new accessories and updates at the SRSrocco Report.

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