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When we talk about offshore, it'll be limited to a Gulf of
Mexico. And then perhaps as Sheila and Richard deem necessary, they
can work in some examples from Canada and Latin America. So with
that said, I think what I want to do is just to set the tone for
everyone, just go around the virtual room and get everyone's
assessment for what they think the situation is for their
particular area. So Sheila, can you please walk us through what
offshore costs are looking like now and in the near and longer term
future?
Sheila Moore:
Okay. So for our offshore costs, when we look at it even
globally, or even North America, it's going to be extremely
depressed. And when we look at our forecast going forward, we pay
attention to what's happened in the past, the last 2014, 2015
downturn, we saw costs decrease quite a bit. And service companies
have been trying to recover back from that decline. And when we get
to the end of 2019, we saw that we had a little bit of a price
recovery in some markets. And then in the first quarter we had the
downturn and the oil price coupled with COVID. And so what we're
seeing is any of the gains or price gains that service companies
might've achieved since the last down turn are going away. And so
they're basically put into a worst position. And so all this
combined together, we're going to see changes in overall supply
chain.
So you're going to see changes in your rigs who's going to be
able to be there at the end. So with all this changing and
companies, we anticipate more will go bankrupt. We're going to have
to restructure. And even if we stay around $40 with oil for
offshore, the demand is going to be still pretty low for activity.
So when we do our forecast going out this year and next year, it's
going to be extremely muted and driven by the low demand. We don't
see activity ramping back up significantly in the next two years.
Our forecasts out for our offshore indices are just below inflation
moving out. So, I mean, it's going to be extremely weak market
overall for offshore. So it's extremely depressing.
I don't know if Richard is seeing anything better for the
offshore vessel markets, but it's not looking good for offshore in
general. And we have gotten a couple of client questions about what
would happen if activity does pick up? And so they're all concerned
about whether or not there's going to be ample supply ready,
especially since they're stacking so many rigs and retirement,
they're going to end up retiring more. Will there be a price spike?
It's hard to see that happening.
David Vaucher:
So, on that point then, that's a good segue into Richard what
you're looking at. I guess there's a two part question, Sheila teed
up there. The first one is what are you seeing now in terms of
where the utilization is at given the scene that Sheila just set
and do you expect that to rationalize downwards then to meet where
demand is looking to go?
Richard Sanchez:
The offshore supply vessels, which is the main market that I
focus on, they have direct correlation with the drilling rigs. In
fact, they depend on offshore drilling to give them their base of
activity and work. They're at the lowest point that we've seen I
think ever to be honest. The other comparison might be to the 1984,
'85 crash in offshore oil and gas, which hit the market really hard
back then. But you still had, in the 85 crash, you still had a
large base of activity. So it was largely a jack up market then. In
early 84, I think you probably were looking at more than a hundred
rigs jack ups working on the offshore Gulf. After the crash, it
came down to something like 70 rigs. And so while that was
significant, there was still a lot of work there for the vessel
owners to do.
This time around we've seen a severe constriction in the use of
the boats. We've had, in May, we had a huge number of boats that
were released from jobs and were mostly sent straight in shore for
layup. The vessel owners are suffering probably through one of the
worst downturns they've ever had. 2014 was really bad downturn for
them. But even going into that, you still had a big backlog. One of
the real differences going into this more severe downturn now,
which was really created by COVID's destruction of demand, demand
for oil, there's no real supports there. On the rig side when we
went into the 2014 downturn, the rig companies had a huge backlog
of months of wells going forward that they could count on as future
income. That's been gradually eroded over the last four or five
years.
And because the contract structures for the rigs offshore has
been significantly shorter than in the past, when we were in 2014,
those rig companies and the oil companies were going into that
downturn with sometimes holding three, four year contracts on the
rigs. This time around, we have a lot more short term rates where
they only chartered the rig for a few wells, maybe six months to
nine months. And so that means that now, as the downturn is getting
more severe, and we're starting to see the budget cuts that were
announced early in the year really take effect and show up as
cancellation of drilling programs, it's just getting worse and
worse.
And in fact, just this morning, I was looking up Rig Base, which
is our marketing intelligence tool for the rigs. And I saw there
were two more cancellations. The Pacific Sharav had its last well
canceled. It's currently with Total. It was supposed to be going
back to Murphy. And Murphy went ahead and just decided they weren't
going to do the work they were planning with it in Mexico. Now they
still went ahead and contracted the rig for some
additional wells starting in the second half of 2021, but that
doesn't really help the rig contractors here in 2020 when they're
really suffering. There was another one in the Pacific, Khamsin, I
believe it had its remaining well with Ecuador canceled. And while
it's still working now, it's going to be rolling off in a month or
two.
David Vaucher:
Sure.
Richard Sanchez:
And I expect we could continue to see more cancellations of the
actual rig schedule.
David Vaucher:
So, okay. So unfortunately, if anyone was tuning in for good
news, Sheila and Richard did not set a great tone and I guess
spoiler alert, I don't think Reed's going to be able to make things
any better. But I guess Reed, by providing some high level numbers
in terms of production and cap ex, what does the scene look like
now for U.S. onshore going forward, particularly as it relates to
the awful state we were in just a couple of months ago? Are we out
of the woods or is it going to be still a hard road ahead for
us?
Reed Olmstead:
Well, I'll put it this way. The story is brighter in the sense
that the hurricane came through and we thought we lost everything,
but in fact, the toilet is still a fixed to the floor. So it's bad,
but it's not as bad as we thought. So where we are, where we're
thinking. Look, we've all lived through this in every sector. I
mean, even everybody at IHS Markit has lived through this with our
clients and whatnot. I would say again, the worst is behind us and
the outlook is brighter, but that's only because the toilet is
still bolted down. So we see cap ex this year, we're expecting it
to come in around $40 billion, which is pretty low. And the real
kicker on that is look, 40 billion but we were expecting 84 to 86
billion at the beginning of the year. And that's what we were
tracking, right?
So the first quarter of the year operators spent a third of
that. So you can take that 25 billion or 22 billion and say,
"That's already spent." That doesn't leave a lot of money for the
remaining nine months of the year and we're on pace for that. So
this year is horrendous and you can look at anything out there, any
commentary from operators, service industry, look at how long a
house stays on the market on your block and realize it's bad across
the board. And oil and gas is not unique in this. So that said, the
bright side, the bright side is next year. It's going to be bad
this year and we know that. We've seen the industry really respond
acutely to this problem. So we saw a lot of shut-ins. We saw OPEC
respond. And so the imbalance has really gotten... We had this huge
overhang, this huge supply imbalance and that's really gotten
worked out much faster than a lot of people were expecting.
We even were very aggressive on our expectation and we were
behind the ball on how quickly this would work out. So that is to
say, things are not as bad as they used to be and next year will be
better. In fact, I've been looking at rigs, rig count is actually
starting to come up. We tromped on lower 48 onshore activity at
about 223 back early July. And we hit 50 last week by IHS Markit
count. So rigs are coming back. We're seeing shut-ins come back and
next year it's going to be even better. So next year we're going to
be at about $52 billion of upstream cap ex, upstream onshore. And
that's a good thing. And it's going to continue to go up from
there.
The other good thing that we're seeing is a shift in the
business model. And I say that as operators are maintaining their
commitment to a shift in their business model as returns based as
opposed to growth. And we saw that starting to play out. And that's
been a story that we've talked about for a couple of years, that
they're really starting to be very good financial stewards of
investor money. Now, David, you asked if there's a bright side and
while I've talked about, it's not as bad as it used to be, that's
not really a bright side. We've talked about a shift in the
business model. That's not really a bright side. You want a true
bright side - how about gas prices above $3.50 next year?
David Vaucher:
Wow.
Reed Olmstead:
And that's our average. And there's a neat little interplay
between oil and gas. And this is a story that we started developing
a few months ago, and we're really starting to get our mind wrapped
around it and put some really robust analysis behind it. But you
drill a well in the Permian for oil and you get some gas and that's
associated gas, it really doesn't factor into a lot of the
economics. In fact, we saw the reports of flaring and venting and,
"We shouldn't be doing this." Well now what was going to happen was
a third of the gas market in the U.S. was going to be this gas that
was produced for... Wasn't based on economics, that's 30 BCF a day.
And we're going to start seeing that decline. Not go away, but
definitely not grow into our demand outlook. And so what that means
is we have less free gas. That means we've got to have more gas
activity that's driven by gas economics. And to get that you got to
have a rising gas price.
So we're actually very bullish on gas price going into next
year. Really it kicks off around fourth quarter and that's going to
be the bright side of where we see the industry going. The oil is
going to come along and the oil will survive, but the gas is the
author of the story.
This article includes information from an audio conversation
and has been professionally transcribed as accurately as possible.
Some words or phrases may have been unintentionally
excluded.
