Another article about the glut of new rigs

I have no idea whatsoever where they got the 1 in 6 jobs are maritime related from? I WISH!

[B]Too Many Rigs?[/B]

A flood of newbuilds coming on the market could spell short-term indigestion for the offshore industry. Will maritime jobs be affected?

By G.Allen Brooks
June 03, 2014

One in six jobs in the U.S. is directly tied to the maritime industry. A significant subset of those jobs is in the offshore industry, drilling for and producing crude oil and natural gas in the waters of the Gulf of Mexico and off the coast of Southern California, the only offshore areas of the U.S. open for exploration. Offshore Southern California is only a producing area today as exploration there has been off-limits for decades.

The public’s awareness of the importance of the offshore industry was low until the 2010 Deepwater Horizon spill from BP’s Macondo well shut down the region. The spill has altered the course of the U.S. offshore oil and gas business and indirectly that of the global offshore industry as well.

Given the extent of the earth’s surface covered by water (more than 70 percent), exploration and development of petroleum resources has barely scratched the surface. Exploration has been focused primarily on the continental shelf regions of the world while deeper water drilling is a fairly recent development. These efforts are beginning to suffer from the petroleum industry’s shift in focus to explore onshore shale deposits, especially in North America.

Birth of an Industry

The offshore oil business has experienced a colorful, albeit short, history. It spans less than a third of the modern petroleum era. The earliest discoveries of oil and gas were in places such as China and Greece thousands of years ago. In China, natural gas from seeps was tapped and shipped through hollow bamboo tubes to the coast where it fueled the distillation of ocean water for drinking. In ancient Greece, a flaring gas seep evolved into the Temple of Delphi where citizens went seeking answers to life’s most important questions.

For most of us, however, the history of the oil business dates to the early wells in Baku, Russia and Col. Edwin Drake’s well in western Pennsylvania shortly before the American Civil War.

As the industry grew, seeking petroleum resources from under the water was dismissed as too challenging. In Southern California in the 1890s tar balls on the beaches signaled oil deposits nearby. The earliest attempts to tap these resources occurred near Santa Barbara where drillers built piers into the surf, allowing them to mount drilling rigs at the end and drill wells under the water. Along the Gulf Coast, drillers tapped oil fields in lakes starting in the 1890s, but the first Gulf of Mexico well wasn’t drilled until 1937, and then from a pier extended into the salt water.

Visionaries began plotting how to drill in deeper Gulf waters, but it wasn’t until the 1950s that industry pioneers ventured out of sight of land to drill the first true offshore well. Finding the oil was one thing; figuring how to produce it was another. Initially, engineers and construction workers built wooden structures to support drilling rigs and the necessary production equipment. Laying pipelines to move the oil and gas to shore was the next hurdle.

Boom Times

From the mid-1950s until the 1970s the U.S. offshore industry grew steadily with every additional rig fully employed. Following the early 1970s’ oil crisis and the quadrupling of oil prices, offshore activity in the Gulf of Mexico mushroomed as the region represented the last great exploration frontier. Oil and gas producers desperate for more reserves and output aggressively purchased acreage at federally-sponsored offshore lease sales. To drill these prospects, an explosion in new offshore rig construction commenced. Fostered by tax incentives and creative financing vehicles coupled with multiyear contracts, the industry grew dramatically.

The surge in Gulf of Mexico activity was matched by a similar boom in the harsh waters of the North Sea. The success in the 1960s of shallow gas drilling off the Netherlands and in the southern waters of the UK was boosted with the discovery of significant oil deposits in the middle region of the North Sea and ultimately in the waters farther north. While the operating environment of the North Sea was considerably different from that of the Gulf of Mexico, the U.S. possessed the most knowledge about and skills for working offshore in progressively deeper waters and in facing the challenges from tropical storms.

Gulf of Mexico-designed drilling rigs, supply vessels, construction equipment and producing platforms migrated to the North Sea. One of the unique challenges for the industry was the discovery that the North Sea, a cold-water body, possessed a corrosion rate exceeding that of warm-water regions. The initial solution was to just make everything from thicker steel. Later, Europeans experimented with exotic metals and different materials such as concrete.

Today, the global offshore drilling rig fleet is 835 units strong and growing. Fleet growth, while a necessary and desirable development long-term, may nonetheless be creating short-term indigestion for the industry. As of February, the offshore drilling fleet is projected to receive 72 more rigs by the end of 2014 and an additional 143 over the following two years. Many of these rigs do not have contracts – the result of speculative ordering based on beliefs about oil companies’ future exploration needs.

Unfortunately, rapidly rising drilling and production costs have forced a strategy shift by these companies. Investors are now demanding producers boost their profitability and share more of their cash flows with their shareholders rather than trying to merely add to their reserves. This means a new trajectory for the offshore business.

After growing 15 percent a year for the past two years, up from eight percent in 2010 and 2011, Credit Suisse estimates spending must grow by 18 percent this year to fully employ the offshore fleet. Surveys of oil industry intentions point to slower spending in 2014 than in recent years. If these plans become reality, it is hard to see full employment for the offshore rig fleet. Should global oil prices decline anytime soon, the offshore industry’s profitability could experience a painful period indeed.

According to a study from Quest Offshore prepared for the American Petroleum Institute, worldwide offshore oil production in 2010 totaled 15.4 million barrels per day or about 18 percent of global oil production. Offshore oil output has grown to about 30 percent of total oil production today according to energy analysts Infield Systems. However, with the North Sea, the Gulf of Mexico and the Middle East populated with large, old fields, the rate at which offshore oil’s share of global production can grow is limited by the high production decline rates of these older fields.

The offshore industry needs to find and develop new, large oil fields. Hampering those efforts are the increased regulations imposed by the U.S. government and designed to protect against another Macondo-like incident. Those rules are spreading to other offshore basins as well, impacting activity and costs. The combination of stricter regulation and more expensive new drilling rigs is pushing up daily rental rates and choking off growth.

Slowdown in Growth

A capital spending survey of the international oil and gas industry issued in January by the investment firm of Cowen and Company showed that global exploration and production spending will increase by only four percent in 2014. North American spending is projected to increase by 4.5 percent to $185.5 billion while international spending will grow by 3.8 percent to $501.6 billion.

Within the survey were several interesting trends. Of those companies operating offshore, only 23 percent, or less than half of those in 2013, plan to increase their spending. Almost 50 percent plan less spending in 2014 than in 2013. Drilling in waters deeper than 5,000 feet should benefit from higher spending in 2014 as 46 percent of the companies surveyed plan to spend more, with 42 percent spending amounts similar to last year. This mixed bag of spending trends has dampened the euphoria for offshore drilling stocks, at least for the near-term, but the long-term future remains bright.

New Maritime Jobs?

An industry positive is that if the growth rate of the offshore business eases, drilling companies may have an easier time staffing their new rigs as they retire older units, thereby freeing up current workers. The 76 new “floaters” destined to enter the global fleet by 2017, however, present a challenge for the maritime industry as it needs to train upwards of 2,500 new workers to support them.

Floating drilling rigs are considered ships for regulatory purposes when not anchored during drilling, meaning they must maintain maritime crews in addition to drilling crews. For maritime workers who prefer the luxury of monthly work assignments and locations closer to home, offshore drilling can be an attractive work choice. Because the global shipping industry retrenched following the 2008-09 recession, the growth of the offshore drilling business was not constrained by worker shortages. Projections for faster global economic growth, at the same time the offshore drilling business is rapidly expanding, may create an employment challenge for the maritime business, or possibly a great opportunity for workers. We shall see.

We shall see indeed…