Why deepwater is going to have a tough time to recover in the future

It’s all fine and good to talk about how costs must be brought down for exploration and production in the deepwater but HOW TO BRING THOSE COSTS DOWN is the hard nut to crack? Every piece of equipment or service required by the operators is going to be more complex and that required for land drilling and production so that in and of itself places the deepwater at a cost disadvantage provided that fracking can keep opening up supplies of tight oil on land. Everyone who is fully invested in deepwater is going to have a very tough time competing in a world awash in land based crude hence why Conoco Phillips decided to pull the plug on their offshore ambitions. There simply is not going to be enough profit to be made to justify the expense.

[B]Bringing down the cost of deepwater developments[/B]

Written by Jerry Lee Tuesday, 24 November 2015 12:40

The high costs surrounding deepwater developments and the low price of oil is a challenging combination for operators.

For deepwater operators, such as Total, this challenge must be carefully navigated in order to sustain deepwater investments. Khalid Mateen, vice president, engineering and technology at Total, gave his insights into the challenges and potential remedies that lay ahead in a keynote speech at the seventh annual Teledyne Technology Focus Day on 19 November 2015.

The immediate issue for deepwater developments is the current low price of oil. Developing deepwater fields is a cost intensive process. Considering transportation, services, qualifications, permitting, and infrastructure costs, capital expenditure (CAPEX) costs are much higher than onshore developments. Similarly, operating in remote locations, where risk must be low, and safety and preparedness must be high, operating expenditure (OPEX) is also much higher than onshore.

“In the last 10 years, we’re looking at the doubling of both CAPEX and OPEX, when it comes to deep offshore,’ Mateen said. “Even at US$100/bbl, these costs were not sustainable, and when it comes to $40/bbl, one obviously cannot justify this capital cost.” The sources of capital cost increases comes from many areas including the complexity of current operations, and the increasing remoteness and complexity of the fields being discovered.

As the price of oil rose in the early 2000s, operators were able to justify designing operations that were more flexible and could respond to a greater number of scenarios. However, this resulted in complex designs, which involved more engineering, and greater costs. Mateen explained that there was a time when operators were able to afford more costly project specific specification, however, in the current cost environment, operator must now work with the service companies to discuss what acceptable specifications are. If deepwater operations are to survive going forward, the luxury of unnecessary customization of facilities and individual company specifications of components must cease; industry needs to develop a more cost-effective “good enough” mindset.

“We have to do things simply, rather than making designs which can do everything, let’s go for something that is good enough for what you’re trying to do; simplify things,” Mateen said.

By simplifying, standardizing, and industrializing deepwater technologies, 25-30% reduction in lead time and costs are projected, Mateen told the crowd. However, these likely won’t save the industry, he said. They are a necessity, however, there is a limit to how much they can save.

Mateen said that these limits are based on two reasons: first, the resources we are developing are no longer come from massive fields, which limits the economic and cost-saving potentials; second, the industry cannot create an economy of scale like commodity industries such as automotive. As an example, the automobile industry produces millions of vehicles every year; however, in the oil and gas industry’s most productive year, 2013, the industry delivered 632 Xmas trees, he said. Thus, the industry must be mindful of the limits that standardization and industrialization have, and must set reasonable expectation, but more importantly, the industry must realize that more must be done.

Project inefficiencies are not the only source of prohibitive CAPEX. The fields themselves are also a contributing factor, Mateen said. Considering the fields as a whole, more are being found away from shallow depth, far from current infrastructure, and in smaller quantities. These isolated fields are not large enough to require standalone facilities, and, if they are to be developed, require costly tie-backs to existing infrastructure. The oil itself is also found to be more complex in nature, resulting in greater costs associated with flow assurance management to ensure greater reliability and operability at deeper water depths, Mateen said.

These issues may be overcome with the willingness of the deepwater industry to continue investing in technology developments. For example, Mateen said, with more isolated fields requiring greater length tie-backs, improvements in pipeline cost could be realized by developing single pipe architecture, and lowering laying costs, or research into composite material and subsea high-integrity pressure protection system (HIPPS). Also, the flow assurance issues associated with complex oils can be reduced with greater investment into remediation technologies, more reliable prediction tools, and developing a better understanding the nature of the oil.

“[Total] firmly believes that technology and constant innovation is what will bring us acceptable economic profitability, which will allow us to continue deepwater development,” Mateen said.

However, with the prohibitive costs of new technology developments, collaboration is key to its feasibility.

Technology qualification is an area that can see value from collaboration, he said. When taken into perspective, it is unnecessary for the same technology to be qualified multiple times to specification customized to individual companies.

“Companies should get together and come up with an industry acceptable criteria for new technology qualification. So you do it once and everybody can use it,” Mateen said. “I think there is a reason for industry to sit together to work on this so that we can avoid the unnecessary cost and waste that we incur qualifying technologies multiple times.”

Industry-wide collaboration also has the potential to lower the technology costs upon commercialization, as a result of competition during the development process. FMC Technologies and Subsea 7’s joint industry projects (JIPs) to develop 20,000 psi rated equipment exemplify these ideas. Each JIP can qualify their equipment and all parties involved may use them, and because both JIPs are doing similar work, the commercialized cost of the technologies must be competitive, lowering deepwater development costs.

“This is high time that we press on with technology development because that’s the only way that the required profitability can be ensured,” Mateen said.

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Interesting read. Exxonmobil came out and said basically the same thing a year or so ago. Not really new news.

But I don’t buy their whole BS excuse about needed high dollar crude to justify a major project. One of the majors, I can’t recall which one, said that one of the upcoming deepwater GoM developments would be sanctioned even if crude were $10/bbl. These fields produce for 20+ years. They take the long view in that respect.

If you look at this inflation adjusted oil price chart the oil price hardly went above $40 between 1986 and 2004. There were still plenty job in those times. Due to having a 10 year period of high oil prices, salaries and costs have rocketed. Oil companies have to reduce their costs to pre-2004 levels, and mariners have to reduce their salary aspirations as well from $136+ salaries to $40 salaries.

I am just glad I didn’t start construction on my beach house as scheduled. Be hard to pay for it on the $40 dollar salary.

The deep water salaries for larger vessels requiring unlimited (or 10,000) ton licenses with unlimited DP certicates (or comparable engineering skills and credentials) are not going to fall below a reasonable level (at least not for too long). The days of having three times as many overpaid under skilled mates as the COI requires are probably over. ABs are a dime a dozen and unlikely to be so overpaid next time.

I hope the Gulf oil field comes back in the next couple years. A rising tide lifts all boats.

[QUOTE=Capt. Lee;174349]I am just glad I didn’t start construction on my beach house as scheduled. Be hard to pay for it on the $40 dollar salary.[/QUOTE]

There are probably a lot of stupid people who over exposed themselves to debt who will be in trouble now. Anyone with an ounce of sense should know that the oil and gas industry is volatile and the good money won’t be there forever.

[QUOTE=follow40;174356]There are probably a lot of stupid people who over exposed themselves to debt who will be in trouble now. Anyone with an ounce of sense should know that the oil and gas industry is volatile and the good money won’t be there forever.[/QUOTE]

I can agree with that. I wouldn’t call them stupid people. I would just say people. One lacking educational issue in America is finances. It is up to individuals to educate themselves on it. Even with eyes wide open it can be easy to give in to the urge to get that new truck or car. To finance the mini mansion. To take those expensive trips.

Luckily my wife has a more conservative view on finances. Take my situation for example and my story is very similar to many in the oil and gas industry. I have never been without a job. I have never made less the next year than the year before (that is soon to change). I drank the corporate kool-aid. I work long hours for a month or more at a time. So don’t I deserve that new truck, that trip to Europe, that nice house. You can see how easy it would be to convince yourself that you and your family not only deserve it but are even entitled to it. I have spent most of my adult life in debt.

I read a book and I know I have mentioned this before. Dave Ramsey total money makeover. It helped me become debt free and can help anyone if they truly put the principles into practice. I knew this gravy train wasn’t going to last forever and I have been preparing for this for years. What I did not know is the severity of this cycle. My father went through it and now it’s my turn. The difference is I will be doing it debt free.

I wish everyone that is going through this the very best. Remain positive in your life even in the face of defeat.

[QUOTE=follow40;174356]There are probably a lot of stupid people who over exposed themselves to debt who will be in trouble now. Anyone with an ounce of sense should know that the oil and gas industry is volatile and the good money won’t be there forever.[/QUOTE]

This is what the tugboat companies told us when we asked why wages had not risen much since the 80’s and why the oil field guys were suddenly making twice as much.

[QUOTE=Capt. Lee;174389]Dave Ramsey total money makeover. It helped me become debt free and can help anyone if they truly put the principles into practice.[/QUOTE]

It’s an excellent reference to get out of debt. Just please ignore his investing advice!

[QUOTE=c.captain;174014]It’s all fine and good to talk about how costs must be brought down for exploration and production in the deepwater but HOW TO BRING THOSE COSTS DOWN is the hard nut to crack? Every piece of equipment or service required by the operators is going to be more complex and that required for land drilling and production so that in and of itself places the deepwater at a cost disadvantage provided that fracking can keep opening up supplies of tight oil on land. Everyone who is fully invested in deepwater is going to have a very tough time competing in a world awash in land based crude hence why Conoco Phillips decided to pull the plug on their offshore ambitions. There simply is not going to be enough profit to be made to justify the expense…[/QUOTE]
Basically what this article is saying is that its too expensive to develop new technology for deep water operations, and not worth the money it would cost to operate with the current technology? How would an increase in oil prices affect this? In addition is this affecting blue water trade in any way?
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[QUOTE=Christopher Rothwell;174536]Basically what this article is saying is that its too expensive to develop new technology for deep water operations, and not worth the money it would cost to operate with the current technology? How would an increase in oil prices affect this? In addition is this affecting blue water trade in any way?
.[/QUOTE]

I think they’re saying with the current price of oil costs have to be brought down but can they be lowered enough to still allow for money to be made (@ $40/bbl).

From the OSV side I can tell you the most expensive part of the operation is the personnel. When 40-50% of your daily operating costs are associated with personnel, it puts a strain on the business to make enough money to survive. The boom we just saw will probably have a sting for quite some time and lead to long term ramifications in relation to what mariners are paid. Even in a good market the wages that were paid over the last 5-7 years were too high. For long term stability of the workforce companies don’t want extreme lows or extreme highs in pay, somewhere in the middle is desired. If you look at the demographics of the GOM OSV market its ludicrous to think how many people were making six figures compared to their education level and/or performance. A typical compensation tree of a business should look like a Christmas tree with the owner/CEO at the top, Executive management below, Senior management, middle management, and trickling down to your lowest laborer. It needs to be that way for a reason, the more responsibility you have the more pay you should receive. The last several years didn’t follow that model and I know at several companies it caused lots of unrest internally. How does a Captain who is responsible for (1) boat make more than a person that manages (6) vessels? And Captain’s making more than the Ops Manager who may be responsible for 20-30 vessels?

It was good for lots of people while it lasted but the model has to be realigned into what will work long term. And I think less money should be paid and more should be geared towards benefits for the employee in the future. Companies need to pay more toward their employees insurance premiums, more matching in the 401k program and scale back the day rate by a few percent. For the guys chasing the last dollar it won’t be popular. For the folks who are looking long term it will be a no brainer.

The best way to reduce crew costs would be to cut back crew sizes, especially all those “training mates”, to not too much more than the COI requires. Also, cut back on some of the extra credentials that companies ask for beyond what the USCG requires. A lot of companies excess personnel costs are self inflicted or oil company inflicted.

Those $425 a day high school drop out ABs need to be more like $225.

A captain should be paid a lot more than a port captain that goes home every night.

Sure, the Ops Manager and senior managers should make more.

It will be interesting to see how much extra personnel and training the oil companies demand next time. They have to make up their minds how many sets of suspenders and belts they want to wear.

[QUOTE=Saltine;174601]From the OSV side I can tell you the most expensive part of the operation is the personnel. When 40-50% of your daily operating costs are associated with personnel, it puts a strain on the business to make enough money to survive.[/QUOTE]

On a Chouest OSV contracted to BP a year ago, before pay cuts or day rate renegotiations, the crews day rate as a whole was less than $10,000. I chose the BP contracted vessels because BP mandated crew above and beyond what the other majors had so those boats had more personnel than any other OSV.

At that time those boats made day rates of over $40,000…

[QUOTE=Saltine;174601]It needs to be that way for a reason, the more responsibility you have the more pay you should receive. The last several years didn’t follow that model and I know at several companies it caused lots of unrest internally. How does a Captain who is responsible for (1) boat make more than a person that manages (6) vessels? And Captain’s making more than the Ops Manager who may be responsible for 20-30 vessels?[/QUOTE]

When the ops manager can be arrested if the vessel has an accident or spills oil then he has a right to complain about making less than the Master of the vessel. A manager MAY have more responsibility (that’s debatable) but he has far, far less (read, zero) LIABILITY.

[QUOTE=tugsailor;174606]The best way to reduce crew costs would be to cut back crew sizes, especially all those “training mates”, to not too much more than the COI requires. Also, cut back on some of the extra credentials that companies ask for beyond what the USCG requires. A lot of companies excess personnel costs are self inflicted or oil company inflicted.

Those $425 a day high school drop out ABs need to be more like $225.

A captain should be paid a lot more than a port captain that goes home every night.

Sure, the Ops Manager and senior managers should make more.

It will be interesting to see how much extra personnel and training the oil companies demand next time. They have to make up their minds how many sets of suspenders and belts they want to wear.[/QUOTE]

Well a lot of the extra personnel are necessary in a fair to great market. As an operator, the last thing you want is having new employees to your company being thrown onboard in a Masters/Captain/Chief position without any knowledge or history of their performance. It’s a big gamble to put someone in charge without watching them first in a lessor position. It’s necessary to have guys in place, or in waiting, for a new vessel to come out or a position to come available. It’s a necessary evil.

i personally believe that the COI requirements on OSV’s and FSV’s are too low and always have been. And your absolutely right, a $425 AB needs to be in the $200 range and the whole pay scale needs to come down. But in the AB’s defense there are a hell of a lot of Captains who dropped out of high school as well.

At the end of the day it’s economics for long term stability and not personal. A lot of people don’t get that.

Let’s say the lowest laborer’s job is highly unpleasant for some reason so that the only way to get people to do the job is to pay them an awful lot. Think old school garbage men. They were paid well even though the job required no education or training.

This is why blue water maritime jobs pay so well. Most normal people don’t want to be away from their families and real life for so long. Brown water or coastwise jobs tend to pay less because they’re less time away from real life.

Nothing dictates that a supervisor’s pay should be higher then those he supervises. If the supervisor’s job is sufficiently less unpleasant then his workers then his pay can be, and in many cases, is less.

When the job is otherwise not very desirable it costs more to entice a person to do it. The captain of one boat likely spends six months away from his family. The manager of six boats spends every night and every weekend with his family and friends.

[QUOTE=Saltine;174615]Well a lot of the extra personnel are necessary in a fair to great market. As an operator, the last thing you want is having new employees to your company being thrown onboard in a Masters/Captain/Chief position without any knowledge or history of their performance. It’s a big gamble to put someone in charge without watching them first in a lessor position. It’s necessary to have guys in place, or in waiting, for a new vessel to come out or a position to come available. It’s a necessary evil.

i personally believe that the COI requirements on OSV’s and FSV’s are too low and always have been. And your absolutely right, a $425 AB needs to be in the $200 range and the whole pay scale needs to come down. [/QUOTE]

$425/day is about right if adjusted for inflation over the last 30 years and considering its a 12 hour day. I have never bought into the idea that those that work for a living should sacrifice a decent living and live like serfs/servants so that those at the top can live like kings. The AB making $425 didn’t hold a gun to anyone’s head or even have a union speak for him to get that money. Someone running a company decided he was worth it.
The average family with both people working makes a little over $50,000/yr in the USA with flat wages for over 20 years. That this has become normal to an entire generation is a sad commentary on the state of affairs in the country. The few that make a living wage should not feel guilty. The majority not making a living wage should not be jealous just pissed off.
I don’t blame working folks like ABs for bad business decisions made by the really really smart people running these companies or the normal boom and bust of the oil business.

[QUOTE=Saltine;174601]How does a Captain who is responsible for (1) boat make more than a person that manages (6) vessels? And Captain’s making more than the Ops Manager who may be responsible for 20-30 vessels?[/QUOTE]

It’s called a license. I invite everyone that gasps at the pay scale to go get their OS and get started on their new 6 figure income… It’s easy, anyone can do it.

Oh, and a side note: Captain is responsible for the lives within… Ops manager don’t really give a F*@% as long as his bonus isn’t cut.

[QUOTE=tengineer1;174633]$425/day is about right if adjusted for inflation over the last 30 years and considering its a 12 hour day. I have never bought into the idea that those that work for a living should sacrifice a decent living and live like serfs/servants so that those at the top can live like kings. The AB making $425 didn’t hold a gun to anyone’s head or even have a union speak for him to get that money. Someone running a company decided he was worth it.
The average family with both people working makes a little over $50,000/yr in the USA with flat wages for over 20 years. That this has become normal to an entire generation is a sad commentary on the state of affairs in the country. The few that make a living wage should not feel guilty. The majority not making a living wage should not be jealous just pissed off.
I don’t blame working folks like ABs for bad business decisions made by the really really smart people running these companies or the normal boom and bust of the oil business.[/QUOTE]

I do not blame mudboat ABs for poor corporate decisions. I did blame mudboat ABs coming on here and complaining that they were only getting $425, but that they were worth a lot more. That’s about what a crew boat captain made. It’s not much less than a typical, fully licensed tugboat mate with skills makes.

I agree that many of us are making less now than we did 30 years ago, when adjused for today,s much higher cost of living in the real economy.

[QUOTE=tugsailor;174647]I do not blame mudboat ABs for poor corporate decisions. I did blame mudboat ABs coming on here and complaining that they were only getting $425, but that they were worth a lot more. That’s about what a crew boat captain made. It’s not much less than a typical, fully licensed tugboat mate with skills makes.

I agree that many of us are making less now than we did 30 years ago, when adjused for today,s much higher cost of living in the real economy.[/QUOTE]

True. If a mud boat AB is worth more than a tug mate that does twice the work something is screwy on both sides of the equation.

[QUOTE=tengineer1;174633]$425/day is about right if adjusted for inflation over the last 30 years and considering its a 12 hour day. I have never bought into the idea that those that work for a living should sacrifice a decent living and live like serfs/servants so that those at the top can live like kings. The AB making $425 didn’t hold a gun to anyone’s head or even have a union speak for him to get that money. Someone running a company decided he was worth it.
The average family with both people working makes a little over $50,000/yr in the USA with flat wages for over 20 years. That this has become normal to an entire generation is a sad commentary on the state of affairs in the country. The few that make a living wage should not feel guilty. The majority not making a living wage should not be jealous just pissed off.
I don’t blame working folks like ABs for bad business decisions made by the really really smart people running these companies or the normal boom and bust of the oil business.[/QUOTE]

If we’re talking about adjusted for inflation then you probably have to revisit lots of peoples pay. Leave inflation out of the argument, I disagree with the fact that an A/B should get paid $425/day or roughly $103,000/year. I know someone at the top of the company decided this was appropriate for his company, I’m not arguing that fact. My opinion is that its grossly overpaid and no one has to agree or disagree. When the bulk of someone’s day is spent cleaning or doing deck maintenance I just can’t see the numbers making sense.