[evilgenius]

Right now, at an oil price of about $60 for WTI, almost every single off-shore driller's stock price is hovering only a few percentage points above a 52 week low. If you do some research many people are speculating that oil will come back, but most of them are basing that upon a view that says that the industry can take its low rig count and manage a way forward - using fracking. They are talking about a mostly land based near future. This doesn't bode well for the health of off-shore exploration and production.

I read somewhere that in order for off-shore to blossom the number of drill ships will have to come down. Apparently there are too many ships seeking exploration contracts. This could be accomplished a number of ways, but the most likely seems bankruptcy on the part of a driller or two. In light of how a company like Vantage, which has one of the most modern fleets in comparison to say Trans Ocean, is looking like it might go under this might not be the most efficient way to reorganize the industry. The best way would, obviously, be to retire fully depreciated and aged ships across many companies, but it doesn't look like there will be a program developed to accomplish that, not that I have heard of.

What do you think about off-shore? Will it enter a stagnant period? Will it rebalance and succeed going forward? Will it unexpectedly boom? Will it practically die?

[wildbourgman]

We are stacking ultra-deep water rigs, we are slowing and eventually stopping the new builds for a while. It's happening!

[C8]

A problem for off-shore vs. fracking is nimbleness. Fracking allows a far quicker start up and shut down process- this allows it to respond quickly to price/demand changes- right now fracking is the oil/gas industry's new best friend. Off shore is too intensive, expensive, and slow moving by comparison. Its going on the back burner for now as far a new projects.

[wildbourgman]

One other point C8 is that for a deep water well that works out, it's so much more prolific of a producer. Now you can have a 200 to 500 million dollar dry hole too.

In the Gulf of Mexico and other parts of the world deep water is still very strong. I'm having a real hard time figuring out what the next move is. I've been feeling this downturn coming for a while (since mid 2013), long enough that my oilfield co-workers thought I was out my mind. My they are right!

[phaster]

$this->bbcode_second_pass_quote('wildbourgman', 'O')ne other point C8 is that for a deep water well that works out, it's so much more prolific of a producer. Now you can have a 200 to 500 million dollar dry hole too.

[wildbourgman]

Phaster, I would hate to give anyone bad advice and I believed in what I thought would be good advice I'd be rich myself.

I think that we have a lot of waste, inefficiency, and down right ridiculously stupid people in the oil industry as a whole and especially in Deep water.

For instance for the average worker on a Deep water oil rig you might wake up and go to a safety meeting, then you fill out forms so you can have another meeting at the actual job sight. Then you get all the protective gear together and prepare to start a task, but then a Safety Supervisor audits you prior to doing your task and questions you about the job, which slows down the operation, so this leads into break time. After break you have to have another job safety analysis because a new employee came to help you, so finally you get ready to START that task, but right when your ready to get started the rig manager decided to have a fire drill. You go to the fire drill and then you have a post drill meeting which rolls right into the 11:30 pre tour meeting for new people coming to work. By the time the meeting is over it's time for lunch.
So you go to lunch, which is nice. Well after lunch you get dressed in your work clothes and go back to the work site to get started and you find that someone has taken the gear you need in order to complete the task safely. So you then go fill out a requisition and go to the store room to get new gear. By the time the store keeper shows up and gets you your gear it's time for afternoon break. Ok after break you go straight to the work site because you really need to complete this task but then, you notice severe lightning and rain is in the area. So you pick up your gear and wait for the weather to pass. Once the weather passes you finally get to work and you find a loose pipe fitting was sitting on an I-beam in your work area, so the job is stopped because that is a potential dropped object. Potential dropped objects must be investigated, pictures must be taken and the entire area must have a hazard hunt to look for more potential hazards. Prior to taking pictures you must have a hot work permit filled out, signed by the rig manager, the area must be checked with a gas meter. Then the pictures, investigation and hazard hunt can take place. After the hazard hunt you have a post hazard hunt meeting where you talk about what was found. At this point you go double check to make certain your tools are picked up and your work area is clear and you shut down for your tour. You then go write down notes for your relief, you turn you job duties over to your relief for the next 12 hour tour.

Now that's why I don't feel comfortable telling to invest in companies that drill wells in Deep water.

[ROCKMAN]

"Off shore is too intensive, expensive, and slow moving by comparison. Its going on the back burner for now as far a new projects." Actually just the opposite. Just look at the onshore rig count drop in the last 6 months. That's not "nimbleness"...that's a panic reaction. What you describe as nimble I would classify as vulnerability. OTOH if an operator were planning on drilling DW wildcat in 2015 why would he worry about the current price of oil if his well makes a major discovery but it will take 5 to 8 years before he sells the first bbl of oil? Or consider during the last 3 o4 years he's made a new discovery and drilled several confirmation wells. So now he's ready to commit $300 million to building the production facilities. The drop in oil prices might give him a bit of concern but it will still take 18 months to build the facilities and then another 30 months to drill the development wells. Thus he isn't worried about the price of oil in 2015 but the price in 2019. So what about the company that made a big discovery in 2008, drilled confirmation wells and built facilities from 2009 to 2013, drilled development wells in 2013-14 and bought on his 300,000 bopd last December just in time to get hit with low oil prices? Is he going to reduce production and wait for higher prices? Extremely unlikely: cash flow is an even more powerful King in such operations.

Running credible future economics on DW operations is virtually impossible. Again think of the 5 to 8 year time lag in the decision making process: when have you ever seen anyone correctly predict oil prices in such a time frame? Current low oil prices might cause delays in some DW projects but for the most part they are more nimble in the sense that the price drop won't disrupt their timing very much.

And if you think the Wildman's description of the process on a DW rig drags on painfully slow you can imagine how much slower the response time is back on the bank in the operator's office. I've had DW meeting rescheduled 3 to 6 months out. LOL.

[evilgenius]

What are the stages of an off-shore project where it can be put on hold? Are any of these stages worse for a project than any of the others? And when they do go down what does it cost at each stage to stay down? Maybe the answers are different for deep as opposed to ultra-deep water?

[wildbourgman]

$this->bbcode_second_pass_quote('evilgenius', 'W')hat are the stages of an off-shore project where it can be put on hold? Are any of these stages worse for a project than any of the others? And when they do go down what does it cost at each stage to stay down? Maybe the answers are different for deep as opposed to ultra-deep water?

[ROCKMAN]

evil - I can just offer some ballpark scaling. Once a discovery is made any confirmation wells can be delayed easily since even if a company rushed it could take a year or more to get a rig. Rig availability has always been a choke point for DW ops. Once the field size has been confirmed contracts for production facilities can be let. A company could drag their feet at that time but remember: if they rushed it could still take a couple of years before delivery. So they might not like oil prices today but what will they be like in a couple of years? But even if prices have recovered and they let the construction project it might still be 2 to 4 years before they might begin selling oil. So even if they are satisfied to go forward at that point what if oil prices hit the skids again in several years when they are ready to produce?

As long as a company has the capex to move forward they typically don't delay from stage to stage simply because they know they can't accurately predict oil prices so many years out. Consider how high prices were just 12 months ago: how many companies delayed DW projects in the first half of 2014 because they anticipated oil falling 50% less than a year later? When it comes to DW development you just pull the trigger and hope like hell everything works out OK many years down the road.

Think about Shell Oil drilling in the Arctic. Low oil prices haven't delayed their plans: even if they hit a huge discovery it could easily be 7 to 10 years before they make first oil sales. Do you think anyone at Shell believes they can come close to accurately predicting the price of oil in 2022? 2025? For some geologists a single DW project might encompass most of their career. Remember the exploration phase: a year or so developing an idea. It might then take two years to win the bid on a DW lease, And a couple of years to shoot additional seismic if needed. And then a year to permit the first well. And then a year or 2 to get a rig to drill it. And then maybe another year or two to get a rig back to drill confirmation wells. Add the prospect generating phase to the development phase and it can be 15+ years from the time the exploration lead is developed until first oil sales. An exploration "lead": long before a prospect is generated a geologist has to have some clue there is a POTENTIAL prospect that might be generated. The majority of "leads' never turn into drillable prospects. When one lead fizzles you start beating on the next one. I still have a lead that I generated 30 years ago sitting in my files. Who knows...maybe I turn it into a drillable prospect before I die. LOL

Hell, think about my recent effort to drill horizontal wells in a 65 year old onshore oil field: I developed the idea in the late 90's. Only took 12+ years and $100/bbl oil to get someone to believe me. And then only because we had to shut down our deep NG drilling program when those prices cratered. I've known geologist that have taken 20+ years to get their idea drilled. And some of those turned out to be dry holes. So, time to start over. LOL.

[evilgenius]

Thanks, Rockman and Wildbourgman. Rockman, reading your last post I realized that the off-shore approach seems pretty sound under almost all economic conditions, except for severe deflation. If the world goes back into what it did during the Great Depression, a severely deflationary time, then all of those costs could get racked up and then have to get paid off by $10 or $20 oil. I'm sure the oil companies would still pump at that point, but would they continue those projects that aren't near production?

[phaster]

$this->bbcode_second_pass_quote('wildbourgman', 'P')haster, I would hate to give anyone bad advice and I believed in what I thought would be good advice I'd be rich myself.

I think that we have a lot of waste, inefficiency, and down right ridiculously stupid people in the oil industry as a whole and especially in Deep water.

[sparky]

.
" A day in the life of an offshore rig hand sound very much like a life in a modern petro-chemical plant !!!
we even had a "workshop" on being motivated ,that was Sooooooo boring , it wasted two days but we got muffins !

On the time lag issue the big question is , how much crude fracking can contribute worldwide ?
is it an US phenomenon only or is there some readily available site in other countries
Poland came bad , Ukraine has problems , not necessarily geologic ,
Britain and Australia have ferocious political opposition , China situation is unknown

Is fracking a viable worldwide source of crude or is it a flash in the pan ?
if it is viable and expandable , deep offshore will die a slow death

[ROCKMAN]

sparky - "Is fracking a viable worldwide source of crude or is it a flash in the pan ?
if it is viable and expandable , deep offshore will die a slow death". First the facts:

1) The vast majority of the VOLUME of US shale formations haven been PROVEN to have little or no oil frac'ng potential. That includes the tens of thousands of feet of shales that sit immediately above and below the 400' thick Eagle Ford Shale formation. I would guess about 95+% of that volume has no commercial value. The conditions required for a shale formation to have commercial oil potential via hz drilling and frac'ng is very unique. In fact is has already been PROVEN that the great majority of the volume of the Eagle Ford Shale formation itself has no commercial oil potential.

2) We've discussed before the other very unique aspects of commercial oil production from US shales: private ownership of US mineral rights, the pressure on the oil pubcos who would drill anything that has a chance of adding reserves and keeping Wall Street happy, the huge drilling and frac'ng infrastructure that is present in the US compared to the rest of the world and, lastly, a stable political environment.

So even if one ignores the geologic requirements name any country on the planet where the other factors exist to any significant degree. Just think if Chevron had found a shale similar to the EFS productive interval in Poland before they abandoned the project. Can you picture hundreds of companies taking tens of thousands of leases from their govt and then getting 1,000+ drill rigs turning to the right? BTW according to Baker Hughes this last June there were a total of 7 RIGS DRILLING IN THE ENTIRE COUNTRY OF POLAND. I have more rigs drilling in my backyard. LOL. Not really but I'm sure everyone gets the point.

[sparky]

.
Thanks Rockman , that was my hunch , ....so offshore is safe

it still is pretty costly , the Gulf is about as homey as it can get ,
Arctic oil is going to be a hoot to get to market , oceanic floor pre-salt even more so !
I doubt even the big publicly listed oil companies can afford this kind of outlay anymore
we are not running out of oil , we are running out of big cash to get big oil !

[wildbourgman]

Offshore update the GOM is still kicking but nowhere near as good as it was. I'm not sure how much longer I'll have a job at this point. The back biting and back stabbing has started to take some victims.