Offshore in depth

Most media coverage of the offshore industry during the current down cycle has been focused on the impact of lower prices and slashed E&P budgets on deepwater activity, and on contractors’ ability to provide floating rigs. This month, I’d like to explore how shallow-water contractors and operators are responding to what is likely to be an extended period of low commodity prices.

The contractors’ plight. As you probably guessed, most offshore drilling contractors with large fleets of jackup rigs have fared about as badly as drillship and semi providers. BOEM issued 14 shallow-water drilling permits for the U.S. Gulf of Mexico in 2015, compared to 65 in 2014. In December, there were 433 competitive jackups worldwide, of which 250 units were under contract, 128 were hot-stacked, and 55 were cold-stacked, according to Rigzone. Utilization for jackups had fallen to 58%, compared to 78% at the end of 2014. IHS reported that West Africa and Southeast Asia, two predominantly jackup markets, had seen contracted rigs decline 30% and 37%, respectively, during the past year. Depending on rig class, day rates have fallen 22% to 34%. Nearly 100 new jackup rigs were under construction at the end of 2015, of which 85% do not have contracts in place. As many as 100 jackups will need to be retired to make supply match demand.

Hercules Offshore responded to the crisis by seeking Chapter 11 protection in August 2015, with a plan to exchange its debt for 96.9% of its shares, giving majority ownership to its creditors. The company emerged from bankruptcy in early November, and in February 2016 said that it was considering strategic options, including a possible merger or the sale of the company. Hercules has a fleet of 27 jackups, eight of which are working.

In February, Paragon Offshore, which was spun off from Noble Corp. in 2014, also filed for bankruptcy protection to restructure its $2.7 billion in debt, and transferred 35% of its equity to creditors. Paragon has 32 jackups in its fleet, 12 of which are working.

Operator strategies. Operating companies have more flexibility than drilling contractors in responding to lower oil and gas prices. Chevron announced on Feb. 19 that it intends to sell all 27 of its shallow-water Gulf of Mexico oil and gas fields, with about 46,000 boed in production. The planned divestiture is part of the supermajor’s plan to sell up to $10 billion in assets by the end of 2017, while enabling Chevron to focus on deepwater projects in the Gulf.

Other operators, like Energy XXI and Fieldwood Energy LLC, see opportunities for growth in the shallow-water Gulf of Mexico by acquiring and exploiting mature assets. Formed in 2005, Energy XXI has completed six major acquisitions, totaling approximately $5 billion, including the purchase of Marlin Energy Offshore, POGO Producing Company’s Gulf of Mexico assets, Exxon Mobil’s shelf properties, and EPL Oil & Gas. Energy XXI operates nine of the largest fields on the shelf, from High Island to Main Pass, with around 100 platforms and 340 wells producing 59,000 boed. According to Energy XXI’s investor presentations, the company has deferred new-well drilling in favor of performing economical, low-risk recompletions of existing wells. Taking this approach, the company has maintained consistent production levels while reducing capital expenditures by a factor of four, to around $75 million per quarter. Energy XXI’s ongoing program to reduce lease operating expenses has lowered its production cost per barrel by 30%.

Formed in 2013 as part of a portfolio run by Riverstone Holdings LCC, Fieldwood Energy is a relative newcomer to the Gulf of Mexico, but its acquisition strategy has made it one of the largest leaseholders on the shelf. In September 2013, Fieldwood acquired Apache Corporation’s Gulf of Mexico shelf properties, including more than 500 blocks and 100,000 boed of net production, for $3.75 billion. In February 2014, Fieldwood acquired Sandridge Energy, Inc.’s GOM business unit for $705 million, adding another 26,000 boed in production. With over 2 million leased acres, Fieldwood has the largest asset base on the shelf.

Cutting costs. In an October 2015 interview with the Houston Business Journal, Fieldwood Energy CEO Matt McCaroll described steps that the company has taken to remain cashflow-positive in a low-oil-price environment. He said that the company was not drilling any new wells, but that it had retained one rig to perform recompletions of existing wells to maintain production. He also said that Fieldwood had shortened its list of suppliers to 750, from 1,400, to gain efficiencies. The company closed three of its nine shore bases, and changed its offshore rotation schedules from seven days on and seven days off to 14 on and 14 off, cutting transportation costs in half while reducing downtime between crew changes.

Fieldwood confirmed its commitment to shallow-water operations, when it announced in January that it had signed a production sharing contract for two fields in Mexico’s Bay of Campeche, along with its local partner, Petrobal. Fieldwood will conduct a two-year appraisal program, beginning in 2016.

Maintaining output. The Middle East is one region where shallow-water drilling has continued unabated, as OPEC strives to maintain output despite lower commodity prices. According to IHS, Saudi Aramco has kept over 45 jackups working after renegotiating rates with contractors. Abu Dhabi’s ADMA-OPCO and ZADCO also have stayed busy, so contractors like National Drilling Company and Shelf Drilling have kept relatively high utilization rates. And Iran is reported to have 25 jackups working, largely in the South Pars gas development. Iran’s demand for shallow-water rigs could increase sharply, as sanctions are lifted.  

About the Authors

Ron Bitto

Contributing Editor

Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM