Low oil prices create a $1-billion business killing aging fields

By Dan Murtaugh on 11/27/2016

SINGAPORE (Bloomberg) -- Low crude prices that have been hammering oilfield service companies for the past two years might be ready to give a little back.

Sinopec Oilfield Service Corp., Keppel Corp. Ltd. and others will have a chance to fight for $1 billion a year in new business in Asia as the crude crash forces energy producers to decommission aging and unprofitable fields, industry analyst Wood Mackenzie said in a new report. More than 600 fields, mostly in China, Australia, Indonesia and Malaysia, could be shut down over the next decade.

The decommissioning represents an opportunity for oilfield service firms to rebuild their business after two years of layoffs and cost-cutting as the crude plunge caused a drop in drilling and exploration, the main activity for these firms. The Bloomberg World Oil & Gas Services Index has dropped 40% since the summer of 2014, compared with a 12% gain in the S&P 500.

“There’s been a lack of the traditional activity for service companies, like drilling and exploration,” Andrew Harwood, Wood Mackenzie’s director for Asia upstream research, said in Singapore. “Maybe this is an opportunity to fill the gaps.”

Decommissioning oil fields can be as simple as plugging an old well on land or as complicated as disassembling complicated subsea infrastructure, said Jean-Baptiste Berchoteau, an upstream analyst with Wood Mackenzie in Singapore. Poorly done work can leave oil leaking, causing environmental damage for years. Most of the fields are producing little or no oil, so the decommissioning won’t have much impact on global supply and demand balances.

Regulations regarding decommissioning vary from country to country. Wood Mackenzie sees Australia and Thailand having clear rules in place, while China, Indonesia and Malaysia have murkier controls on issues like liability. Lack of clear regulations could make it more difficult for companies to obtain financing to decommission fields in those countries.

Oil prices will go a long way in determining how quickly decommissioning work ramps up, Berchoteau said. Wood Mackenzie sees oil trading in the $50 to $55 range in 2017, which would speed up the process. A rebound in prices could make companies delay shutting some fields to try to eke out a few more barrels.

“There will be work for everyone,” Berchoteau said. “The cake is big enough for a lot of people to eat from it.”

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