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Last Updated: June 6, 2016
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Marine & Offshore
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So you can now buy three (3) five-year old ultra-deepwater drillships for the price of one new build jackup out of China!

Ex-Schahin ultra-deepwater drillship Cerrado went under the hammer and was sold to the only bidder at the reserve price of $65 million, a bargain basement price if there ever was one. Quite a punt by Ocean Rig betting on the eventual recovery of the ultra-deepwater market which is the drilling industries worst performing sector in the current downturn.

An earlier auction, for Odfjell operated drillship Deepsea Metro 2, also just five (5) years old, failed to elicit even one bid. But then, by comparison, the reserve price had been set to a whopping $175 million, almost three times higher than the reserve price for the Cerrado. To put this into context the published construction costs for the Cerrado (now Ocean Rig Paros) and Deepsea Metro 2 were $678m and $652m respectively. Some depreciation. Deepsea Metro 2only had three years of operations under its belt and the Cerrado only managed three years out of a ten-year contract before it was early terminated by Petrobras.

So where does this leave the likes of Hyundai, DSME, Jurong, Samsung and COSCO, all of whom have UDW units that have had their construction contracts terminated by their original owners. Add to this list of unwanted assets the KeppelFELS speculative drillshipCan Do plus potentially any of the near-to-completion rigs that were ordered by Sete Brasil which may be left to Keppel and Jurong to find alternative buyers if they choose to complete construction. Then there is still the possibility of further cancellations of other units currently under construction. The construction costs for the seven (7) rejected ultra-deepwater rigs are stated as between $672m and $740m. One of these, the ill-fated Dalian Developer must have cost its various owners a combined number in excess of $2 billion as it has been under various stages of construction and bankruptcy since January 2006. The news of the Cerrado sale must have reverberated around those shipyards with assets for sale, causing a high degree of heartburn.

And how does this market sector look today? For rigs capable of drilling in 7,500ft water depths or more and excluding Brazilian owned units which, at least at present, do not compete in markets other than within Brazil (honorary exception SSV Catarina), the worlds competitive fleet consists of one hundred and fifty-seven (157) ultra-deepwater semi-subs and drillships. There are a further twenty-six (26) in various stages of construction, only five (5) of which have contracts to go to. Many of those under construction have had their delivery dates pushed back into 2017 and even as far back as 2020. As mentioned above seven (7) of them have had their construction contracts cancelled with ownership reverting to the shipyard.

Of the competitive fleet; i.e. excluding those under construction, 42% are currently out of work, that is sixty-six (66) units listed as “available”, although five (5) do have contracts to go to later in the year. Another eight (8) are currently stacked/on standby on contract and a further fourteen (14) units have contracts that terminate in the second half of this year. Of course even having a valid contract is no longer any guarantee that you will be working until the end of your contract; of the seventy-one (71) cold stacked/warm stacked and recently scrapped UDW units, thirty-one (31) or 43% of these suffered early termination of contract. So unless there is a rush of fixtures this year, a highly unlikely event, there will be just under 50% of the competitive fleet out of work and “available,”

It is not just the threat of early terminations. Many operators have forced contractors to lower their dayrates through blend-and-extend deals or straight forward ultimatums. From a high of $640,000 a day in the halcyon days of the not too distant past the most recent fixtures have been as low as between $190,000-$250,000. Adding to these woes are the cancelled and postponed deepwater projects, slashed budgets from the operators, cessation of exploration work and a fluctuating oil price that is still nowhere near the level needed for the deepwater market to recover.

All in all, is this a brave move by Ocean Rig or a foolish one? There was certainly no interest from their peers in either rig that was put up for auction, even at $65 million.

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September, 21 2019
Your Weekly Update: 16 - 20 September 2019

Market Watch  

Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b

  • Global crude oil prices surged at the start of the week as news that a successful drone strike on the Abqaiq processing plant and the Khurais oil field in Saudi Arabia took out over half of the Kingdom’s crude production capacity
  • Brent prices jumped above US$70/b at one point on fears on global supply disruption, but abated as President Donald Trump authorises the release of US strategic petroleum reserves to cover the market
  • Initial fears that the Saudi Arabian crude output would be crippled for months proved to be extreme, with Saudi Aramco announcing that some 70% of capacity at Abqaiq had been restored within days
  • But more worryingly is that this incident escalates the risk of a full-blown military confrontation with Iran; the US was quick to accuse Iran of the attack, citing data on the attack, which was denied by Iran
  • Yemen’s Iran-backed Houthi rebels claimed responsibility for the attack, although initial results of a Saudi investigation pointed to the weapons originating from Iran
  • For now, crude oil prices have retreated as the risk of widespread supply disruption abated, but tensions are still high in the region
  • This comes after President Trump signals that he was considering easing sanctions in an apparent thaw in the US-Iran relationship; this opportunity now appears to have evaporated
  • Saudi Arabia’s new oil energy minister, Prince Abdulaziz bin Salman, made a positive impression at the recent OPEC+ meeting, with errant members of the group signalling that they were now ready to adhere to the supply deal
  • In Venezuela, the oil crisis continues as ongoing US sanctions now mean that the country cannot find enough vessels to transport its crude, as shippers fear losing insurance coverage if they transport Venezuelan oil
  • Iran has released the UK-flagged Stena Impero vessel that it had impounded, a lone bright spot in a region now clouded by geopolitical tensions
  • Against this backdrop, the US active rig count recorded yet another fall, losing five oil and seven gas rigs for a net drop of 12 to a new total of 886 rigs
  • With the shock of the Saudi drone attacks abating, crude oil prices are retreating back to their previous range – US$60-63 for Brent and US$56-59/b for WTI – as the impact of global supply was minimised; another attack, however, might cause a more permanent shift in prices


Headlines of the week

Upstream

  • Equinor has received consent from the Norwegian Petroleum Directorate to continue operations at the Tordis and Vigdis fields through 2036 and 2040, respectively, extending the life of the North Sea fields by 34 years
  • BP has announced that it will deploy continuous measurement of methane emissions for all future oil and gas projects in a bid to reduce emissions
  • CNOPC and Niger have agreed to collaborate on a 1,892km pipeline to carry oil from Niger’s Agadem rift basin to port facilities in Benin
  • The South African government is tabling a new law that will allow the state to take a free stake of up to 10% in all new oil and gas ventures, hoping to capitalise on a surge in upstream interest after Total’s Brulpadda discovery

Midstream/Downstream

  • As the IMO deadline for low-sulfur marine fuels approaches, refiners have begun stockpiling supplies of very low-sulfur fuel oil to ensure adequate supply; this includes Japan’s Cosmo Oil that aims to begin supplying VLSFO to the domestic marine market by October 2019
  • IndianOil’s Gujarat refinery stated it ready to produce 12,900 b/d of VLSFO by October while its Haldia refinery will start producing 5,500 b/d of VLSFO by December; this should be adequate to cover the India’s marine fuel demand
  • India is considering selling a stake in BPCL, the country’s second largest refiner, to an international firm to boost competition in downstream fuel retailing that has historically been dominated by state firms
  • Valero Energy and Darling Ingredients are launching the first renewable gasoil plant in Texas, focusing on producing renewable diesel and naphtha
  • In the UK, Essar Oil’s Stanlow refinery aims to increase its diet of US crude from a current 35% to 40%, leveraging on cheaper American oil
  • The after-effects of Russia’s contaminated crude through the Druzhba pipeline continues as Total issues a tender to sell 1.3 million barrels of tainted Ural crude through Rotterdam after failing to process it

Natural Gas/LNG

  • Poland has won a ruling from the EU courts to reduce Russian control over the key EU Opal pipeline that carries Russian gas from the Nord Stream link to Germany, preventing Gazprom from using most of Opal capacity in a bit to increase energy security for Eastern European countries
  • Vitol and Mozambique’s state player ENH have set up a new joint venture in Singapore to capitalise on trading opportunities for LNG, LPG, and condensate
  • Australia’s Liquefied Natural Gas Ltd and Delta Offshore Energy will supply gas from the Magnolia fields to an LNG-to-power project in Bac Lieu, Vietnam
  • Eni’s Baltim South West gas field offshore Egypt has started up production, only 3 years after discovery, producing an initial 100 mscf/d of gas
  • US gas player Sempra is looking to take FID on its Energia Costa Azul LNG project in Mexico’s Baja California region by the end of 2019
  • Egypt has announced that it expects to receive first natural gas from Israel by end-2019 through the East Mediterranean Gas pipeline, with initial supplies of 200 mscf/d that will rise to 500 mscf/d by 2020
  • The Independence floating LNG terminal in Lithuania – built to reduce the Baltic region’s dependence on Russian gas – is set to receive its first-ever cargo from Siberia, likely from Novatek’s LNG projects in Yamal
September, 20 2019
Financial Review: Second-Quarter 2019
Key findings
  • Brent crude oil daily average prices were 9% lower in second-quarter 2019 than in second-quarter 2018 and averaged $68 per barrel
  • The 117 companies in this study increased their combined liquids production 4.6% in second-quarter 2019 from second-quarter 2018, and their natural gas production increased 5.0% during the same period
  • Nearly half of the companies were free cash flow positive—that is, they generated more cash from operations than their capital expenditures
  • Dividends plus share repurchases were nearly one-third of cash from operations, slightly lower than the six-year high set in first-quarter 2019

Distributions to shareholders via dividends and share repurchases amounted to nearly 33% of cash from operations


See entire second-quarter review

September, 20 2019