Back before the oil price crash there were a lot of engineering companies and consultancies that offered engineering services for the standard rate to engineer + 50% overhead cost + 15% profit margin. They didn’t construct or install anything, just focussing on engineering deliverables. These were the source of a lot of good and well-paid oil and gas engineering jobs, however nowadays, it is unlikely that companies can survive doing just engineering specialist work. The market has shifted to projects being delivered by companies providing engineering along with installation, construction or drilling services.
Why pay for engineering when it comes free…
Engineering work is now being done at cost (or sometimes for free) by companies that are interested in selling something else, normally the installation or construction of something. When an oil company gets two comparable proposals they typically select the one which is cheaper, meaning if you only offer engineering you are likely to keep losing out. Oil companies are also now looking for complete solutions, where a single company comes in to perform conceptual design, FEED and EPIC without having to go back and redesign “because that subsea manifold can’t be installed by the vessel we are using”.
Using a company interested in installation or construction to do your concept or FEED does however come with problems, as designs will be tailored so they are the only companies that can install or build things. However, if you can get a project to FID cheaper this way then it is an understandable approach that oil companies are taking.
So for engineering houses that have provided many thousands of manhours on major projects in the past, it is unlikely that they will be doing as much of this in the future. Even as the number of projects increases these are more likely to be given to companies that provide the full package, i.e. more than just engineering. Some business models might need re-adjustment or we will probably see some more industry consolidation taking place.
Does it matter for your oil and gas job search?
For us engineering specialists trying to find work we need to factor this in when deciding what oil and gas engineering jobs we go for. The rate squeeze will stay for longer if you are working for someone who is trying to deliver an oil and gas project that they have bought by reducing their profit margin down to zero. Oil and gas recruitment seems to be following this trend, with engineering companies currently advertising less oil and gas jobs than their EPIC ready competitors.
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The Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
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