Energy Industry Trends Review

Rig activity
Key trend—The rig market continues to
look buoyant as the continued high oil
price drives upstream activity. According to
data from Baker Hughes, during the third
quarter of 2011, the average number of rigs
under operation generally witnessed steady
growth (though there were declines in some
markets) as compared to the same period in
2010; North America (17 percent), Europe
(33 percent), Middle East (6 percent), Africa
(-15 percent), Latin America (13 percent),
Asia-Pacific (-10 percent). The number of
oil rigs in the US exceeded 2,000 as of the
beginning of November 2011 and drilling
activity has finally surpassed pre-crisis lows
(a year ago the rig count stood at 1,668
rigs). Gas rig activity in the United States,
however, has been starting to slow over
recent weeks. The number of rigs drilling
for natural gas in the United States fell to
865, toward the end of November 2011, the
lowest level since January 2010, down from
highs of 936 just a few weeks ago. 72
Globally deepwater and ultra-deepwater
rig availability remains tight, with day rates
for deepwater and ultra-deepwater rigs
increasing and contracts becoming longer,
as the market tightens. Deepwater drilling
activity continues to recover in the US Gulf
of Mexico, where a hurricane-free season
allowed for a continuation of the post-
Macondo recovery in production, with the
pace of new well completions accelerating.
So far this year, the U.S. Bureau of Ocean
Energy Management, Regulation and Enforcement
has given approval to more than
40 drilling permits, with 13 being issued
in October—nearly three times the average
seen so far this year; awards are now
approaching historical levels of 15 to 20
permits per month. 73
There continues to be a steady rise in orders
for rigs as drillers replace old fleets and step
up exploration and production activities
to take advantage of high global crude oil
prices. Analysts expect the world’s two largest
rig builders by market share (Singapore
based Keppel Corporation and Sembcorp
Industries Ltd.) to continue to receive
strong orders for rigs in 2011, which is likely
to boost their profits over next two to three
years. Both Keppel Corp. and Sembcorp
14
Marine have seen their share prices rise on
the back of better-than-expected US retail
sales and hopes that Europe will act soon
to resolve its debt crisis. The stocks of the
rig builders generally have been recovering
from a recent sell-down due to concerns
about a possible slowdown in orders amid
a weakening global economy as oil prices
stay high and there is strong demand from
countries like Brazil. Sembcorp management
is reportedly seeing higher enquiries for
semi-submersible rigs and remains upbeat
on new order intake, especially on potential
rig orders from Brazil. 74
Observation
As the rig market continues to tighten and
rig rates rise, the outlook for the services
industry and rig suppliers in particular is
much improved. The industry is showing
high rig utilization in most markets, with
rig rates rising as demand increases.
As demand for rigs and oilfield services
increases in high growth markets, it is fair
to say that a trend is emerging of some
companies either buying rigs or increasingly
looking to bring key services in-house. This
is particularly true of the US onshore oil
and gas market, where producers are buying
onshore drilling rigs and related equipment
to keep their costs in check, rather than
rent from the market at increased prices
amid strong demand for work in shale
fields. While prices to rent rigs and costs
of operating them are increasing, some
analysts are noting that the rise in prices
for buying a rig have risen more slowly,
meaning buying a rig is more cost efficient.
With a 15 to 20 percent increase in the
cost of land-based drilling, North America
had the highest cost escalation in the past
12 months (according to some analysts),
meaning that in this environment, company
can recoup the $20 million or so cost of
a rig within two years. Some smaller US
producers are also bringing key services like
pressure pumping in-house to better control
costs and access to services as oil and gas
fracking activity continues to increase. 75
Companies
Key trend—Most of the major oil companies
have continued to generate high profits
in the third quarter owing to higher oil
prices—though declining production and
rising costs are still much in evidence. Most
of the majors reported a fall in production
with new field start-ups failing to match
natural declines in portfolios and significant
portfolio rationalization still taking place.
This quarter also saw the continued effect
of unforeseen situations such as the conflict
in Libya and delays in getting back to
work in the Gulf of Mexico. While industry
costs fell in 2009 and 2010 due to the global
economic crisis, the trend appears to be
on the turn, with some analysts expecting
industry cost rises of 6 percent for 2012. 76
Higher oil and gas prices once again contributed
to higher profits for the integrated
oil majors during the third quarter of 2011,
even though asset sales, geopolitical problems
and maintenance turnarounds led to
another decline in production. Each of the
majors recorded production declines for the
quarter, ranging from a less than 1 percent
decline at Total to 10 percent-plus declines
at BP and ConocoPhillips. Total’s relatively
small production decline was due in part to
increased output at Russian gas producer
Novatek, in which Total took an equity
stake earlier this year. BP’s third-quarter
production fell 12 percent to 3.32 million
barrels of oil equivalent (boe)/d, largely
on the back of major turnarounds and
production declines in the Gulf of Mexico.
Conoco’s sharp production decline came
from a variety of sources, shut-ins in Libya,
asset sales and reduced output at the Peng
Lai 19-3 field offshore China following an
oil spill. 77
Profits were also strong at the larger
oilfield services companies, that continue
to benefit from the upturn in upstream
activity, as well as national oil companies
(NOCs) generally. However, Brazil’s NOC,
Petrobras, actually reported a drop in profits
this quarter of 26 percent as government
price controls prevented it from capitalizing
on high crude prices and its fuel costs
increased. Petrobras’ profit was curbed by
price controls for gasoline and diesel while
a weaker local currency increased imported
fuel costs. (Petrobras’ gasoline imports quadrupled
this year to about 30,000 b/d.) 78