“Over” – A Word Heard Often at OSEA

By: Cheang Chee Yew

“Over” seems to be word frequently used by conference speakers to describe the state of the offshore oil and gas industry at the Offshore South East Asia 2014 (OSEA2014) in Singapore in early December.

An oversupply of rigs, over production of oil and over-priced petroleum projects were just some of the topics discussed at the 20th OSEA conference and exhibition – a biennial tradeshow in Singapore that has served the offshore petroleum sector and its supporting industries in the region since 1976.

While miniscule in terms of attendance compared to the annual Offshore Technology Conference in Houston, OSEA2014 managed to attract more than 28,600 attendees from 65 countries and regions, conference organizer Singapore Exhibition Services (SES) highlighted in a Dec. 5 media release.

“Representatives from major industry players and SMEs had a productive time, be it from sourcing for the right equipment or services, networking with regular and new business leads, or picking up fresh and varied perspectives from industry’s movers and shakers,” Chua Buck Cheng, project director for Engineering Events at SES said.

Douglas-Westwood’s chairman John Westwood was one speaker who provided his perspective of the offshore industry at the conference in Singapore – home to two of the world’s largest rig builders – Keppel Corp. Ltd. and Sembcorp Marine Ltd.

The offshore oil and gas industry currently faces an oversupply of rigs, which is evident in some mobile offshore drilling unit (MODU) sectors, Westwood said. This has led to a deflation syndrome, with field operators waiting for rig rates to fall.

Such a scenario, where “high drilling costs are the killer” prompted field operators to look at exploration drilling as it is the easiest target for the “re-focusing”, the Douglas-Westwood consultant noted, adding that “the latest generation rig assets will win work, but at what price?”

There is an unprecedented investment in drillships, with an anticipated oversupply creating a difficult market for the next five years. The current book to fleet ratio of 61 percent for drillships, suggesting oversupply, is exacerbated by the fact that 44 percent of the fleet has yet to secure contracts, the British-based consultancy company said.

In contrast to drillships, strong growth was expected in global demand for semisubs as the segment is relatively under-invested with new supply likely to be absorbed faster than drillships.

Chinese yards, with their lower costs and attractive financing terms, are fueling the oversupply of rigs worldwide. China now has 32 percent of the global MODU orderbook, compared to Singapore with 21 percent, South Korea 19 percent, Brazil 13 percent and others 15 percent.

Chinese yards account for 43 percent of the jackup orders and 37 percent of semisubs, with these companies “already proactively marketing drillship capability,” Westwood added.

With OSEA2014 taking place just after the Organization of Petroleum Exporting Countries (OPEC) decided at their Vienna meeting to maintain production, the question of over production of crude was a topic for discussion.

“The cartel [OPEC] has refused to do anything terribly meaningful about the global energy glut, which has created, almost as much by its own production surge, as it has by American shale. If OPEC reduced its production, it would clearly have a stabilizing effect on prices,” Dan Eberhard, CEO of Canary, LLC. told the conference.

Cost overruns were another “over” raised at the conference, this time in reference to the liquefied natural gas (LNG) sector in Australia.

While the country is now constructing several LNG projects, which will propel Australia to overtake Qatar as the largest LNG exporter in 2018, the issue of costs has dampened its attraction as an investment destination for energy companies.

Around 67 percent of LNG projects in Australia were over budget compared to the time when the final investment decisions were made, far higher than the global average of 38 percent, according to Cyrille Scart, Asia Pacific LNG and natural gas consultant at Poten & Partners.

For projects that experienced cost overruns, those under developments in Australia were around 31 percent over budget, compared to the global average of 23 percent, he commented, noting that only three of Australia’s current LNG projects – Ichthys, Wheatstone and Prelude – are on budget, while project costs for Gorgon, Queensland Curtis LNG, Australia Pacific LNG and Gladstone LNG have seen increases.

Labor costs were a big contributory factor for the cost overruns in Australia’s LNG industry; the available workforce was too small to simultaneously handle several LNG construction projects.

“In our view, you reached this type of situation due to labor … You are losing people and you want to keep them so you increase the wages. This was because you had a fundamental need for experienced labor at exactly the same time,” Scart said.

Still, the conversation between industry players will not end with the conference as solutions are needed to deal with the challenges facing the offshore oil and gas sector in the years ahead.

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