Sector Snap: Drillers down, but analyst bullish
National oil companies have been locking in drilling contracts in recent months while most publicly traded oil majors "have been waiting on the sidelines," analyst Omar Nokta wrote in a client note."Now, with limited availability and record high leading edge rates, they must combat declining reserves and production to satisfy stakeholder demands."And here: Energy Sector Roundup: Oil Backs Off a Record
Nokta and colleagues boosted their forecasts for average drilling rates by $50,000 per day, meaning that they now expect the priciest ships, which can operate in very deep water under harsh conditions, will fetch an average of $600,000 per day over the next three years.
"We believe Transocean (RIG) stands to benefit the most from the tight deepwater market as it controls seven of the 16 ultra deepwater rigs available to market through the end 2010," Nokta wrote. "We expect the company to negotiate attractive contract terms that allow for substantial visibility deep into the next decade."
Major oil companies "have their backs against the wall" when it comes to getting offshore drilling contracts, according to Dahlman Rose & Co. managing director Omar Nokta.
Nokta says Brazil's national oil company, Petrobras, has aggressively locked up a significant amount of rig capacity. As a result, dayrates have been pushed to record levels.
"We expect the few deepwater rigs available during the next three years will see significant enquiry and lead to higher dayrates and contract durations," said Nokta. "We are raising our dayrate assumptions for ultra deepwater floaters (7,500-feet drilling capability or more) to $570,000/day, harsh environment ultra deepwater floaters to $600,000/day and standard 5,000-feet deepwater floaters to $475,000/day. These dayrates are $50,000/day higher than our prior forecasts."
Nokta thinks Transocean Inc. could benefit most from the tight deepwater market since it controls seven of 16 rigs available through the end of 2010.
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OIL MAJORS CAUGHT WITH THEIR PANTS DOWN
"They must combat declining reserves and production to satisfy stakeholder demands."
"Major oil companies 'have their backs against the wall' when it comes to offshore drilling contracts."
"Most publically traded oil majors 'have been waiting on the sidelines'."
While a flurry of news has come out, from huge new oil finds offshore of Brazil, to rig operators expanding, and having their rigs fully contracted out -- oil majors are literally getting left at the dock.
What's going on here?
If you are a stockholder in one of the oil majors, you hope they are crazy like a fox, waiting for demand for rigs to drop and prices for dayrate contracts to bottom out.
It doesn't look like that's in the cards. Nothing in the published data supports that outcome.
Is a huge drop in world oil prices in the offing -- and only the oil majors are in the know. Again, that seems highly unlikely.
The oil majors are being caught flat footed? Out maneuvered by state oil companies -- who could of 'thunk' it.
But maybe the oil majors are getting bad advice from their servants -- the oil geologists.
Could it be that behind closed doors these servants, seeing the new discoveries -- don't believe, and are telling their employers that deepwater, deep-drilling is a flash in the pan. This is seriously looking, if such is the case, like the worst advice ever given to the oil majors and acted on.
Shareholders have a right to know what is going on.
Because right now the oil majors are being caught with their pants down -- in a very public place -- on the business wire, internet, and national business papers and magazines.
Again, one must look to the servants, the oil geologists and wonder if their 'shaman' pride is clouding their advice: "Deep oil, impossible, just can't be, it violates all the principles of 'fossil' theory I was taught in school."
If so, then the servants really are poisoning the food.
Shareholders need an accounting from officers and directors of the oil majors.
This is no longer academic: We're talking money here!
A PRETTY PICTURE OF BLUE SKIES AND DEEPWATER, OR A FLASH IN THE PAN?
The oil majors are waiting on the sidelines. So far, no comment from the majors on the reasoning behind the failure to lock up deepwater, deep-drilling contracts with rig operators like Transocean and others.
There must be reasons for this business decision.
Do petro-geologists share the views of Mathew Simmons that deepwater, deep-drilling is still too speculative and unproven at this point? (Repudiating his previous position, as late as 2003, Simmons was bullish on offshore oil exploration.) See post, the Lies of Kenneth Deffeyes, 10/03/07, Comment #5, The Contradiction of Mathew Simmons, 4/19/08.
"A flash in the pan," refers to gold prospecting when a "flash," usually a strong indicator of gold in the miner's pan, turned out not to be gold, or the gold didn't lead to further significant finds of gold in that portion of the stream.
Do those petrol-geologists that have the ear of the oil majors believe deepwater, deep-drilling is a "flash in the pan?"
The scientific evidence supporting large, repeated, deepwater oil deposits is strong. Please see post and comments, Technological Barriors to Carioca field, May 3, 2008.
Or is there another strategy afoot?
Let the smaller companies take the risk of exploration costs, then after discoveries have been made, come in and buy out the discoveries from the smaller companies. Similar strategies have been used before by the oil majors.
If the "buy out" strategy is what is going on, then there should be no dark clouds on the horizon for rig operators and successful smaller companies alike. A pretty picture of a calm deep blue sea, and puffy white clouds on an azure sky reflect market conditions for rig operators.
Is that true for the oil majors?
So the next fundamental question is which of the smaller comapnies has a proven track record for having a "nose" for deep oil finds?
Which of the smaller oil companies has the smartest, maybe it should be said, most open-minded petro-geologists?
Devron Energy has a good track record for deep water discoveries.
OIL MAJORS' "BUY OUT" STRATEGY PROMOTES "WILDCAT" OPPORTUNITY FOR INDEPENDENTS
The oil majors' decision to sit on the sidelines, during the race to lockup contracts for ultra-deepwater, deep-drilling ships, has been questioned in this space, but the results can be good for the oil industry as a whole and the deepwater, deep-drilling sector in particular.
It's nothing new for the oil majors to sit back content to let smaller independents take the financial risks inherent in oil exploration and discovery. After all, that's how the term "wildcat" got into the oil lexicon. Wildcatting has a long and successful place in the history of the oil industry.
ExxonMobile has announced this year that their business and exploration strategy will focus on making existing assets more productive. Please see post Sakhalin I: 7 Miles Deep, April 24, 2008, Comment #6, 4/29/08.
So, to refrain from a "bidding war" with the other oil majors for ultra-deepwater contracts, if you think about it, is not surprising.
The "wildcatters" are what made the oil industry nimble, and creative, pumping necessary vitality and competition into an industry, otherwise dominated by large, cautious corporate enities.
Mid-sized and smaller independents, provide investment opportunites, as well as physical growth for oilfield services providers and others in the oil industry. A cascading effect is created when a multiplicity of companies are expanding their operations.
"All boats rise with an incoming tide."
Independent "wildcatters" have the flexibility to employ unconventional exploratory methods and principles. In the West, abiotic theory is that "wildcard."
A "wildcatter" is a person (or company) who drills for oil wells in areas that are not in advance known to be oil fields.
Abiotic oil principles and wildcatters were made for each other.
So far, ultra-deepwater, deep-drilling has shown signs of success: The recent Brazil find, the Carioca field, initally, is estimated to have 33 billion barrels of oil, the third largest find ever.
Everything about this find breaks traditional ideas and constraints of the fossil theory: It's deep, it's hot, it's beyond the continental shelf, a 180 miles at sea, and below the salt line.
Carioca Field is a monument to abiotic oil theory.
The real proof for "roughnecks" out in the oil patch, is what search principle gives "the final word to the borehole."
Should wildcatters consistently rely on abiotic oil accepting geologists and engineers to give "the final word to the borehole," and hit paydirt consistently, the oil majors will start to fall in line.
And, "buy out" the successful finds, where they can muscle in on the action. That is what the oil majors are counting on: The expense of developing confirmed plays, and the ability, with their deep pockets to offer a price that can't be refused.
The oil majors will want to know how the oil was found. They will then turn around and hire the most successful "hole punchers," for themselves.
This is an age pregnant with possibility.
Long live the wildcat spirit!
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