December 1998 Vol. 219 No. 12  Drilling

J. John Grow,  Engineering Editor

Oil prices, mega mergers and a hopeful future

Everywhere we look these days, oil-pricing issues combined with mega mergers and buyouts are in the news. This is not the first time our industry has faced trying times, yet the news is disheartening and reality is tough, especially for those directly affected by workforce reductions due to job redundancy. This column examines what some of the major independents and oil companies are saying about our current situation.

The Oilfield Breakfast Forum, held Oct. 16, 1998, is a good place to begin. Panelists discussing opportunities for oil service and supply companies were: Mobil Drilling’s VP Steve Comstock, Chase Manhattan Bank’s Managing Director Len Paton, Schlumberger’s Executive VP Chad Deaton, H&P’s President George Dotson and ENSCO’s Chairman/CEO Carl Thorne. Some relevant comments are noted here.

Soft oil prices are shifting competitive landscape. Combined with increased finding / development costs, increasingly stringent EHS requirements and a constantly changing workforce, challenges are rampant for Mobil and the O&G industry.

Mobil’s response is to leverage its global organization and total system optimization. To improve a project’s front-end-definition, with increased focus on applied technology and operational reliability, and continue to build supplier relationships. In other words, use fit-for-purpose technology, avoiding goal misalignment and poor quality services.

ENSCO examines market fundamentals and notes that: 1) either the world is awash in cheap oil — a long-term problem; or 2) current supply will be overcome by demand growth and depletion — long-term fundamentals are sound.

Pre-1973 discoveries account for about 80% of world oil production, and technology is increasing oil’s depletion rate. Depletion must be offset to satisfy growth and meet oil demand (which has slowed but still shows growth). With hydrocarbon depletion a given, the O&G market is self-correcting and as oversupply diminishes, pricing will follow.

With near- to intermediate-term crude prices uncertain (when depletion and lower activity levels will restore equilibrium), a conservative investment strategy and financial position is to be maintained.

Schlumberger’s perspective is a proactive vs. reactive response to the down market. The industry is again feeling the pinch of low, unstable crude prices. Resulting financial pressures have led to another round of restructuring and staff reductions, all of this on the heels of major consolidations, as witnessed by several recent, large-scale mergers and acquisitions.

The mid-1980s oil price collapse taught us several lessons, with both positive and negative implications. Over-optimistic speculation is dangerous, and while industry can adapt to a depressed business environment, an immense toll is paid for necessary steps to maintain profitable operations. Both sectors, operators and service companies, learned that communication and cooperation must characterize our business, for us to survive and prosper. E&P efficiency depends directly on applying cost-effective, technological solutions targeted at changing the way reservoirs are discovered, characterized, developed and produced.

Are "super-major" oil companies predatory? With an era of the "super-major" loudly proclaimed in all quarters, are major integrated oil companies likely to become super predatory?

According to Alexanders Gas & Oil, August 1998, pressure to grow comes with stronger-than-ever borrowing power, as majors have the acquisition world at their fingertips. In addition, despite stubbornly low oil prices, many majors have $1 billion or more cash stashed away.

It’s been said there is a danger in holding too much cash because it depresses a firm’s capital efficiency, and returns are low relative to other investments. However, the longer oil prices remain depressed, the more likely it is that smaller companies will buckle under, and that will open opportunities for those who have kept their powder dry and saved money for a rainy day.

Few companies will feel the need to make a move quite as strongly as Mobil, which has now been surpassed by BP Amoco’s $50 billion combo. Nevertheless, Chevron and Texaco are under pressure to compete in the super-major league, as are European majors Total, ENI and Elf.

The acquisition strategy may not be good for everyone. Just last year, analysts criticized Shell for having $11.5 billion in cash. It has reduced the cash pile to a more acceptable $4 billion, mainly through acquisitions. However, analysts say Shell is now facing a structural problem of having an asset base too large and disorganized.

Exxon has worked hard to upgrade its own assets and is wary of picking up inferior assets. Instead, it has reduced its cash by buying back its own shares, an option not yet available to Shell because of British tax laws penalizing share buybacks. However, the law is set to change in February 1999, and Shell is predicted to have the largest share buyback of the next 5 years.

Looking to the future. Here’s an example of commitment to deepwater drilling. Without previous contracts or major oil company commitments (the Saga Petroleum memo of agreement fell through in September 1997), Norwegian backed Ocean Rig ASA is investing in becoming a leading drilling contractor in offshore exploration. Four Bingo 9000 rigs (planned completion dates are from August 1999 through December 2000) can be configured for dynamic positioning or thruster-assisted deepwater mooring. The Bingo 9000 concept is a twin-pontoon hull with six columns (see artist’s rendition in World Oil’s Rig Directory). Pontoons are coupled with aft and fore transfer bracing, plate and strut sizes are standardized where possible and structural symmetry is emphasized. The semis, designed for operations in up to 10,000 ft (3,000 m) of water in a dynamically positioned mode, are fifth-generation drilling rigs and represent the most up-to-date capabilities.

Friede Goldman Offshore has agreed to outfitting the rigs, Ocean Rig (Polycrest) will operate in Norway and North Sea areas, and Sedco Forex is planned as operator for other worldwide drilling projects.

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Copyright © 1999 Gulf Publishing Company