Cheap oil triggers supplier price war in the North Sea

The fall in exploration work frees resources to increase efficiency, especially for well optimization - but it can strain relations between operators and suppliers. For example, Helix Energy Solutions and Island Offshore Subsea (light well-intervention vessels serving small operators) are holding their breaths as current rates may only last 6 more months.

The impact of low oil prices may lead to a boom in well optimization work, and a complete reorganisation of the relationship between operators and service providers in the North Sea, according to a senior executive at one operator, speaking to Upstream Intelligence on condition of anonymity.

According to The UK Continental Shelf Activity Survey 2015 released by Oil & Gas UK, in 2014 the production revenues of the industry amounted to $36 billion, the worst since 1998, while $14 billion was spent in 2014 on operating the UK Continental Shelf - approximately eight per cent more than in 2013.

Based on current project performance and investment, investment is expected to decrease to between $14–17 billion in 2015. Merely eight new fields were approved together with 28 brownfield opportunities. Besides, only 14 of the expected 25 exploration wells were drilled, continuing a plunging trend since 2009, according to the report. Overall, the fall in oil prices caused $8 billion worth of losses for the industry, the worst since the 1970's. 

Hence, companies operating in the North Sea, such as Statoil, Chevron and BG, are re-evaluating their investments in the region.

One consequence of cheap oil has been a fall-off in discretionary spending on exploration and an increased interest among operators in redeploying resources to maximise the returns from their existing assets.

“I think the low oil price is the best thing that could have happened for well optimization, as it’s forced us to look at what’s existing in the ground and to improve production from these assets, rather than installing new wells. We’ve become more frugal and more efficient, and that’s actually the best thing that could have happened from the point of view of the basin,” the source said.

 A spot market for vessels?

However, this potential boom in optimization is being hampered by difficulties in accessing subsea wells using rigless techniques, and the difficult relationship that exists between some suppliers and operators. One particular source of friction, according to the source, is the terms of the commercial relationship between owners of light well-intervention vessels such as Helix Energy Solutions and Island Offshore Subsea and smaller operators.

“There tends to be a small number of companies and they can dictate the price to everyone but a handful of majors who are able to give them 200-day contracts, and in the past, the rest of us haven’t really had a look-in. But that seems to be changing: in the past few months we’ve had a lot more phone calls from the owners as their majors decide they don’t have the feedstock in the next 12 months,” the source said.

The source described the situation as “who can hold their breath the longest” - suppliers were reluctant to cut prices just because operators were suffering from lower profits because they didn’t pay more when the price per barrel was $110. Besides, if they take “two steps back” now, they might find it difficult to recover the ground when the market strengthens.

“When we start to look at our budgets for next year then, yes, we would want to exploit the opportunities for well optimization, but we’re generally told that these rates will exist only for the next six months. I think that the days of having a contract in place for a fixed workload is disappearing in the UK continental shelf," said the source.

“We’re going to have to change our model to what’s available at the time, what we can use, if it’s sitting ready and what’s the price on the day. It’ll be like the Canadian land market, where whoever is nearest to the well site gets the job for whatever’s agreed on the day. Vessel owners will have no choice but to adapt to that,” the source added.

The missing piece

Another source of tension between operators and service providers is over the development of coiled tubing technology that is deployable from a light well-intervention vessel.

“A lot of our wells are not sitting on platforms, they’re on subsea templates, so there’s a significant untapped resource there in our subsea wells that have the same problems as our platform wells but we can’t get access to them with the technology. On a platform you have maybe four or five wells and you share the cost across them all; on a subsea system you have a single well so to bring the technology out to that well you have to have either a pretty high production gain or you need to campaign a number of wells into it,” said the source.

However, there is a gap in service providers’ capabilities that is making this difficult to achieve.

“The one technology that would unlock the most opportunities is the ability to get liquids into the well bore from a light well-intervention vessel. If you can do that you can use stimulation fluids, any kind of an acid, you could use asphaltene dissolver, you can clear natural reservoir debris, you can introduce chemical breakers for scales or asphaltene. You could potentially unlock a lot of opportunities,” said the source.

Sharing R&D costs

The problem here is that although the technology is close to being deployable from a monohull vessel, some issues need to be resolved - and neither side is willing to pay for the necessary R&D work.

“It’s very close to being there, and as an industry we would have made great progress if we had not started to see additional pressures from oil price falls. Everyone went into safeguard mode, so saying to operators, can you add to your woes by becoming part of this joint effort and offering some open-ended funding so that a vendor service provider can make this tech available wasn’t likely to work. As a result, that technology is now sitting in a yard somewhere, undeployed. It’s a stalemate,” said the source.

Kevin Lacy, a former Vice President Drillings and Completions for Chevron and BP, told Upstream Intelligence that operators ought be more willing to share the costs of R&D.

“It’s a very difficult situation. As oil companies have shifted their research to the service companies, the service companies have rightfully said, well I need a margin to invest for the long term. In shifting this burden to them the contracting approach by the operators is quite frankly brutal. As the oil price has gone down they’ve asked for discounts and walked away from contracts, and the service companies have minimal recourse in many cases, and on top of that they’re expected to invest for the long term,” he said.

Oil and Gas UK, the British industry trade body, is trying to mediate between the two sides on this dispute. It has already chaired one meeting among operators to try work out how they might help the service providers to make coiled tubing available.

The source said the process of making a deal had been made more difficult by the distrust that had grown between the two sides. “There’s an attitude among operators that the service provider is in business to provide this equipment, so why are they asking us to pay for their R&D so that they can then charge us for using it at the end?” 

The source said these negotiations would be a stiff test of the new co-operative spirit that was introduced by last year’s Wood Review.

“There is this new operating philosophy that we’re all working as a single unit for the benefit of the basin rather than for our parent companies.” The source added: “We might be able to get some government funding from an innovation council – that could help the service provider to continue the development of this technology and unlock some of the potential. And OGUK is actively trying to meet the challenge.”

Another factor in the North Sea that is eroding the relationship between operators and monohull owners is the likely introduction of light semi-submersible units over the next 18 to 24 months.

“When that tech becomes available, than coiled tubing can become deployed from it without any additional spend, so that’s an additional reason why service providers are not incentivised to prove up the technology,” said the source.

The submersibles, which have a more stable double-pontoon system are being used for well construction rather than production optimization and they will be freed by the decline in the drilling of new wells.

“The monohull vessel organizations are getting a little jittery because they realise that these vessels are not being used, so the rates for them will come down and because they can use off-the-shelf technologies, they could become cost effective,” the source added.