Oil Rigs Left Idling Turn Caribbean Into Expensive Parking Lot
Comment of the Day

July 23 2015

Commentary by David Fuller

Oil Rigs Left Idling Turn Caribbean Into Expensive Parking Lot

Here is the opening of this interesting article from Bloomberg.

Imagine parking your $300 million boat for months out in the open sea, with well-paid mechanics hovering around it and the engine running.

The Gulf of Mexico and the Caribbean Sea have become a garage for deepwater drillships -- at a cost of about $70,000 a day each. It’s either that or send your precious rig to a scrapyard.

The dilemma underscores how an offshore industry that geared upfor an oil boom is grappling with a bust. Rig owners are putting equipment aside at unprecedented numbers as customers including ConocoPhillips pull back from higher-cost deepwater exploration. That’s helped make Transocean Ltd. and Ensco Plc two of the three worst performers in the Standard & Poor’s 500 Index over the past year.

“Most contractors have never seen an environment like this, where demand is falling as quickly as it is,” David Smith, an analyst at Heikkinen Energy Advisors in Houston, said in a phone interview. “It’s been a big headache, and the problem is that we’re not halfway through.”

A growing glut of newly built exploration vessels looked worrisome enough before the oil rout. Now it’s beginning to look disastrous.

Shipyards continue to roll out new units to meet orders made during the boom, but the rig providers may not need them anymore. As contracts expire, many producers may not renew them, and some are being canceled.

David Fuller's view

A big problem for all crude oil producers is the speed with which the oil price slumped.  Of course it has happened before and the plunge was even more dramatic in 2008.  However, prices recovered relatively quickly because OPEC producers reduced supplies and others followed this lead. Speculators also bought crude oil.

I maintain that technology is the biggest factor behind the current decline in crude oil and all other industrial commodities.  Slow GDP growth is another important reason.  Together, these two factors have changed market dynamics, because it has been more profitable to sell rather than buy commodities. 

Being the most important commodity in the world, crude oil’s slump casts a long shadow over all other industrial resources.  This time, crude oil will not recover as quickly as we saw over six years ago, at least not without significant supply cuts.  Deep water drilling companies have reduced supply but Saudi Arabia is producing as much oil as it can, to hold market share and squeeze out rivals.  Other low-cost oil producers are following this example. 

Demand for cheap commodities will increase, especially as global GDP growth gradually improves over the next few years.  However, oil faces growing competition from natural gas and renewables, of which solar is becoming the most important.  I think Brent crude will mostly stay within a $70 to $40 range, and when it does move somewhat higher, it will not approach the heights we last saw in 2011-2012.       

Back to top

You need to be logged in to comment.

New members registration