Asia offshore drilling drops
India’s offshore is the only part of Asia likely to see activity perk up in the short term, as the slump spreads
OFFSHORE activity remains lacklustre across the continent, except in India. Excluding units being built, Asia has 227 delivered drilling rigs – semi-submersibles, drill ships and jack-ups – according to consultancy IHS. About a third of that total remain idle or stacked. The downturn has hit Southeast Asia the hardest.
But in India drilling rig activity remains relatively robust, with the utilisation rate running at 93%, compared with 51% in Southeast Asia.
India’s biggest oil firm, state company ONGC, is driving the country’s demand for rigs; part of its effort to maintain or even boost offshore production. The recent announcement of gas-pricing reform could even restart offshore gas development, which bodes well for the future.
Under the latest reform, if oil prices recover to $60 a barrel or more then a gas price of $7-8 per million British thermal units for “new difficult-to-develop fields”, should be enough to push some deep-water gas discoveries into producing assets. India, according to some estimates, has 60 trillion cubic feet of gas off its east coast in deep and ultra-deep fields. To date there have been over 25 gas finds in India’s deep waters, although only one has been developed. The offshore acreage is dominated by Reliance and ONGC.
One of the most exciting finds over the past two years has been MJ-1 or D55 in the prolific KG-D6 block, operated by Reliance on behalf of its partners BP and Niko Resources. The find opens up a deeper, liquids-rich play off India with significant follow-on potential yet to be tested.
While drilling has not dropped significantly in India, and could even improve, offshore activity is not expected to pick-up elsewhere in Asia, with demand to remain flat at best.
National oil companies in other parts of Asia, particularly Malaysia’s Petronas, are slashing capital expenditure along with drilling campaigns. Exploration activity is the first to go. Chinese offshore producer Cnooc cut back capex 29% last year and will trim another 11% off this year.
In Southeast Asia, where rig utilisation rates have dropped from 77% in 2015 to just over 50% so far this year, offshore activity has been hit hardest in Malaysia and Indonesia.
The offshore rig count in Indonesia has dropped to a multi-year low of 15, which suggests it is only a matter of time before production declines accelerate. In the short term, output will probably rise this year as new offshore fields −which have been under development over the past three to four years − come online. An unattractive fiscal regime, high levels of bureaucracy and unclear regulatory framework regarding contracts have all slowed exploration and production investment.
Most of Malaysia’s production comes from offshore fields. Over the past decade the country has held off falling output by developing expensive deep-water projects and using enhanced oil recovery in mature fields, where breakeven costs are high. But a combination of capital spending cuts and high-cost mature fields will eventually see production fall. Total capital spending in 2015 dived under 60bn ringgit ($15.3bn) and is expected to drop to 50bn ringgit this year. Over the next four years, Petronas will slash spending by an average of 12bn ringgit per year, or 20% from 2015 levels. This is already being reflected in the rig count of 13, which is at its lowest levels since the late 1990s.
Asian rig builders are reeling from the oil-price rout too. Building activity at Singapore company Keppel, the world’s biggest maker of jack-up rigs, and Sembcorp Marine, its local rival, has crashed.
Keppel expected to deliver 15 jack-up rigs last year, but the yard ended up handing over seven, as customers asked for delivery delays. Sembcorp, which delivered eight jack-ups in 2014, supplied just one last year. Singaporean and Chinese companies build most of the world’s jack-up rigs. While yards in South Korea, as well as Singapore, dominate the higher-end market for semi-submersible rigs and drilling ships used in deeper waters.
With many offshore projects being put on hold or cancelled, South Korea’s Hyundai Heavy Industries, Daewoo Shipbuilding, and Samsung Heavy Industries, which all make drill ships, posted losses last year, as did the Singapore yards.
Order books have been decimated and the industry’s immediate prospects look grim. Asia’s offshore industry has responded by slashing costs to try to cope with the slump. But as Chinese rivals come offering generous financing terms the traditional rig builders could find themselves under even more pressure.
This article is part of an in-depth series on offshore production. Next article: Bright spots in the offshore gloom.