The Rig Market

Oil Market Background

It’s likely that many of our readers in the offshore and tanker sectors have already seen the recently published report from the US National Petroleum Council. For those who haven’t, the report is basically an outlook through 2030 for global oil and gas supply and demand. It’s also pretty certain that the offshore sector in particular is quite happy and not surprised with the conclusion of the report: although oil is a non-renewable source of energy, practically speaking the world is not running out of oil; it’s simply facing a sustained period of tight supply that will make meeting projected energy demand very challenging. Figure 1 illustrates the uncertainty of current oil reserves being able to sustain future demand as well as the projected impact that new discoveries will have on the overall supply of oil. Part of the challenge facing the oil majors is that many of the potential reserves that could meet the future surge in demand lie in unconventional areas, such as the Canadian Oil Sands and harsh arctic environments. Because the exploration and production (E&P) of oil from such areas requires new technology due to its complexity, the costs associated with E&P have basically doubled. As Figure 2 demonstrates, the projected total oil and gas industry investment up until 2010 is $2.1 trillion. That’s $420 billion per year, which is nearly double when compared to the years 2001- 2005. Figure 2 also illustrates that the bulk of the oil and gas industry’s investments are in E&P, which is almost expected because historically when supply is tight and demand is forecasted to increase the oil majors spend more of their petrodollars on E&P.

This year alone the oil majors are expected to spend billions on exploration and production alone. In turn this implies a high utilization rate among rigs for the foreseeable future. It is our understanding that the current boom in the offshore sector is being and will continue to be sustained by the amount of cash the oil majors are spending on E&P. Figure 3 illustrates the trickle down effect that E&P budgets have on the whole offshore industry. From exploration all the way down to decommissioning there is no doubt that the oil majors are indirectly funding growth in every sector of the offshore industry through their E&P spending budgets which are in turn supported by high oil prices. The current price of oil has increased the margins of the oil majors and every sector in the offshore service and transportation sector has benefited from it.

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