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I hope a couple of drilling companies go bust

Thursday, August 13, 2015

I hope a couple of drilling companies go bust to encourage the others,' said Dr David Bamford, conference chairman and a non-executive director of Premier Oil

Drilling rig rental costs ('day rates') have kept high probably longer than they should have done, given that the oil price started dropping in June 2014, and you would expect the drilling rig rates to go down in step with the oil price.

But by the day of the conference (June 5 2015), 'day rates are plummeting for all sorts of rigs especially deepwater rigs,' said David Bamford, chairman and producer of the Finding Petroleum 'Cost Reduction in This Era' conference in London on June 5 (and a nonexecutive director of Premier Oil).

'My comment is, 'at last, hoorah''.

'I hope a couple of drilling companies go bust to encourage the others.'

This is not vindictiveness, the problem with high drilling rates is that they have made it impossible for operators to consider deepwater wells, which means a large amount of prospective parts of the world become off limits, he said.

'Deepwater wells had become uneconomic. When a company drills a well [costing] $250m offshore North West Africa in deepish
water, that is not an economic proposition for anybody.'

If drilling costs go down, it will 'bring deepwater drilling back into the frame and make drilling deepwater wells viable again, they are not at the moment,' he said.

How bad is it?

You can get a sense of how bad this oil price crash is, by comparing the current crash with the last three (1985-86, 1997-98, 2008-2009), with graphs published by BP showing the percentage drop in price over time, from 1 month to 21 months after the previous peak.

The graph shows that the 1997-98 crash was actually the least severe, in terms of how low and how fast the price dropped.

However this might have been the crash with the biggest impact on the industry.

Mr Bamford said that this was the crash 'I remember best, because I was most immersed in it,' he said. 'That led to the demise of Amoco, Arco, Texaco, Fina, and Elf.'

'[From] where we are now, you cannot predict where we're going to finish up. So there's a lot of uncertainty in several time scales.'

High costs

The oil and gas industry had problems with return on investment before the oil price started to sink. 'Investors have become
exceedingly skeptical about our sector because they lost money,' he said.

'The North Sea was and is threatened by high costs. Exploration success is failing around the world,

With oil and gas development projects, 'overruns and lateness are almost mandatory,' he said.

'The low oil price presents the need and opportunity to fix some of these things.'

With subsurface costs. One rule of thumb is that half of your money should be spent on drilling, a quarter on data (mainly seismic), and a quarter on people costs, known in the industry as 'G&A' (general and administrative), which includes salaries, travel expenses, training and 'all that sort of stuff'.

This 50:25:25 ratio 'works pretty well,' he said. If a company has a budget which goes out of line with that, it's 'a warning sign'.

The industry should look at is its habit of making a massive reduction in staff when the oil price goes down, and then a massive hiring when the price goes up.

Perhaps the oil and gas industry would be better if the oil companies were flatter, with less senior executives, and more use of outsourcing, he said.

Watch David's talk on video here

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» Finding Petroleum
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