• Is Offshore Oil on the Way Out?


Is Offshore Oil on the Way Out?

Jun 20 2020

Following the historic crash triggered by the COVID-19 pandemic and the price war fuelled by Russia and Saudi Arabia, analysts are warning offshore oil could be on the way out. Referencing spending cuts, cancelled projects, well shut-ins, demand slumps and flailing investor confidence, industry experts say the same issues afflicting onshore producers have now rippled into the offshore sector.

One of the major factors set to drive the downward trend is the expense associated with offshore drilling. Despite major advances in efficiency over the past decade, offshore drilling is still significantly more expensive than onshore projects. As a result, offshore producers may find it far more difficult to turn a profit in the post-coronavirus economy.

28% of UK continental shelf dormant

A recent study analysing profitability in the North Sea sheds light on the issue, with 28% of oil reserves in the UK continental shelf no longer worth extracting due to high production costs. With Brent crude currently trading at under US$45 a barrel, more than a quarter of oil reserves were classified as uneconomical.

The Gulf of Mexico is also experiencing a downturn, with Baker Hughes counting just 12 rigs in a recent report analysing activity in the United States section. This represents a significant drop from the 22 rigs counted in March. In fact, an analyst from Forbes warns it’s the lowest weekly rig count seen in a decade.

Oilfield services expenditure set to plummet

Finance is also an issue, with Rystad Energy warning the COVID-19 pandemic will slash oilfield services expenditure in Europe by US$5 billion. Almost all oil extraction on the European continent occurs offshore, which could see around 20% of oilfield services facing bankruptcy. On a global scale, offshore oil represents around one third of total production. If benchmark prices continue to slump, the impact on the world’s offshore oil industry could be devastating.

A silver lining?

While the outlook is bleak, some experts have a more buoyant outlook. Last time the oil industry was hit by a crisis, the offshore sector adapted to become leaner and more efficient, with lower breakeven costs and higher productivity levels.

As the oil industry navigates the new normal, experts such as Dr. Raj Shah, David Phillips and Ms. Shana Braff are attempting to predict what’s on the horizon for the sector. From pricing to demand, ‘The Only Certainty is Uncertainty for Corona-Stricken Oil Industry’ explores what’s ahead for the post-pandemic market.

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