Manup Industry Roundup - W1123: NEWSL -01
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ESG conscious investors are demanding that big oil companies lower their carbon footprint while investing in low-cost greenfield oil projects.
For instance, ExxonMobil CEO says its policies and companies need to strike the right balance between energy security and ways to cut emissions from oil and gas.?Meanwhile, Chevron looks to advance more than 100 projects this year to lower the carbon intensity of its operations.
Below are the oil and gas stories and news that made headlines this week carefully curated by?Manup.
Summary of the news
Workforce Watch
Report: Drilling Contracting Activity Slows As Operators Take
Drilling contracting activity has slowed in March with only a few contracts announced so far this month, according to Evercore ISI’s latest Offshore Rig Market Snapshot.
This follows a “busy” February where five drillships and four jackups secured new multi-year terms. This included a new three-year contract from Petrobras for the?Valaris DS-8, which was cold stacked at the start of the pandemic, as well as new one-year extensions for two Stena drillships operating offshore Guyana for ExxonMobil.
With all available sixth and seventh-generation drillships spoken for and only eight floaters rolling off contract over the next few months, “contracting activity is likely to remain limited in the near term,” the firm said.
“Meanwhile we count 14 cold stacked and 12 newbuild drillships available, of which seven are scheduled [to be] delivered this year,” Evercore said in the report. This includes the 99% finished seventh-generation?CAN-DO, the lone Singapore-based drillship transferred to Rigco Holding Pte Ltd following the merger of Keppel and Sembcorp Marine; and the reportedly 74% completed?Guarapari, one of four remaining floaters originally ordered for Sete Brasil.
“We believe [that] four or five newbuild drillships from the South Korean yards are more likely to be delivered, including the?Valaris DS-13?and Transocean’s?Deepwater Aquila?from DSME; and the?Stena Evolution?(former?Ocean Rig Crete) and?Dorado?from Samsung,” the firm commented.
“Recall [that] in December 2021, Stena Drilling paid $15 million for the option to purchase the?Crete?for $245 million,” Evercore said. “While the purchase option has yet to be exercised, preparation of the seventh-generation drillship is underway with the rig leaving the shipyard for sea trials.”
Westwood – Buyer Beware When It Comes To Exploration Farm-Outs
Since 2017 high impact (HI) exploration wells drilled outside USA and Canada, where equity was farmed-out by one or more of the participants before drilling, had approximately half the commercial success rate and median discovery size than those wells that were not farmed-out.
In a recent farm-out drilling performance study, Westwood analysed the results of 419 high impact exploration wells drilled outside the US and Canada, which completed between 2017 and end October 2022. 26% of these wells had been subject to a farm-out deal and a proportion of the cost of the well was covered by the company farming-in.
The analysis shows that companies usually know which are their best prospects and have reduced their exposure to exploration failure by selling down their equity in lower ranked prospects before drilling, whilst those who choose to farm-in have exposed themselves to lower success rates and smaller discoveries.
Exploration for hydrocarbons is a high-risk business and only one in every three high impact exploration wells drilled between 2017 and end 2022 resulted in a potentially commercial discovery. The cost of failure can be high and explorers will try to manage their exposure according to their appetite for risk. Exploration companies frequently invite other companies to join them in the venture in order to share the cost and the risk, by farming-out equity in planned wells.
Companies have been farming-out higher risk wells
Westwood assigns a pre-drill chance of commercial success to exploration wells based on the historical success rates of analogue prospects. The average pre-drill estimated chance of commercial success for wells that were farmed-out was 19% compared to 28% for wells which were not farmed-out. Companies tend to sell equity in higher risk wells.
Farm-out wells have a lower commercial success rate
The actual commercial success rate of high impact exploration wells that had been farmed-out and were completed between 2017 and end October 2022 was 17% compared to a commercial success rate of 37% for those wells that had not been farmed-out. The success rate of farm-out wells was slightly less than would have expected for, whilst wells that were not farmed-out had a significantly higher success rate than historical analogues. Companies tended not to farm-out prospects that they knew to be lower risk.
Farming-in can be successful but may result in smaller discoveries
The difference in success rates should not be taken as an argument against ever farming-in. For some companies, a decision to farm-in to an exploration opportunity can pay off handsomely. Between 2017 and end October 2022, 19 commercial discoveries were made from the 111 farmed-out wells, discovering an estimated total of 10 billion boe of oil and gas. This compares to an estimated 60 billion boe of oil and gas resources discoveries by non-farmed-out HI wells.
The average size of discoveries made in wells that had been farmed-out is very similar to that of those that had not, at ~500 mmboe. This is, however, biased by a few giant discoveries such as Venus in Namibia (3 bnboe), Yakaar in Senegal (2.5 bnboe) and Ken Bau in Vietnam (1.25 bnboe). The median size of discoveries made in farmed-out wells is just 127 mmboe compared to 246 mmboe in discoveries that had not been farmed-out. Farm-out discoveries are generally smaller.
Exploration companies have been successfully reducing their exposure to failure by farming-out their equity in high impact exploration wells with a lower chance of commercial success and smaller volumes than those where they retained their equity from the time when they entered the licence.
Farming-in to drilling opportunities can bring great rewards. Just look at Hess and CNOOC’s successful farm-in to the Stabroek license in Guyana in 2014, accessing 55% of nearly 11 billion barrels. Nonetheless, the statistics show companies choosing to farm-in should be mindful of the concept of “caveat emptor” or “let the buyer beware”
Is There a Chance OPEC+ Enters Maximum Production Mode in 2023?
There is a low probability that OPEC+ enters maximum production mode this year.
According to Matthew Bey, a senior global analyst at risk intelligence company RANE, the group already has a production agreement for the year and that OPEC+’s core non-Russian leaders - Saudi Arabia, the UAE and Kuwait – all seem content with supporting the market and oil prices with a restrained oil production policy.
“In order for these countries to change their tune there would need to be an exogenous shock forcing them to respond,”
“If the West continues to scale up sanctions on Russia and oil prices increase dramatically, then the rest of OPEC+ could respond. However, in order to see this occur we would need to see the West agree to place significant secondary sanctions on Russia’s oil to prevent China, India and Turkey from buying its oil, but Washington has thus far opposed,”
“One would presume there would need to be a dramatic escalation in the conflict in Ukraine to get Washington to place secondary sanctions on Russian oil exports, as they would know it would dramatically increase politically sensitive gasoline prices in the U.S.,”
According to Bey, “the other shock” that could result in OPEC+ entering maximum production mode “would be a supply shock that increases production that forces the Saudis to engage in a war for market share, akin to the 2014-16 price war”.
“However, this would need to see a significant increase in U.S. shale production, whose growth has been slowing down, and/or a relaxation of restrictions on Russian oil, which would require an end to the Ukraine war, which seems highly unlikely in 2023,”
OPEC+ Production Cuts
At the 33rd OPEC and non-OPEC ministerial meeting, which took place in October 2022, OPEC+ decided to cut its overall production by two million barrels per day from August 2022 required production levels, starting in November 2022.
According to a production table posted on the OPEC website following the meeting, OPEC+’s voluntary production figure from November 2022 to December 2023 is 41.856 million barrels per day. The group’s August 2022 required production level was 43.856 million barrels per day, the table shows.
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The latest OPEC and non-OPEC ministerial meeting took place via videoconference on December 4, 2022. At that meeting,?OPEC+ decided to hold production steady. On February 1, the 47th Meeting of the Joint Ministerial Monitoring Committee (JMMC) took place via videoconference.
At that meeting, the JMMC reaffirmed its commitment to the Declaration of Cooperation, which extends to the end of 2023 as agreed in the 33rd OPEC and non-OPEC Ministerial Meeting, a statement posted on OPEC’s website earlier this month noted.
The next meeting of the JMMC is scheduled for April 3, while the next OPEC and non-OPEC ministerial meeting is scheduled for June 4.
Oil Majors Juggle Cheaper Crude With Lower Emissions
The world’s biggest international oil and gas firms continue to pledge lower-emission operations to supply the world with the hydrocarbons it needs and will need in the future.
Unfortunately for Big Oil, not all basins and areas of production are equal, so companies have focused in recent years on investing in the most prolific operations that yield the most profitable oil with relatively lower emissions than in other locations.
To keep investors in the sector, the largest oil firms continue to tout their progress in reducing emissions.
But to create additional value for shareholders via higher returns, companies are prioritizing specific basins and resources they believe will yield the cheapest-to-extract oil and natural gas in their portfolios.
In the era of ESG investment and the energy crisis following the Russian invasion of Ukraine, Big Oil is now juggling the need to keep producing oil and gas with the imperative to cut emissions if they want to continue to have a license to operate.
Despite the surge in renewable energy in recent years, the world still relies on fossil fuels for more than 80% of its energy needs.
“Strike The Right Balance”
Policies and companies need to strike the right balance between energy security and ways to cut emissions from oil and gas, ExxonMobil’s chief executive Darren Woods said at the CERAWeek by S&P Global conference last week.
“It would be a mistake to abandon any one of those objectives,” Woods added.
ExxonMobil targets to grow its Permian production to 1 million barrels per day (bpd) and, at the same time, reach net-zero emissions at its operated unconventional assets in the Permian by 2030.
“One of the points in doing that is to demonstrate to the world that we can do both,” Woods at CERAWeek.
Exxon is also one the least emission-intensive refiners in the world, the executive added.
If Exxon doesn’t make the diesel and gasoline the world needs, someone else – with higher emission intensity operations – will, and there wouldn’t be a net benefit for the world in terms of emissions abatement, Woods noted.
The other U.S. supermajor, Chevron, said on its Investor Day 2023 last month, “We’re making progress toward our upstream CO2 intensity reduction targets. We continue to prioritize the projects expected to return the largest reduction in carbon emissions cost efficiently.”
Chevron looks to advance more than 100 projects this year to lower the carbon intensity of its operations, focusing on energy management, flaring reduction, and methane management, among others.
“Our goal on methane is simple – keep it in the pipe.”
The New Advantaged Resources
Very productive fields and newer basins tend to be less emission-intensive per barrel due to the sheer volumes of production and new designs to make extraction in newer fields less carbon-intensive, by electrifying operations
For example, In the deepwater U.S. Gulf of Mexico and onshore Saudi Arabia, per-barrel production is among the cheapest and cleanest at the same time because the wells there are very productive, that’s according to Julie Wilson, research director of global exploration at Wood Mackenzie
Norway also boasts some of the lowest-emission barrels globally.
Operators offshore Norway have started to replace gas turbines with electricity from onshore – Norway’s electricity comes predominantly from hydropower – bringing down emissions from the newer oilfields.
For example, Phase 2 of the giant Johan Sverdrup oilfield will emit 0.67 kilograms (kg) of CO2 per barrel of produced oil, thanks to power from shore, operator Equinor says. The global average is 15 kg/barrel, according to the Norwegian major.
Workforce Watch
Employment in Texas Upstream Sector Rises Further
Employment numbers in the Texas upstream sector are continuing to grow month-on-month with the Texas Independent Producers and Royalty Owners Association (TIPRO) saying there is a continued demand for talent.
Going over the latest Current Employment Statistics (CES) report, TIPRO notes that direct Texas upstream employment for January 2023 totaled 198,100, an increase of 1,700 jobs from revised December employment numbers. Texas upstream employment in January 2023 represented the addition of 24,000 positions compared to January 2022, including an increase of 1,600 jobs in oil and natural gas extraction and 22,400 jobs in the services sector, TIPRO said.
The Houston metropolitan area, the largest region in the state for industry employment, showed an increase of 700 upstream jobs in January compared to December, for a total of 66,400 direct positions, according to TIPRO.
Houston metro upstream employment in January 2023 represented an increase of 6,200 jobs compared to January 2022, including an increase of 400 in oil and natural gas extraction and 5,800 jobs in the services sector, the association said.
The association further noted that there was an increase in search for talent as a total of 12,478 positions were open during the month of January, including 5,313 new job postings added in the month by companies.
Throughout the state, TIPRO says that most active sectors in searching for new talent were Support Activities for oil and gas operations, gasoline stations with convenience stores and crude petroleum extraction. Postings were mostly located in Houston, Midland and Odessa.
The top three companies ranked by unique job postings in January were Love’s (1,151), Baker Hughes (617) and John Wood Group (582), according to TIPRO.
Commenting on the data released by Texas comptroller’s office, TIPRO highlighted that production taxes paid by the oil and natural gas industry to the state of Texas generated nearly $800 million in tax revenue in February 2023.
According to the comptroller’s data, in February, Texas oil producers paid $492 million in production taxes. Natural gas producers, meanwhile, last month also paid $305 million in state taxes.
Citing data from the U.S. Energy Information Administration (EIA), TIPRO adds that oil output in the Permian Basin is forecasted to hit a record 5.68 million barrels per day (bpd) this month. In the Eagle Ford Shale in South Texas, oil output in March is also anticipated to reach 1.18 million bpd. Overall, U.S. crude oil production in March will top 9.36 million bpd, forecasts the EIA.
EIA further said that in the Permian Basin, natural gas output will hit 22.2 billion cubic feet per day (bcf/d) this month, while production of natural gas in the Eagle Ford Shale is forecasted to grow to 7.422 bcf/d. Altogether, EIA forecasts natural gas production in the United States to total 96.6 bcf/d in March.
Other stories we are following…