Falling Oil Prices Not Reason Enough to Divest in Offshore Operations

January 15, 2015 Audubon Companies

Offshore exploration and field development has long played an important role in the portfolios of energy companies. However, as demand for crude has decreased and supply has risen, oil prices have been dropping in 2014, putting related markets into flux. Yet for companies that already have major investments in offshore field developments, falling oil prices aren’t enough of a reason to divest. “You just don’t stop a development like this,” Moody’s senior vice president Terry Marshall recently told the Houston Chronicle, adding that their offshore investments were planned many years before the downturn. Companies like Chevron, Total, and Hess Corporation are maintaining investments in offshore ventures that will continue to reliably produce crude at a profit as long as it doesn’t go below $40 per barrel for an extended period of time. These larger companies can survive due to their integrated business model.

Smaller upstart companies like Venari Resources may also still be able to maintain profitability in offshore field developments — including in the Gulf of Mexico, which has had its share of uncertainties since BP’s 2010 Macondo spill — at $60 per barrel, particularly for fields that produce large volumes of crude. Yet other independent operators that don’t have an integrated model could be forced to cut back on offshore field exploration and appraisal projects in the short term.

Drilling contractors like Transocean are being affected as well. A Financial Times article in early November revealed how the company is facing more lengthy idle times between utilization contracts as well as cancellations and delays of other contracts as oil companies re-evaluate spending. Transocean and other contractors to the offshore oil industry will have to be more creative in navigating through the slumping market in the short term, potentially by expanding offerings to markets that are speculated to grow in the future, such as ultra deepwater infrastructure and floating production storage and offloading (FPSO) vessel development.

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