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Cheap Oil and Offshore Support

By Pat Gray | July 1, 2016


Pat Gray

You may view the current state of offshore as chaotic, tumultuous, convulsive; maybe even troubled. But it’s not exactly so.

The oil business is cyclic. It is always tied to the cost of producing a barrel of oil, which is where chaos lies. With fracking, deepwater drilling, old wells squeezing out more oil, foreign discoveries and Organization of Petroleum Exporting Countries (OPEC) producers, current oil production is raining on the world like Noah’s flood.

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For some countries, this leads to an oil glut, like in the U.S. We store it in any conceivable facility — steel tanks, salt domes, empty million-gallon oil tankers anchored in ports. Since refineries are going full blast to export a refined product (gasoline) to other countries, less supply is available to Americans, who pay inflated prices (only partly due to exports). Refining crude oil into solvents and benzene doesn’t put a dent in reserves because most of that is imported at $50 or less.

Not too long ago, the U.S. had an oil deficit and was dependent on OPEC members to supply its needs. Due to demand, they could arbitrarily set the price of oil, establishing it at $100-plus a barrel. Of course, this transferred to domestic suppliers.

However, government leaders previously enacted a law that said the nation’s producers could no longer export crude oil because we did not have enough to meet our needs. But they could export refined products. (Recent gyrations in Congress may have sidestepped the issue, and crude may soon be exportable again.)

Since then, deepwater drilling has evolved and shale oil has got on board. Now we are stuck with an abundance of $50 crude oil. OPEC again manipulated prices to about $50, perhaps hoping the shale producers would be forced to shut in.

If U.S. oil is exported into the world markets, what would this mean for the price of oil? After all, $50 oil is still profitable.

All these ramifications affect oil field suppliers, with helicopter support being a major player.

Hundred-dollar oil was like manna from heaven. Producers demanded bigger, faster, safer helicopters, and manufacturers built and sold them. Fleets were modernized. Some producers and operators went with all twin-engine aircraft for their fleets. Others stuck with proven singles but with bigger engines and more capacity. So far they have not been seriously affected, but some companies have seen stock prices drop.

Other sectors of the oil supplier/service business have not been so fortunate. Many small companies trying to grow their businesses are overextended and are either filing for Chapter 11 bankruptcy protection (in the U.S.) or are being bought by the larger suppliers for peanuts. These include small drilling companies, well-completion services and work-over crews. There is some chaos, but again that’s not unusual when oil takes a dip. Seasoned oil patch observers take it in stride.

Amazingly, helicopter providers have not been broken. Bent, maybe, but they still are fulfilling contracts set years ago, using the same equipment written into the original bids. There has been and will continue to be pressure to increase operational efficiencies (such as by combining flights, using less expensive helicopters for routine jobs and repositioning offshore fuel sites to reduce flight times).

Another innovation is the rise of helicopter leasing companies. Ten years ago, they were almost unheard of (likely because they were doing large airplanes, and a helicopter deal was considered small potatoes). Recently, they have realized helicopters have a hefty price tag.

The timing could not have been better, especially for the users. The big advantage of leasing is the conservation of capital. This will assist big operators greatly during downturns like the current oil price slump and the inevitable reduction of flight hours and numbers of helicopters flown (especially if the price of oil continues a downward spiral).

Questions remain. Can the oil industry flourish with $50 oil? Where is the bottom? What is the implication if we reach it? This has never happened and is unlikely now. In the mid to late 1980s, we saw many oil rigs stacked over Texas and Louisiana, including mothballed jack-ups and floaters in ports all up and down the Gulf Coast.

Today, opinions vary throughout the oil patch as to where prices will be in one to two years. Regardless, helicopters are here to stay. It will require innovation, readjustment and resiliency, all proven characteristics of worldwide operators.

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