Oil price uncertain - but offshore recovery assured
This is North Scotland, March 2001
by Stephen Boyle
If you want concrete evidence of rising confidence and investment in the offshore industry, just count the rigs, writes Stephen Boyle, head of business economics with the Royal Bank of Scotland Group.
OPEC's production cut has had more than its intended impact on the oil price.
Brent averaged almost $26 per barrel in January and has hovered around $29 since the new quotas came into effect on February 1.
So much for "stabilisation" around $25.
If the outlook for the oil price remains perennially uncertain, the recovery in offshore activity this year is now assured.
Long hoped for and much heralded, there is now concrete evidence of rising investment.
Baker Hughes, the global oil services company, has been monitoring the number of drilling rigs in operation for more than 25 years.
The rig count is a good measure of both industry confidence and investment.
The price collapse of 1998 quickly resulted in a reduction in drilling activity.
Operators scaled back investment spending as the falling price hit profits and cashflow.
Worldwide, the trend in active rig numbers dropped by 35% between early-1998 and late-1999.
But the response to the higher oil price has been rapid and substantial.
January saw more than 2,370 rigs in operation across the globe, the highest figure for any month since January, 1987.
The growth in drilling has been greatest in North America and Latin America.
Until recently, however, Europe – mainly the UK and Norway – had lagged some way behind.
In the rest of the world, the rig count trend bottomed out in October, 1999. In Europe, it kept falling until mid-2000.
Only in the last couple of months has the European recovery looked anything other than faltering.
But it is now well established.
There were 87 active rigs in Europe in January, 22 more than the same time last year.
There are three messages in this tale of rising rig counts.
First, the volume of business for the offshore industry in Scotland will be higher in 2001 than at any point in the last three years.
That should vindicate the optimists – like me – and give the sceptics and doomsayers a need to find something else to worry about.
Of course, higher volumes do not necessarily mean higher profits, and margins in many parts of the industry will remain tight.
Secondly, prospects for the European sector might now be brighter, but Europe was close to the end of the queue when the funds for new investment were being distributed. That is instructive. It emphasises the most significant weakness of the industry here: it is a high-cost province.
With the price above $20, large swathes of the North Sea are profitable.
But if the duration of the downturn in activity following the next price-induced industry contraction is to be shorter, this province has to move itself up the pecking order for new investment.
That means a continued, relentless focus on cost reduction.
Finally, the sharp increase in the number of rigs has potentially important implications for the oil price.
Unless these rigs are drilling endless numbers of dry holes, new supplies will flow from them in the future.
Some of the new oil will replace depleted fields.
The balance, however, will boost total supply.
Since much of the drilling is in countries outside Opec, the cartel will exert almost no influence over the resulting production.
That diminishes Opec's market power, leaving it with the difficult choice between further production cuts in an attempt to sustain the price – at the cost of lower volumes for Opec members – and lower prices and revenue.
There is a small, but growing, chance that the arrival of new, non-Opec oil on the market will coincide with the slowest period of world demand growth since the Asian crisis.
Asia's problems and an Opec misjudgment are what caused the last price collapse and the fall in the rig count. History might not repeat itself in 2001, but the prospect of growing supply and weakening demand growth mean that Opec's goal of price stabilisation will remain beyond its grasp.
thisisnorthscotland.co.uk |
