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Renewed activity offshore South America could be 18-24 months away

Tue 18 Apr 2017

Renewed activity offshore South America could be 18-24 months away
Changes to local contents rules could see demand pick up in Brazil, but international owners remain hamstrung by the peculiarities of the market

As a presentation at the 2017 Annual OSJ Conference, Awards & Exhibition made clear, increased demand for support vessels in South America is unlikely in the short term, although longer term a more stable political situation and developments in Guyana could help create demand

The downturn in the offshore oil and gas industry has affected markets everywhere, including South American countries such as Brazil, Argentina, and Colombia and in the Falklands.

Brazil, the region’s most important oil province, has also been affected, but is a case apart for a number of reasons. Only a few years ago vessel owners’ expectations were high, but Brazil has become an especially challenging market for owners for a number of reasons: the Laval Jato scandal has engulfed the industry and requirements for Brazilian domestic content have led to delays, higher costs and reduced efficiency.

One heralded as the offshore market of the future, Brazil’s potential has not been realised, although the political winds are, at last, blowing in the direction of a more diverse and dynamic oil sector and changes to local content rules are coming into effect. Even so, Brazil remains a difficult place for offshore vessel owners to do business, not least because of ‘blocking’ rules that have seen international vessel owners lose contracts and depart the region in droves..

Speaking at the 2017 Annual OSJ Conference, Awards & Exhibition, Inger-Louise Molvaer from shipbroker Westshore, explained that, as a result of the crisis in the industry, the Brazilian rig count has decline significantly since its March 2012 peak. There has also been a significant reduction in term charters fixed since 2013 and as term demand dropped, the spot market absorbed tonnage. There has also been a similar reduction in the number of firm days.

“The exodus of vessels leaving Brazil started in 2014,” she told delegates at the conference. “Where once there was enough work for the foreign and Brazilian tonnage, now Brazilian ships take preference.”

In the boom years before the crisis, many rigs were also contracted in Brazilian yards. A total of 29 rigs were planned originally, but only 17 have actually commenced construction and, of these, only a handful is expected to deliver. Despite this, large numbers of vessels, also contracted from Brazilian yards, are due to be delivered this year and next: Bram/Chouest has eight PSV 4500 platform supply vessels due to be delivered in 2017 and four AHTS 21000 anchor handlers due to be delivered in 2018; CBO has two PSV 4500s and six AHTS 18000s due to be delivered in 2017/18; Starnav has five PSV 4500s due to be delivered this year and next; and Wilson, Sons and Bravante are each due to take delivery of one PSV 4500 this year.

Given the decline in demand and pressures faced by overseas owners, said Mrs Molvaer, there has been an “exodus” of foreign PSVs and growing interest from international owners in the Brazilian special registry (REB). “Brazil was heavily reliant on foreign AHTS in the past, and there is now interest in the REB for anchor handlers too,” she explained.

Looking ahead, Mrs Molvaer said she believes that newbuilds will replace foreign vessels but not add additional vessels to the overall size of the offshore vessel fleet in the country. She said Westshore expects that the overall size of the fleet will therefore be “stable” with the number of some vessel types expected to grow. “There will be few contract extensions after the conclusion of firm periods,” she told delegates “and REB vessels will have stronger chance of securing work – with the exception of PSVs. Rate levels are not expected to increase dramatically in the near future.” The only good news is that new players in Brazil’s pre-salt fields will open up the number of clients for OSVs going forward.

Turning to Argentina, Mrs Molvaer said that, currently, there are no rigs drilling offshore Argentina. Total had a jack-up there up until mid-2016. The national oil company (NOC) YPF is in talks with Statoil to study the potential of the country’s deepwater areas, and Chilean NOC ENAP has several interests offshore Argentina and has aspirations to develop these further. In terms of vessels, DOF and Siem Offshore have had most success in securing contracts offshore Argentina.

Eirik Raude was on hire to Premier for work in the Falklands but was terminated at the start of 2016. Premier says it is working to secure a financing solution to move the project towards sanction. There is potential for more exploration work in the future from several operators, and political tensions have eased over the past year, making it a more attractive area.

In Colombia Repsol was due to drill a one-well programme in the second quarter of this year using Maersk Developer. Anadarko has the drillship Bolette Dolphin drilling currently. Other operators with potential drilling requirements for this year and 2018 include Ecopetrol, Repsol and Shell. Petrobras is also involved in Colombia and as of February was tendering for three PSVs for work commencing this year. However, few European OSVs have secured contracts offshore Colombia in the last few years, with the tonnage mainly coming from local or US owners.

Guyana has suddenly become very much of interest to the offshore oil and gas industry (see box). The drillship Stena Carron is approaching the end of a firm contract with ExxonMobil, who made the huge Liza discovery, which is now being fast-tracked for development. Mrs Molvaer said another rig could be brought in in 2019 for further drilling in the field. Other operators with potential drilling requirements include Anadarko and CGX Energy. Other operators have also shown an interest following the Liza discovery, including Repsol and Tullow. However, there are a limited number of OSVs working offshore Guyana at present.

“To sum up, there are relatively few opportunities across South America for additional foreign vessels,” Mrs Molvaer told delegates. “Colombia has some activity in the near term but most drilling has been put on hold or pushed out to 2018 or 2019. A period of political stability and recent large finds mean future exploration and activity will happen, but not to any great extent before 2018 or 2019.

ExxonMobil builds momentum in Guyana

On 30 March 2017, ExxonMobil (45 per cent and operator) announced its third oil discovery on Guyana’s Stabroek Block at its Snoek-1 well. The well was drilled to 5,175m at a water depth of 1,563m. It encountered 25m of oil-bearing sandstones of Maastrichtian-Aptian age, similar to the Liza-1 discovery well 9km to the north. The rig will next drill the Liza-4 appraisal. ExxonMobil’s partners are Hess (30 per cent) and Nexen (25 per cent, and a wholly owned subsidiary of CNOOC).

This discovery follows on the heels of the Payara discovery and Liza-3’s discovery of a new reservoir. “Our base case for Liza-Payara is 1.5 billion barrels of oil,” said analyst Wood MacKenzie. “Snoek adds another 220-370 million barrels in our estimate.” The partners have identified another five prospects to drill on the Stabroek block through 2018.

ExxonMobil also farmed into and took operatorship of two blocks north of Stabroek, while Hess farmed into Block 42 in Suriname. In Suriname, Apache is currently drilling the Kolibri-1 well on Block 53, and Tullow will drill in Block 54 later in the year.

A key unknown is whether this Cretaceous fan play extends across the Guyana basin or if it is isolated to this discovery cluster.

The three Stabroek discoveries benefit from close proximity (around 30km). Economies of scale can be achieved if floating production, storage and offloading (FPSO) units and subsea infrastructure are shared.

“With each discovery, the disposal of associated gas (we estimate over 3 tcf) becomes a bigger challenge,” said Wood Mackenzie. “Initially, the joint venture will target low-GOR areas and will re-inject produced gas, but floating liquefied natural gas or a long pipeline may be required as well.

“The partners are taking a phased approach to the area’s development. We model two large FPSOs to develop Liza and Payara. We assume Snoek will require another vessel. We modelled two scenarios for Snoek: a high case with reserves of 370 mmbbl oil exploited by a 120,000 b/d FPSO and a base case assuming 220 mmbbl producing to an 80,000 b/d FPSO.

“Snoek’s NPV10 would vary between US$0.6-1.3 billion, assuming a long-term Brent oil price of US$65/bbl. Under this case, national production will peak at 400-450 thousand b/d in the next decade.”

Guyana’s fiscal terms were set at a level to attract high-risk wildcatting in a frontier area. When success improves prospectivity, a tightening of fiscal terms may follow as a country’s expectations shift.