Oil Price War & Stacking Assets

OIL PRICE WAR – BEGS THE QUESTION… Is it back to the graveyards for stacking of assets?

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OIL PRICE WAR – BEGS THE QUESTION…
Is it back to the graveyards for stacking of assets?

World’s Thirst for Oil All-Time Low

With these unprecedented times we find ourselves in, due to the pandemic of COVID-19, it is expected that the world’s thirst for Oil will see an all-time low in terms of supply and demand.

With many countries on lockdown and the many travel restrictions in place, airline bookings have plummeted drastically, not to mention the consumer gas pumps being negatively affected.

As if we are not already in a state of disarray, the current breakdown in talks with OPEC between Russia and Saudi Arabia make this a triple whammy and gearing the Oil sector as a whole towards a horrendous few +months/year.

Oil Industry Price Plunge

Brent crude is languishing around the $30 per barrel, and at that rate it’s an extremely scary time for the entire Oil industry, not just the operators or drillers but all the supply/service chains within the industry.

According to OPEC figures for the UK Offshore E&P, $41 is the estimated requirement for breakeven costs.

A recent article called “Oil Majors Slash Spending Amid Price Plunge” written by Tsvetana Paraskova, a writer for Oilprice.com, sheds light on how many operators are looking to significantly cut spending and reduce operating costs due to crashing oil prices.

Many companies have already streamlined operations reducing costs after the 2016 Oil Crash, so what further cuts can “our” operators and drillers carry out to help avoid potential bankruptcy?

Over Supply Potential Options

Above Ground Storage (AST’s) FPSO’s/Storage barges etc. can be used to store the estimated oversupply of fossil fuels. These are all good options to be considered, however, they all come at an increased operating expenditure above and beyond the usual E&P costs indicated in the OPEC break even figures mentioned above.

The decision to continue to drill/operate and store or sell at a loss requires careful commercial consideration versus the likelihood of temporary abandonment and just “plugging the well” until such times Oil prices increase to a minimum break even happy medium. After all, the Oil will of course remain in the well and that form of storage is somewhat free.

So, if the operator does decide to plug the well the likelihood is many MDU/Semi’s/FPSO’s/Fixed assets become redundant and an oversupply of rigs versus working wells will come in to play. This will ultimately result in stacking periods being sought by the drillers/operators.

Protected Equipment/Items during Stacking

The following is a partial list of typical items/equipment involved in protection during stacking:

• Safety Critical Items
• Hydraulic systems
• Pipeline(s)
• Water Systems
• MUD systems
• Tanks
• Stores
• Generators
• Pumps
• Compressors
• Fingerboards
• Rotating & Static
• Cranes
• Winches
• Paint Defects
• Top Drive
• Roughnecks
• Mud Pumps
• And more.

Choosing the Right Degree of Stacking

The goal with stacking is to find the right balance of reducing upfront spend, avoiding high re-activation costs, and properly maintaining the assets. The degree of stacking chosen usually depends on how ready the owner needs the rig to be when, or if, the rig needs to start drilling again. Below are a few methods of stacking with advantages, disadvantages, and cost evaluation.

Warm Stacked Rigs | About 1/3 of Standard Rig Operation Costs

Warm stacked rigs are, in theory, maintained almost as if they were on contract. All machinery and systems are ran and checked regularly, and the rigs have a reduced, but adequate, crew on board.

A well-preserved and maintained platform with a fully trained, and experienced crew, is much more likely to secure a contract as it’s in a state of readiness. In addition, it will demand higher premiums for when it does pick up new contract(s) vs a platform that’s been left idle/unprotected for some time.

Assuming warm stacking is properly executed, the rigs could be brought back into service relatively quickly. An approximate estimate of the cost per day of a warm stacked rig is around $40-60k, depending on the age, type of rig, and the rig’s location.

Cold Stacked Rigs | More Upfront Costs, Less Long-Term Costs

Cold stacked rigs, however, are almost abandoned, and preservation becomes the focus. Daily operational costs for cold stacking are a smaller fraction of the cost of full operations, coming down to under $10k per day and as little as $2-3k for those that aren’t likely to return to work again.

However, extensive preservation programs must require significant up-front investment. If preservation procedures are not sufficiently implemented before a rig is put into cold stacked mode, the lack of preventative maintenance and operation of generators, station keeping systems (for floaters), marine ballast systems, safety systems, and jacking systems (for jackups) creates a major deferred time and cost risk to owners if the rig has to be put in service again.

If a rig is perfectly operational at the time of cold stacking and is in storage for market reasons, then a higher level of care and attention is going to be needed.

The cold stacked rig will have equipment serviced and then wrapped in protective material. To preserve their working capabilities, engines will be filled with protective fluids. Dehumidifiers will be installed into rooms with critical electrical equipment. There will be more crew members on-board conducting checks, audits and repairs, although this would be very much a skeleton staff.

Smart Stacking | Bringing Warm-Stacking Costs Down while Avoiding Cold-Stacking Disadvantages

The smart stacking of rigs involves finding ways to compromise, to bring the costs of a warm stacked rig right down, but to avoid the disadvantages of a cold stack scenario.

Smart stacking is the side by side storing of rigs, even if some of them will need a longer initial journey to the stack location. The most expensive part of a stacking operation is the labor cost. However, having one crew to operate/maintain multiple assets and jump asset to asset in the same location and another crew that could be deployed when required is where the “Smart” phrase stems from. It’s thinking and working smart to save jobs/companies and our industry.

Another benefit to smart stacking is the ability for one operator to have a potential mix of maintained assets, cold and warm, stacked side by side, to streamline efficiency, so perhaps modern/newer 6th Gen MDU’s/FPSO’s will likely be the assets kept warm and “good to go” versus older fixed assets kept cold.

“Lukewarm” Stacking | Cost-Effective & Temporary Solution using VCI

Perhaps even temporary solutions when a Platform is perhaps due out on contract in the foreseeable i.e. 3-9 month’s a “Lukewarm” approach such as Vapor Corrosion Inhibitor (VCI) films, capsules, sprays, and/or greases can be adopted to protect the commercially critical/safety critical equipment allowing them to be easily re-activated.

Corrosion Threats during Stacking

When offshore platforms/rigs are “stacked” and taken out of operation, they can stay out of operation for several months or years. During this time the various structures on board are prone to severe corrosion and need protection. “We” have protected many global operators’ assets for decades using our full suite of VCI solutions including a wide range of rust removers, protective oils/greases, non-contact vapor diffusing capsules, auto-fogging capsules, corrosion inhibiting packaging products, ability to flush lines/systems with VCI technology and on-site technical support. The Zerust suite is your one-stop destination for all your stacking corrosion protection needs.

 

For information about Zerust Oil & Gas Solutions for Rig Stacking Click Here to view our brochure. Questions?  Please contact us.