COLUMN | Offshore in quarantine: $25 oil takes us back to 2003 [Offshore Accounts]

Photo: Saudi Aramco

There is an apocryphal tale that when the French Enlightenment philosopher and lottery scam-artist Voltaire was asked on his deathbed by a priest to renounce Satan and all his works, he declared, “Now is not the time for making new enemies.”

Would that Saudi Arabian Crown Prince Mohammed Bin Sultan followed Voltaire’s admirable example. Not content with ordering his minions to murder the dissident journalist Jamal Kashoggi in Istanbul in 2018, and having the corpse dismembered with a bone saw, the young royal has now jailed several of his relatives for treason, including his own brother, and has embarked on an oil price war by promising the jack up the kingdom’s oil production from ten million barrels per day to over twelve million (here).

Coinciding with a collapse in demand for petroleum products, as countries around the world locked down to prevent the spread of the Covid-19 virus, the Saudi decision has sent oil prices back to the $25 per barrel last seen in 2003, while VLCC tanker prices rose to record highs of over $300,000 per day as Saudi Aramco opened up the taps and tried to charter as many vessels as possible to flood world markets with crude (Reuters here). Prince Mohammed has made plenty of enemies this last fortnight, Frontline and Euronav excepted.

Hard times as economies freeze

The timing couldn’t be worse. Most commercial aviation is grounded. Airlines around the world have cancelled all their flights, parked their planes and are in the processing of laying off most of their work forces, as air travel is suspended, and country after country closes its borders.

Wilhelmsen Ships Agency has a convenient map of the worldwide travel restrictions here, which include countries as diverse and distant as Ukraine and Oman, Angola and Guatemala, restricting entry to foreigners and shutting entry points.

Thousands have died from the virus, hundreds of thousands have been infected by Covid-19, and millions are working from home in self-isolation. Millions more have lost their jobs, as non-food shops have shuttered, as restaurants, cafes and bars have been closed by government edict in multiple countries, and as economic activity has ground to a halt across the world.

Schools and universities are closed in many states and a new Great Depression seems to loom, unless governments take concerted action to prevent economic collapse through this unprecedented time of pandemic.

Tullow hedged?

So, what is the immediate impact on the offshore sector? There is no good news. The entire sector faces a cashflow crunch, a serious risk of bankruptcy for every company operating in the oilfield services space, and immediate operational suspensions. One economist forecast the immediate loss of over 50,000 onshore oilfield jobs in the US in the next couple of months (here).

Tullow laid off a third of its staff as it announced a $1.6 billion loss (reported here) last week, a loss before the lower oil price had even kicked in. With amazing foresight and good fortune, Tullow has hedged 60 per cent of its 2020 production at $57 per barrel, and 40 per cent at $52 per barrel for 2021, which may yet keep it afloat through these desperately hard times.

Elsewhere, just a week into the price plunge, we have seen players as diverse as Oil Search announcing it was slashing its capital expenditure by 40 per cent, BW Energy declaring it was halving its capex off Gabon and cancelling two option wells, and Equinor and Husky notifying stakeholders of the cancellation of their Bay du Nord project in Canada.

At $25 a barrel, no deep-water oil projects are feasible, most new shallow-water field developments are unviable, and nearly all onshore shale drilling is uneconomic. Even Saudi Aramco, in the ultimate act of chutzpah, declared this week that it would trim its capital expenditure by $10 billion in 2020, Bloomberg reported here. Proof that low oil prices perhaps hurt Prince Mohammed’s kingdom more than he is willing to admit.

Crew moves and projects suspended

In many countries, crew moves are no longer possible, and vessels may be unable to move between nations without extended quarantine.

Unions have advised their members that, in many cases, they may have to extend their contracts because there are simply no reliefs to replace them due to the restrictions. Even when foreign seafarers are allowed into a country, often they have to spend 14 days in a hotel before they are permitted to join.

So far, thankfully, the sector has avoided the mass infections seen on cruise liners like the Diamond Princess, which became giant, floating petri dishes, where the virus spread with rapidity amongst many on board. The risk remains, though, that a rig or accommodation barge becomes a hotspot for the disease with catastrophic consequences, as the ITF warned, here.

Certainly, everyone will be wary of following HSE advice to always hold the handrail on stairs, unless they have been thoroughly sanitised.

Fisher catfished by Saudis

Amid all the bad news, you may have missed the news that James Fisher announced in its annual results (here) that it had been “catfished” (here) in the acquisition of a Saudi Arabian diving company last year, and that the company it acquired was not at all the beauty it appeared in its profile picture or due diligence report.

We had warned readers to expect something fishy from the acquisition-hungry British maritime conglomerate.

A terse note from the company reported a large write-down: “The acquisition in January 2019 of a 60 per cent shareholding in Murjan, a Saudi Arabian based company, has not gone as planned and local management have failed to achieve any significant influence over this entity. With reluctance, it was decided to exit the business, having exhausted all reasonable commercial solutions with the 40 per cent shareholder. As a result, the group has taken an impairment charge of GBP9.0 million as separately disclosed.”

Worse, the reports showed that Fisher’s debts shot up year on year from GBP122 million to over GBP207 million on December 31, 2019. Now is not the time to be doubling your borrowings.

Vladimir Putin and the rest of OPEC members could have warned Fisher’s board, perhaps, never to trust a Saudi Arabian. Aramco’s massive over-production and the tiny viral particles spreading worldwide together threaten the entire offshore industry.

Hieronymus Bosch

This anonymous commentator is our insider in the world of offshore oil and gas operations. With decades in the business and a raft of contacts, this is the go-to column for the behind-the-scenes wheelings and dealings of the volatile offshore market.