Deep Water Drillers Are Doomed Even If Oil Prices Surge

Jun. 28, 2017 11:27 AM ETTransocean Ltd. (RIG)BAC, BP, CVX, DO, E, VAL, HAL, NE, SHEL, SDRL, TTE, XOM487 Comments

Summary

  • The short-term impact of OPEC flooding the market with oil in 2014-16 was to crush oil prices.
  • The long-term impact, when combined with impending EV penetration, was to destroy deepwater investment by the oil majors and banks.
  • Companies levered to deepwater drilling are mostly doomed.

OPEC's decision in late 2014 to ramp up oil production in an effort to kill competition was wildly successful across the board to start. Oil prices plunged, which led to dozens of oil companies having to file for bankruptcy and most of the rest having to dilute and extend debt. Americans naturally felt that U.S. oil shale producers were OPEC's target, but that was a self-centered viewpoint.

The reorganization of the American shale oil industry into a leaner oil-producing machine has led to a roaring comeback by shale oil producers. As I discussed in my article "Shale Never Was OPEC's Primary Target," the real goal of OPEC was to stifle investment in deepwater and oil sands megaproject developments.

The Beginning of the End of the Oil Age

Saudi Arabia has been very forward with its belief that the oil age is beginning to end. Its Saudi Vision 2030 to diversify its economy is a harbinger of a future with much less demand for oil.

The temporary setback to shale was merely a byproduct of accomplishing OPEC's real goal of sinking deepwater and oil sands investment. To date, according to Wood Mackenzie, over a trillion dollars of oil megaprojects have been canceled for the window through 2022. As evidenced by offshore spending being down another 20-25%, according to Barclays, in 2017, it is unlikely that deepwater ever approaches former levels of development.

Investors must accept what the banks and the oil majors have. There simply isn't going to be enough oil demand 15-20 years out to justify many deepwater projects over that time frame, many of which take over a decade to build and payoff. They know that the advent of the Electric Vehicle powered largely by solar power (whether on rooftops, by utility-owned solar farms, from the tops of commercial buildings or more likely, all of the

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