The Offshore Drilling Industry in 2011 - Case Study Example

The Offshore Drilling Industry I.D. of the The Offshore Drilling Industry Introduction In this paper, dynamics of offshore drilling industry are explored. Also, the case of Norway remains in top focus of the discussions and analyses. Problem statements Is the offshore drilling rig industry in an over or under supply condition? What is the lead time to meet demand for oil exploration? What are the risks? How have supply and demand conditions for oil determined drilling rig prices and utilisation in this fragmented industry?

Analysis The offshore drilling rig industry is at present in a slightly over supply condition. Several countries like USA and UK want to exploit the potential of offshore drilling, but they are investing cautiously. Also, as of now, the OPEC countries and Middle-Eastern oil producers appear to be cooperating to stabilise oil prices. Consequently, a drastic over supply situation does not appear to be imminent in the offshore drilling rig industry. Whenever there have been instances of non cooperation from OPEC and/or Middle-Eastern suppliers (e.g. Saudi Arabia, Iran, etc.), oil prices have increased.

On the other hand, the OPEC countries have the potential of lowering international oil prices by increasing production. Major oil consumers like USA and UK have resorted to expensive offshore drilling rig development and utilisation primarily during times of crisis. For example, when oil prices became extremely volatile during the 1970s, offshore drilling rig industry began to flourish. At first, offshore drilling rigs had higher prices. But when persistent demands in offshore drilling emerged, oil rig prices started to plummet.

Therefore, it can be deduced that if offshore drilling remains an expensive technology, then oil rigs might have less demand. Offshore drilling rigs remain expensive in comparison with conventional drilling machineries. But rig manufactures are yet not able to extract high profits since demands have not increased considerably. Identifying the Current Situation In this section, the primary focus of discussion remains on the question that what are the supply and demand conditions in the offshore oil rig drilling industry at the end of 2011 in the world?

In order to find out a satisfactory answer, it is an imperative to explore beyond the simple supply and demand equations because fluctuations in oil prices might be triggered by various kinds of socio-political and technological factors. For example, if OPEC countries organise themselves in a bloc such that they raise the oil prices, then technology becomes the key factor. In times of non-cooperation by OPEC (as witnessed in the 1970s), nations like UK and USA start to focus on developing more sophisticated oil rigs so that offshore drilling operations can be rapidly and sufficiently expanded (Casadesus-Masanell et al 2011).

In this way, oil prices are prevented from shooting up too much. However, if political factors like these are disregarded, then supply and demand situation can be adjudged on the basis of consumption and production. If consumption is high and production is low, then there is a supply side crisis. As of 2011, global consumption quantities and production capacities of oil are nearing each other. Although the world saw an excess capacity of oil production mostly during the 1970s and 1980s, annual consumption amounts of oil are almost constantly rising ever since then (British Petroleum 2011).

As of the year 2011, a supply side crisis appears to be looming. Although both consumption and production of oil have increased globally, the amounts of excess capacity are rapidly decreasing (see Casadesus-Masanell et al [2011], Exhibit 2). Consequently, shortage of oil supplies might be imminent in the future. The Situation in Norway The situation in Norway is considerably different. In the context of Norwegian economy alone, Norway produces enough oil to satisfy its needs. For a clearer picture of Norway’s oil supply and demand conditions, refer to Figure – 1: Figure – 1: The comfortable oil supply and demand situation of Norway can be deduced by comparing the consumption and production statistics of the country.

Source: US Department of Energy (2014) Nevertheless, oil productions in Norway are dwindling all through the last 5 years. Consequently, the country’s oil exports are decreasing. The main driver of this changing scenario is depletion of reserves and lack of new discoveries. If Norway is unable to discover new oil reserves, its exports will plummet further. So implementation of offshore drilling techniques is another driver of Norwegian oil industry. Norway must increase exploration and production spending to improve its offshore oil exploration and drilling capabilities.

Impact of oil price movements over time up to 2011 Casadesus-Masanell et al (2011) have developed a very intuitive chart and presented as Exhibit 3 in their research paper (see Figure – 2). By studying the trends in exploration and production spending (E&P spending) as compared with contemporary oil price changes, it can be understood that the two statistics are closely related with each other. In general, whenever there is a large growth in oil prices takes place, E&P spending is also increased.

This happens because governments start in investing in more expensive oil extraction technologies whenever there is a rise in oil prices. And offshore drilling technology research is the backbone of international oil exploration and production operations. However, there are certain exceptions with regard to the relationship between oil price changes and E&P spending. For example, oil prices were almost steady between the years 1984 and 1985; but E&P spending abruptly shot up during that time.

This kind of anomalies can probably be explained by socio-political reasons. In general, oil price growth has a directly proportional relationship with E&P spending. Figure – 2: Changes in oil prices and E&P spending. Source: Casadesus-Masanell et al (2011, Exhibit 3) Advantages in deep-water drilling At present, the bulk of oil supplies originate from OPEC and the Middle-Eastern countries like Saudi Arabia. These oil suppliers have large inland oil fields and they do not require costly oil rigs capable of operating in lakes and seas.

However, if technologists are able to develop inexpensive offshore rigs capable of operating in deep-water regions, then several other oil producing areas can be located and utilised. In this way, more oil producing countries might appear in the international scene. Also, USA and other Western countries might be able to increase their capacity of oil production drastically. In sum, advancements in deep-water drilling technologies have the potential to change the geopolitical structure of contemporary oil industry.

Countries like UK, USA, Norway, and Russia might emerge as the major oil producers if inexpensive deep-water drilling techniques are materialised. Conclusion Offshore drilling rig industry is passing through a marginally or moderately over supply situation since many of oil rigs across the world are not being used today (see Casadesus-Masanell et al [2011], Table A). So even though lead time to meet the demand of oil exploration is not drastically high (given that conventional land based extractors continue to increase production in general), policy level reconstructions are necessary.

Increasing E&P spending with special focus on offshore drilling will benefit the world in the long run. References British Petroleum. (2011). Statistical Review of World Energy 2010. Retrieved on 10th August 2014 from www.bp.com Casadesus-Masanell, R., Corts, K., and McElroy, J. (2011). The offshore drilling industry in 2011, Case Study, Prod. #: 711543-PDF-ENG, Boston: Harvard Business Publishing US Department of Energy. (2014). Norway – Analysis – US Energy Information Administration (EIA).

Retrieved on 10th August 2014 from www.eia.gov/countries/cab.cfm?fips=no