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08.05.2017

Back to BlackThe profits bubble again for the oil multinationals. Even in the Norwegian Sea the branch catapults itself from the crisis. However, the situation remains fragile. An offshore report.

Franz Hubik Kristiansund

Mario Mehren lifts his left arm and points with his forefinger to a small point far away outside on the sea. “This has to be Kristin”, he says, while his finger moves further to the right by 90 degrees. “Here behind, this is Heidrun”, explains the Wintershall boss. “And here in front of us is Asgard.” The three names stand for oil platforms weighing many tons and sailing for years in the Norwegian Sea. They belong to the state oil giant Statoil, but Mehren uses them with Wintershall.

Instead of investing millions in the construction of an own offshore platform, the largest internationally active German crude oil and natural gas producer (with sales of EUR 2.8 billion and 2,000 employees) simply leases the existing infrastructure of the Norwegian raw materials industry in order to be able to drill for oil in deep sea cheaper as before. Thereby the actual revolution can not be seen from the surface of the water. That is why Mehren stands on the bridge of another platform - “Deepsea Stavanger” and observes on a display how a gigantic drilling tool, followed by a several meters long steel rod submerges in the seabed.

Three hundred meters below is the Maria oil field. Wintershall has anchored two underwater production facilities here. Soon oil will start flowing through the pipelines to Kristin. Then the gas and water, which must be compressed in the depository in order to suck out the oil from the well, come from Asgard and Heidrun. “This is a flagship development”, rejoices Mehren. “With this concept we save 50 per cent of the costs.”

There are such tricks with which the oil industry will catapult itself sustainably from the crisis. After three lossy years, the profits start to bubble again. “The oil industry can now breathe with a sigh of relief in many parts”, analyzes Walter Pfeifer. The reason: “In the past two years, the production costs of many companies have improved quite significantly”, explains the raw materials expert from Roland Berger. 

End of the period of suffering

Actually, the industry has made enormous progress since in the summer of 2014 the oil price crashed partially by more than 70 percent. The five independent multinationals Exxon Mobil, Shell, BP, Chevron and Total increased their sales from the beginning of January to the end of March by 37 per cent compared to the previous year – a total of 266 billion dollars. At the same time, the profits of the quintet have increased fivefold. 

In addition, compared to the previous year, the corporations have again sufficient funds to distribute dividends or repay debts. According to assessments made by Handelsblatt, the added free cash flow of the five oil giants amounts to around 8.8 billion dollars in the first quarter of 2017. For comparison: in the previous year, the corporations had a minus of 15 billion dollars in the free cash flow. 

The branch has smoothed the way out of the crisis with a drastic remedy. As a reaction to the fact that the oil prize per barrel (159 liters) of about 47 dollars is not even half of the price of three years ago, the industry cut more than 440,000 jobs. The planned investments were reduced by one-fifth. According to the analyses of Wood Mackenzie, this corresponds to the unbelievable amount of one billion dollars. 

In order to reduce consistently the costs, unattractive oil fields are mothballed, delivery chains are streamlined and service contracts are renegotiated. The Norwegian oil giant Statoil has reduced the break-even point for all new projects from 70 dollars per barrel to less than 30 dollars. Also other oil multinationals, such as the two US giants Exxon Mobil and Chevron, could cut by more than half their production costs since 2014. They were able to be operate profitably even at an oil price of 40 dollars. The BASF subsidiary Wintershall could operate even more profitably. One of the reasons for that is the Maria oil field located at 45 minutes flight with a helicopter from the Norwegian port city of Kristiansund and from which oil will start to bubble from the middle of 2018. According to Rystand Energy, with an expected break-even price of 33 dollars, it is among the most profitable oil deposits in entire Norway. 

Major disaster on the high seas

The head of Wintershall Mario Mehren grins. He does not comment such assessments. It is clear, however, that the Norwegian Sea does not belong in any way to the most suitable production locations in the world. “That is why we must be smarter and more flexible than the others”, says the 46-year-old. Terje Søviknes stands next to him and nods. The Norwegian energy minister believes that the fabulous rise of his country through the oil wealth in front of the shores will not end for a long time. “Our companies reduced the costs already before the collapse of the oil prices”, says Søviknes. As a result, the Norwegian oil industry is now “more competitive than ever before” – despite the increased competition from the USA and its shale oil producers.

Mehren and Søviknes, as well as all employees on Deepsea Stavanger, wear orange overalls and safety footwear. Both of them stare at the heart of the 119 meters long and 97 meters wide offshore platform: the two drilling rigs rising high in the sky at about 180 meters. More than 120 employees are working here. It smells of diesel, the island sways constantly with the waves.

On this day of May, the weather at 200 kilometers from the mainland is splendid. The sun is shining, there is hardly any wind. But those working here know also other weather. When the weather changes suddenly, the 44,000 tons heavy colossus turns quickly in one of the harshest difficult workplaces. 

When the wind blows over the deck with a speed of more than 150 kilometers per hour, the works outside become too dangerous. However, the drilling is continuing up to waves of six meters. But when higher braking waves start rolling, this is a major disaster: the work must be stopped. If this happens, even Mario Mehren takes notice of that in the Wintershall headquarters in Kassel at a distance of 1700 kilometers. 

Then the acronym WoW pops up on Mehren’s iPad in the weekly status reports about the current projects. It stands for “Waiting on Weather”. Of course Mehren reads “quite reluctantly” this acronym, as he says. The reason: The operation of an oil platform costs several hundred thousand dollars per day. Every time the work on the oil rig is stopped due to bad weather, Wintershall money is burning out. 

Currently, however, Mehren is full of confidence. “We see again positive signals”, the manager points out. Lately the oil prices stabilized themselves compared to their lowest level. An optimistic mood of positive anticipation prevails in the branch. 

However, John Feddersen warns against premature euphoria. “Many oil companies continue to be confronted by enormous challenges”, says the head of the British analysis company Aurora Energy Research. Vertically integrated multinationals such as Eni could cushion partially the effects of the falling oil prices with their refinery and commercial business. “On the other hand, as regards the purely oil extraction corporations such as Andarko”, says Feddersen, “it was shown how grueling the exploration business continues to be – despite all cost reductions.”

The high debt dampens the upswing

In any case, there is still much to be desired in the balances of the large oil corporations. So Exxon Mobil, Shell, BP, Chevron and Total are not successful in reducing their mountain of debt. On the contrary. The net debt of the multinationals has increased again in the first quarter by almost four percent compared to the previous year – to 223 billion dollars.

“We as an industry must continue to do our homework”, admonishes Mehren, the head of Wintershall. It would be fatal if the industry relapses again in its old behavioral pattern. Whenever the oil prices rise, the costs of the corporations explode regularly. “This must not happen again to us as an industry”, says Mehren. However, the oil managers have made such promises after every fall in the prices. 

Source: HANDELSBLATT - Franz Hubik Kristiansund

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