HeliValue$: World oil prices and helicopter demand
The following article was first published by Benjamin Moore, senior appraiser at HeliValue$, Inc., in a newsletter sent out on 17 February 2015.
The reaction to the price of oil dropping below $50 a barrel has been amazing in the helicopter industry. Financiers have had coronaries. Some are jumping out of first-story windows. There have been several articles printed that suggest that since the “hysteric lows”, oops, I mean, “historic lows” of the price per barrel of oil, helicopter demand will sink lower than pond scum since no one will want to look for oil until these prices for oil increase. Just a few years ago, around 2002, a barrel of oil was $20! Since that time, it’s gone as high as $110 a barrel. Goldman Sachs, a company that everyone quotes, projected in 2008 that oil could reach $200 a barrel! That might be true yet- in thirty years? But, sanity and fracking has returned the price of oil to, shall we say, more realistic numbers.
A few articles in places such as Reuters and other news sources seem to suggest that the helicopter offshore market is DOOMED. Yet, every manufacturer of helicopters that fly offshore has said that, though the short term may have some reduction in orders, the long term oil and gas Industry market will continue to need helicopters. We have seen plummeting stock prices in the publicly traded offshore helicopter fleet operators. Some have posited that it is another indication that the offshore market will be in trouble because of cutbacks to oil exploration. Yet the mood at the Helicopter Investor conference in London last week was cautiously optimistic: Clark McGinn of CHC repeatedly called the oil and gas helicopter industry a “rational market,” and John Mannion of Bristow consistently reminded the audience that flights to production platforms outnumber those to drill rigs by a sizeable percentage.
It is the public’s misperception that the present market will remain the same for the next two or three years. The fleet operators do have some short-term problems facing them, but lack of contracts in the future is not one of them, yet. Their reasoning is solid. Most of the contracts being worked today are for production oil platforms. Those production wells require fewer people to operate than the exploration and drilling rigs. There may come a slowing of production. However, even if there is slowing, people have to be on those drill platforms to maintain them. And shutting down a well is expensive, time-consuming, and requires people to do the work…which requires helicopters to get them there.
There are two reasons that exploration is going to go ahead, economics and politics. Let’s talk about politics first. Some years back Germany made the decision to shut down their nuclear-fired electric power generating plants and replace them with natural gas fired plants. Great, except the major source for natural gas, is Russia. Otto Von Bismark is hyperventilating in his grave. Most of Europe is in the same predicament. France is much less dependent since they are the largest user of nuclear energy to generate electric power per capita in the world. Regardless, all of Europe needs petroleum products, and the major source of oil today is, you probably guessed, Russia.
Russia decides to do a little meddling in the Ukraine. The World reacts by trying to impose economic sanctions. Saudi Arabia does its bit by increasing production and lowering prices that force OPEC to do the same. The political decision to lower the price per barrel of oil is one of the reasons that oil is relatively cheap today. I do notice that the price of oil is starting to creep up again.
However, this price per barrel level is creating economic havoc in Russia, Venezuela, and some other governments that depend on high prices per barrel to balance their books, complete infrastructure repair and improvements, and pay off debts. Europe’s major source has been Russia, but the lower cost oil prices help Europe to buy from other places such as Saudi Arabia. They know that they must have a larger ready-access reserve of oil/gas in the future. This will blunt the amount of power that Russia might be able to exert when the present crisis is over. Those larger ready-access reserves are in the North Sea deposits off the coasts of Nova Scotia, Ireland, Scotland, and Norway. I believe Europe will encourage exploration in those areas.
Now, let’s talk a bit about economics. Two of the largest emerging markets and growing future use of petroleum products are China and India. They have little oil and gas reserves on the land they own. China, in particular, has been trying to get dependable sources of petroleum products. For example, it has led to China pouring billions into Sudan for pipeline and infrastructure from South Sudan to North Sudanese ports. Those plans were spoiled when a civil war erupted between the north and south.
Now China is investing more money and Army personnel to try to stabilize that supply of oil in North and South Sudan. As a result, their future growth will depend on offshore reserves in the South China Sea, the Indonesian archipelago and the East China Sea. Most of the offshore reserves are well off the coast and will demand helicopters to service both the production and exploration rigs. They need that exploration to go ahead now. Yes, politics enters into their reasoning also. Therefore, these growing economy governments do not want to rely on someone else to supply them with needed fuel.
North America has the largest reserves of shale oil in the world. The development of economical fracking has been industry-changing. The natural gas in both shale oil reserves and the Bakken Formation makes the US a powerhouse in both. Just two years ago, the US imported 65 per cent of the petroleum it consumed. Now, it’s only 26 per cent. Fracking is also allowing us to revisit old oil deposits such as the Permian, Eagle Ford, Barnett and Haynesville Bossier basins (AKA Tea Pot Dome). Good heavens, the stuff is flowing like rain.
Fracking has had a negative effect on the single light turbine market. You can pretty much drill anywhere in the Eastern United States and get a producing oil or natural gas well. Everywhere else, it’s a crap shoot. In the West and Canada traditionally, you first covered the area with seismic operations to look for oil, then spotlighted areas that might have gas/oil reserves (overthrust), then drilled exploration holes to confirm presence of oil/gas and then moved on when that didn’t produce.
In the Eastern US, just drill, and you have a 90 per cent chance of having a commercially producing well. Everywhere else, with traditional seismic methods, there is a 30 per cent chance. Yes, fracking costs more to get that petroleum product out of the ground, but the producer will not have spent money looking for a producing hole in the ground and the petroleum product they get out of the ground using the fracking method will need less refining. Smart money goes to the sure thing. Shut down those seismic methods.
The seismic operations are what produced the most contracts for light single-turbine helicopters in the Western US and Canada. With the exception of right after 9/11, we have the largest inventory of light single-turbine helicopters ever seen on the world market. We know there are over 500 on the market today, the number is growing, and values are dropping every day. The seismic industry is unlikely to come back for a while. Contracts for light drilling both for oil and gas and minerals have gone to the Bell 212s and Bell 205A-1s. We will closely watch what happens to the B212s and 205A-1s this season.