Offshore drilling firms to cut salary

Rig utilisations drop to 57% from 72% a year ago

Offshore drilling companies like Aban Offshore, Jindal Drilling, Global Offshore and Deep Industries are planning to reduce crew wages as oil prices trend down. “Rig rates have dropped nearly 30 per cent. The business has taken a hit and  cutting salaries is an option,” an executive with Jindal Drilling told Business Standard.

The decline in crude oil prices, which have tumbled 50 per cent since last August, has hit offshore drilling more because the cost of production is higher than onshore. This segment of the oil and gas industry offers the highest margins.

“Crude oil prices need to be at least $50 a barrel to make offshore shallow water drilling viable,” said Ajay Arora, partner, transaction advisory services head (oil and gas), Ernst & Young. “For deep water drilling, oil prices should be $60-70 a barrel,” he added. Crude oil prices are below $50 a barrel now.

“The impact on offshore companies’ earnings is two-fold because rig rates have also dropped as oil companies across the globe deferred offshore capital expenditure,” said Arora.

According to Rigzone data, offshore rig utilisation worldwide dropped to 57 per cent on September 2 from 59.2 per cent a month ago and 72 per cent a year ago. “Renewal of contracts for Aban will take place at lower rates and this is a concern for the company,” said an ICICI Securities report. Aban was looking for a renewal of a deep driller contract that expired in April 2015, said the report. Also, Aban 5, Aban 7 and the Tahara ship were not deployed for a second successive quarter, the report added. Maintenance and repair charges and crew wages form the bulk of costs incurred by offshore drilling companies.

“We are asking suppliers to give us discounts of 35 per cent, up from 25 per cent, as business is contracting,” said another executive with Jindal Drilling.

“Equipment suppliers are ready to offer higher discounts but on merit. They are not ready to tie up contracts at these levels,” said an Aban executive.

Apart from cost cuts, drilling companies are maintaining lower inventories of equipment. Though these companies may be forced to cut wages, layoffs are not an option.

“It is not possible to lay off crew for several reasons. One is that since companies follow international standards they need to maintain a certain number of trained manpower. Second, this is a risk-oriented job and so its not possible to get crew easily. Plus one needs to have strong technical knowledge for such a job, so replacement is not easy,” said Rajan Gupta, chief financial officer at Shiv-Vani Oil Gas Exploration Services.

The New Delhi-based company drills onshore in India and Oman and has remained insulated from the turmoil offshore players are witnessing.

Industry sources said if oil prices fell below $40 per barrel it would not make sense to produce offshore.

Aban Offshore has a fleet of 15 jack-up rigs, including eight deep drillers, and three offshore service vessels. Great Ship, the offshore business of Great Eastern Shipping, has four jack-up rigs. Jindal Drilling has two rigs and also provides offshore drilling services. Global Offshore is more focused on offshore services.