Nov 02 2019

Light at the End of the Tunnel - Oil and Gas Helicopter Operators Hope for Improvement Posted 5 years 21 days ago ago by Admin

It wasn’t expected to happen: The world’s insatiable thirst for oil and gas should have ensured that more offshore oil rigs would always be needed, and that suppliers who supported those rigs – like helicopter companies – would always have a secure, stable market to serve.

But then it happened: Oil prices unexpectedly plummeted “from a peak of $115 per barrel in June 2014 to under $35 at the end of February 2016,” states the World Economic Forum website. “The sharp fall is broadly similar in magnitude to the decline in 1985-1986, when OPEC members reversed earlier production cuts, and in 2008-09 at the outset of the global financial crisis.”

When this article was written, a barrel of oil was worth $56.21; hardly a return to the triple-digit boom days before 2014. As a result, major offshore helicopter operators such as Bristow, CHC, and PHI continue to experience substantially less demand for their services compared to the pre-2014 good times, as does everyone who serves the offshore oil and gas industry.

“The oil industry has been in a cyclical downturn and the offshore helicopter market has faced the same headwinds as the rest of the oilfield services markets, said Steve Robertson, director at Westwood Global Energy Group; a consultancy that serves the global energy industry. The good news: “In 2019 we are now seeing signs of recovery and in most parts of the world activity levels are growing again,” Robertson said.

How We Got Here

There are a number of reasons why the price of oil crashed in 2014, and has stayed low since then. The basic problem is that supply outstripped demand back then, and continues to do so today.

On the supply side, the amount of usable oil increased due to the success of U.S. fracking wells in North Dakota, along with Canada extracting more from its oil sands in Alberta. As a result of this local production, the two North American countries were able to cut their oil imports sharply, which put downward pressure on world prices according to the investment website Investopedia. 

In the past, Saudi Arabia would have responded to this downward pressure by reducing its oil output to push prices back up. But not this time: Aware that North American oil costs more to produce, the Saudis opted to keep oil prices low over the long-term to cripple their competition. 
They could afford to: “The cost of pumping a barrel of oil in Saudi was less than $10 in 2015,” reported CNN Business. In another report, the news service observed, “Saudi Arabia is suffering from low prices, but its competitors are hurting worse. U.S. oil production, after years of blistering growth, has not only ground to a halt, but has started to decline.”

Of course, the Saudis had other reasons to keep the oil flowing. For instance, Forbes magazine reported that the Saudis wanted low oil prices to stay competitive with emerging energy alternatives. 

“The Saudis saw this coming,” wrote Forbes. “For years, as their country remained dependent on oil exports for 85% or more of its revenue, they have feared not that they will someday run out of oil but that they will run out of customers for it. They anticipate that electric vehicles, industrial efficiencies, bio-fuels and climate-change concerns will turn consumers away from oil. A return to $100 oil would accelerate that evolution, even if in the short term it encouraged new high-cost producers to enter the market.”

Either way, the stars were aligned to keep oil supplies high and prices low in 2014, just as demand began to slacken. The reason: The large, red-hot Chinese economy started to slow down; along with the formerly-hot economies of Russia, India, and Brazil. “The same countries that pushed up the price of oil in 2008 with their ravenous demand helped bring oil prices down in 2014 by demanding much less of it,” stated Investopedia. 

The bottom line: Oil supplies remain plentiful and cheap, while demand for them has weakened. This is why oil prices remain depressed, and why the offshore helicopter industry has suffered as a result.

Built for Growth, Not Decline

Prior to 2014, the global offshore helicopter industry was focussed on keeping up with customer demand.  

“Their biggest concern was having sufficient helicopters to do the job, which is why these carriers and leasing companies were ordering rotorcraft from helicopter OEMs well in advance,” said aviation consultant Brian Foley; president of Brian Foley Associates. “It was this same level of demand that motivated OEMs to commit to building larger rotorcraft, such as Bell and its development of the 19-seat Bell 525.”

In a nutshell, “The oilfield services industry saw record levels of investment between 2010 and 2014, driven by oil prices at levels in excess of $100 per barrel,” said Robertson. “Activity levels were very high and a significant volume of additional capacity was ordered across the supply chain, including offshore helicopters.” But, Robertson said, after oil prices crashed, “investment in offshore field development ground to a near halt.”

The demand for offshore helicopter transportation didn’t grind to a near halt; after all, the existing rigs still needed to be operated. “The offshore oil industry substantially scaled back their rig and exploration activities, which greatly reduced the need for transporting people and equipment by air,” said Foley. “Suddenly, offshore helicopter operators found themselves faced with surplus capacity, while they were geared for growth.”

Helicopter Sales Down

With demand in decline, offshore helicopter operators and helicopter leasing companies responded by cancelling orders for new rotorcraft. 

“The collapse in helicopter services can be illustrated by the drastic falloff in helicopter sales,” said Richard Aboulafia, vice president of analysis at Teal Group. “Deliveries by value grew by a remarkable 19.8% per year between 2003 and 2008, but then fell 20.4% by value between 2008 and 2010. They have since fallen a further 17.7% by value.”

“Output of smaller models held up well during this period,” Aboulafia told Rotorcraft Pro. “The market downturn was purely due to the larger models, particularly the S-92 and H225 Super Puma, but also the S-76 series, which is heavily oil and gas.”

According to Foley, the percentage of new large offshore helicopter delivered to clients went from 15% of all industry deliveries five years ago, to just 6% last year. “This hurt the OEMs, because a large offshore machine can be worth over $25 million,” Foley said, “whereas an entry-level helicopter only costs $1 million.”

With this slump in large helicopter sales, Foley is wondering what the fate of many OEM models might be. 

The Sikorsky S-92 has received a reprieve by being selected as the next U.S.  presidential helicopter. (Six of these have been ordered by the U.S. Navy under the VH-92A designation, at a value of $542 million.) “I am not sure how Airbus’ H225 will fare in this tight market, given a number of high-profile accidents that have hurt its reputation,” Foley said. “Bell still has time to pull the plug on the 525 before investing heavily in production, if they so choose. Meanwhile, from what I have seen, Leonardo’s AW189 seems to be in a good market position.”

CHC’s Insights

The slump in offshore business has forced helicopter operators such as Bristow, CHC, and PHI to go through Chapter 11 bankruptcies. These operators did so to shed debt and surplus assets, and to restructure themselves to effectively compete in the leaner, meaner offshore support market. (Waypoint Leasing Holdings Ltd., which billed itself as “the largest independent global helicopter leasing company” also went into Chapter 11 and subsequently sold the company to Macquarie Group for around $650 million.)

Going bankrupt “is not unusual for asset-heavy oilfield services businesses,” said Robertson. “We have seen the same trend in the offshore rig and vessel markets.”

No matter how wise a choice it may be, bankruptcy is a difficult subject for any corporation to discuss publicly. Rotorcraft Pro magazine appreciates CHC’s decision to talk about this process—and what the company learned that could help everyone in the industry.

“CHC has lived the Chapter 11 process from the inside, giving us a unique perspective on the issues facing the sector,” said a CHC spokesperson. “We believe the long-term way forward is for both the oil and gas producers and the operators serving them, to focus on how to best build sustainability in the market.”

In calling for sustainability, CHC wants the offshore oil and gas industry to pay their transportation companies enough money to keep the transport business viable; rather than pushing for low prices that make it hard for cash-strapped helicopter operators to survive.

“There is a pressing need to adopt a model that incorporates overall value versus cost,” CHC said. “This is essential to creating a sustainable pricing and support model that allows helicopter operators to continue to invest in the latest technology and safety innovations, and to avoid pricing that destroys net value for both customers and operators.”

In the meantime, CHC has used its Chapter 11 restructuring to create “a streamlined, highly competitive cost structure and has established a fleet of aircraft better aligned with our customers’ businesses,” the CHC spokesperson said. “While oil and gas remains the core of our business, we are working to further diversify our business, grow our global SAR and EMS operations, and develop Heli-One’s MRO presence around the world. Our goal is to find success in the current low-priced oil environment as we expect a slower, more gradual recovery.”

The spokesperson added that CHC’s “fleet productivity now matches our historical peak levels before the oil and gas downturn. We are winning new customers and key contract extensions, while also making strategic investments in the business.”

End of the Tunnel

CHC’s cautiously optimistic take on the offshore helicopter industry’s prospects is shared by the previous analysts cited:

“The demand for offshore oil and gas is unlikely to disappear any time soon, despite the growth of U.S. unconventionals and moves towards renewable sources of power,” said Westwood Global’s Robertson. “Many offshore field developments are cost-competitive with onshore alternatives and decline in production from existing fields will drive a need for new field developments even if demand is static.”

This said, the boom times that occurred before 2014 may never return. “The problem is that oil prices would need to stabilize at $85 per barrel or higher, which seems unlikely to occur in the current situation,” said Foley. “As such, deliveries of large helicopters to serve this sector seem likely to keep declining or flatten out at best,” he added. “One problem for OEMs is that specialized offshore helicopters are not easily adapted to other missions.”

Westwood Global also expects casualties: In the current scramble for offshore transportation contracts, the market remains too fragmented, Robertson explained. As a result, he expects “the rotary-wing market to follow the path of the fixed-wing business, with further consolidation amongst the various international and regional players.”

Still, all is not lost: Robertson said that Westwood Global projects demand for offshore helicopter services to pick up, with “a 5% compound growth rate over the period 2019-23.” 

In other words, the bottom of the offshore industry downturn has already been reached, and things are beginning to turn up for OEMs and offshore helicopter operators. There is light at the end of the tunnel at last – and it’s not an approaching train.