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And it begins — rig stacking

With oil prices still decreasing, companies in the Permian Basin have begun the process of cold stacking their rigs.

The term “rig stacking” consists of two different methods.  “Cold stacking,” means the releasing or stopped drilling of a rig.  “Warm stacking,” refers to temporarily taking a rig off the market.  During “warm stacking” rigs still maintain basic operations and are mostly crewed.

According to CBS 7, an unidentified CEO of an oil operation company explained that many companies have started to consider rig sharing or subleasing their rigs.  Apache, for example, has already stacked 10 of its rigs within the Permian Basin, according to the CEO CBS 7 spoke with.  The CEO also expressed how it is something those working in the oilfields should be concerned about.  When a single rig is stacked, 20 to 50 jobs are at risk, but to minimize job losses companies are already going to their vendors seeking cost reductions.

According to an article by Fuel Fix, Texas drilling permits decreased by 50 percent during the month of November in comparison to October.  The CEO also stated that within the next few months the Permian Basin could see a decrease of more than 75 out of the 500 plus rigs operating in the region.  If this occurs, it will drastically affect the number of jobs in the region.

The CEO continued to explain that there is some good that comes with slowing production.  It will give people the opportunity to regroup and execute the work with more accuracy.  Slowing production will also give the region the chance to work on its infrastructure issues, including housing and roads, which have suffered greatly due to the rapid change in the economy that came with the oil boom.

Offshore operators, where it is more common for rig stacking to occur, are also beginning to stack their rigs due to sliding oil prices.

Chief Executive Officer of Kim Heng Offshore & Marine Holidings Ltd. Thomas Tan commented on the changes occurring in operations:

Six months ago, no one talked about stacking rigs … In the last few weeks, things have become scarier and the talk of stacking started.

Tan explained how over the last few weeks he has received numerous enquiries to stack dozens of rigs.   “A lot of people are looking at warm stack, as they hope that the market will turn around quickly … Cold stack is on their mind… but they haven’t given up hope yet,” said Tan.

Along with Kim Heng, Transocean Ltd, which owns the largest offshore drilling rig fleet in the world, said they, too, may be shutting down rigs.  As of November the company has two ultra-deepwater fleets and one midwater fleet sitting idle.  With market conditions the way they are, if Transocean cannot contract the fleets they will have to cold stack them, which would affect the company’s 2015 cash flow significantly.

The CEO of Seadrill Ltd, the world’s largest driller by market value until recently, said they expect to see a pickup in stacking and scrapping during next year.

Although the declining oil prices have caused companies to take a step back, re-evaluate their spending and close down rigs, the oil prices have allowed for historic mergers and bargain price investments.

Many investors are picking up shares that other investors are dumping in hopes of future stabilization.

James Burgess of Oilprice.com reports, “Industry analysts agree: oil prices are not expected to significantly rebound in 2015, but the oil slump can’t last forever.  The bottom line is that the current market undervalues oil, and therefore, North American oil and gas production is still a safe, long-term bet.”

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