HOUSTON – Dashed hopes and diminishing returns in Brazil and the Gulf of Mexico have pushed Maersk Oil to lay off a quarter of its Houston employees and curtail its oil exploration in the Gulf.
In an internal memo that said some jobs would be cut immediately, Maersk Oil CEO Jakob Thomasen told employees Wednesday that “disappointing results and an escalating cost environment” led to the decision to lay off some of its Houston staff after nine years of exploration drilling in the Gulf.
“As a result of challenges of growing a non-operated exploration portfolio in the U.S. Gulf of Mexico, Maersk Oil has decided to scale back exploration in this basin,” Thomasen wrote in a memo obtained by FuelFix and confirmed Thursday by a spokeswoman for the Danish oil company.
The spokeswoman, Charlotte Holst Frahm, said 54 employees would be let go in Houston, while eight will relocate to Copenhagen. About 150 employees will remain in Houston, where they’ll “continue to play a key role in managing Maersk Oil’s interests in U.S. Gulf of Mexico.”
“It’s not an exit; it’s a refocus,” said Bruce Laws, president of Maersk Oil and head of the company’s Houston office. From now on, he added, a majority of the firm’s Houston employees will work on Maersk’s prospect at the Chissonga oil field off West Africa’s coast near Angola. “What changed yesterday was really in the exploration world. It was pure business.”
Thomasen’s announcement came a day after the firm’s parent company, Denmark-based oil services, drilling and transportation conglomerate A.P. Moller-Maersk Group, said it would distribute cash to investors through $1 billion in share repurchases over the next 12 months, its first buyback ever.
It cited Maersk Oil, which besides Africa is developing projects in the North Sea and off the coast of Qatar, as one of the drivers of a 42 percent increase in underlying profit to $2.4 billion in the first half of the year.
But in a presentation to investors, the conglomerate said Maersk Oil faced a $1.4 billion loss after it had to write down the value of its Wahoo and Itaipu offshore assets in Brazil by $1.7 billion. It bought the assets for $2.4 billion three years ago. On Wednesday, Maersk told employees the teams working on its Brazilian assets will be let go Nov. 1.
Ross Lubetkin, an analyst with Houston energy research firm Wood Mackenzie, said that after appraisal drilling in offshore Brazil, Maersk found that the oil in its fields was on the lower end of its initial estimates, prompting the company to adjust the value of its assets.
Plus, for certain Brazilian offshore assets, oil companies are required to use materials and labor from Brazil in developing projects. While contracts vary, Maersk’s two oil projects in Brazil are required to source 81 percent of their development from the country, he added.
“That’s seen as a significant challenge,” Lubetkin said.
In the Gulf of Mexico, where Maersk’s projects are still on track, costs have risen dramatically as global supply chains for human resources and the resources needed to build rigs have become strained, Laws said. Another emerging challenge for oil companies and a driver of global costs is that foreign governments in recent years have been clawing back more oil profits, through a mixture of higher taxes and brand new levies, he said.
Globally, “the government take continues to increase a bite at a time, with the end result being that the cost-per-barrel increases,” Laws said. “It’s not one thing that you can point your finger at, but it’s all led to a squeezing of margins.”
In his note to employees, Thomasen said some of the capital used to fund the Gulf operations will be used elsewhere.
He added that management of some of its Gulf exploration activities will be transferred to its headquarters in Copenhagen and that part of its Houston exploration staff will be laid off. Employees who work in its Geophysics Imaging Center will be let go immediately.
Construction costs for offshore drilling rigs, subsea equipment and other steel-built tools have been rising rapidly over the past decade, and deep-water drilling in the Gulf has become more expensive after new regulations were put in place in response to BP’s 2010 oil spill, said Lysle Brinker, director of company research at IHS.
Higher crude prices have forced shippers of steel, copper and other supplies to raise their prices dramatically in recent years.
“While the Gulf still has a pretty bright future, it may be that they’ve decided it’s too costly,” Brinker said. And it’s often a challenge to build a portfolio of non-operated exploration assets, he added.
“It matters who the operator is and how focused they are on those leases that they’re a partner in,” he said. As a non-operating partner, “you have less influence over the time line of development, and so forth.”
The Maersk memo also said certain technical and commercial support jobs in Houston will be eliminated as those operations are moved to Denmark. Other support services will be “reduced in line with the diminished needs of the new Houston office,” effective immediately.
The Houston teams working on Maersk’s projects in the Chissonga oil field off the coast of Angola, and the Jack and the Buckskin fields in the Gulf will remain the same, “thereby maintaining a continued significant presence in Houston,” the memo said.
“The impacts to our colleagues in Houston are a regrettable result of this announcement,” Thomasen said. “I want to assure that we support all affected individuals through a safe transition and that everybody is treated with respect and in line with our company values.”
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