Oil Stored In Tankers Declines in December

Jim Brown
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According to shipbroker Simpson, Spence and Young the amount of oil held in floating storage declined by 12 million barrels in December. A total of 122 tankers are holding roughly 86 million barrels of oil products, mostly distillates, were under charter at month end.

The drop came as futures prices rose sharply making it lucrative to sell the cargos and end the inventory trade. At the end of November there were 136 tankers storing 97.65 million barrels of oil and distilled products. The distilled products were gasoline, diesel and heating oil. The decline in ship storage was the largest off the coast of northern Europe and the Mediterranean.

The number of very large crude carriers (VLCC) holding crude oil in the U.S. Gulf fell to 8 tankers from 10 tankers.

Exxon May Buy $1 Billion Artic Rig from Transocean

Rumors are surfacing that Exxon (XOM) may be in talks to buy a rig capable of operating in extreme artic conditions for as much as $1 billion. Exxon is expected to use the rig offshore Greenland, Iceland or Alaska. The day rate could be enormous and in the range of $650,000.

In November Transocean CEO said the company would probably be announcing an artic class rig build and a long term contract for that rig by year end. On a recent conference call the new incoming CEO said the rig design had been progressing quickly and discussions with a customer were proceeding. Exxon is about the only company that has the cash and the desire to acquire this kind of rig.

Nobody really knows what kind of oil remains undiscovered in the artic because of the difficulties in drilling in that region. Heavy ice both on the rig and around the rig, ultra cold weather, harsh winds, high waves and icebergs are just some of the problems associated with drilling in the artic. Exxon is really stretching the limits of exploration if this is their new direction.

Exxon needs to stretch those limits because recently they have been on a dry streak with a 40% failure rate on exploration wells. That is up from 36% he prior two years. The most recent was the abandoned well in Hungary after a $75 million effort to produce gas. By purchasing (XTO) for $30 billion they hope to acquire the needed technology to drill and produce those unconventional gas formations. The same techniques XTO uses in the Barnett Shale and others can be used in Hungary, Germany and wherever shale gas is found. The Hungarian formation has the same characteristics as the Freestone Trend in Texas and that accounts for 28% of XTOs output. Obviously they know how to drill that formation.

XTO more than doubled production over the last four years while Exxon's production fell -1.2%. Other companies are taking the cheaper route to gaining the technology by partnering with Chesapeake (CHK) in various shale plays. Companies getting in bed with Chesapeake over the last two years include Total SA (TOT) Statoil ASA (STO) and BP Plc (BP).

Tidal Wave of New Rigs To Swamp Dayrates

Only 70% of the current offshore rig fleet is currently under contract but there is a tidal wave of new rigs ready to hit the sector in 2010-2011. Nearly 60 new rigs are scheduled to come online over the next two years.

When oil prices were hitting $140 in 2008 the various oil companies were writing checks for deposits on new builds at a record pace. Now with oil around $80 and only 70% utilization those contracts are coming back to haunt them.

The credit crunch killed the order boom since getting financing for new rigs was nearly impossible. Those contracted and financed during early 2008 are likely to be the last quantity of rigs produced for several years. New orders over the last 12 months have dried up.

Petrobras could fill the gap since they estimate it will take 60 rigs around 10 years to drill their new offshore fields. Petrobras has contracts for six new drillships that were placed in 2009 and they are likely to place more in 2010 plus pick off the best of the existing rigs coming off contract from Transocean (RIG), Diamond Offshore (DO) and Nobel (NE)

A total of 57 rigs are scheduled to be delivered in 2010. That consists of 29 jackups, 15 semisubmersibles, and 13 drillships. Only about 75% of the SS and DS rigs have rental contracts and only about 15% of the jackups.

Seadrill has been very successful in its rig builds. They have five new rigs delivering in 2010 and several are already under contract for $500-$610,000 per day to Petrobras.

Transocean has four drillships under construction and all four already have signed contracts. Exxon has already contracted the Deepwater Champion for $640,000 per day through 2015.

Rig construction prices have soared due to the higher cost of steel and the constantly changing technology needed to drill in the deep water. Drillships delivering in 2010 average $665 million each to build with semisubmersibles around $500 million.

Jim Brown