Offshore Drilling Due for Recovery

Jim Brown
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It may take a long time before the demand for rigs catches up to the number of available rigs but at least the trend is in the right direction. However, new rigs planned or under construction continue to grow faster than executed leases.

Currently there are 261 offshore rigs categorized as floaters as compared to jackups. Floaters are just that. Rigs that float on the surface and are either moored using anchors an cables or dynamically positioned using complicated GPS systems and thrusters. Jackups are rigs that rest on the bottom and their support legs are raised and lowered as necessary when the rig is positioned to drill.

The permit halt after the Horizon disaster crippled the rig rental sector. Numerous rigs went to standby status and operators paid nominal rent to maintain control of the rig while others canceled their leases with varying success sometimes including large penalties. As many as eight rigs left the Gulf of Mexico for locations as diverse as offshore Brazil or offshore Egypt.

At the beginning of 2010 there were 236 floaters and 200 were under contract. That equated to an 85% utilization rate. There was actually more demand but always a constant negotiating process with the leasing companies for future rig commitments. There were 36 rigs off lease but some were on hold for an expected future commitment while others were going through maintenance or equipment upgrades.

In 2008 there were 205 floaters and 177 were leased. Fast forward to today and there are 261 rigs and 206 leased. That is an increase in the number of rigs by 27% in only three years. Several companies including Transocean have recently announced plans to build several high specification floaters in addition to the existing fleet. All the new builds already have signed multiyear contracts with major operators like Chevron, Conoco and Shell. Rigzone claimed last week there are 60 newbuild ultra-deepwater rigs coming to market over the next three years.

There are currently 17 rigs hot stacked. That means they can be activated almost immediately and put to work. There are 18 rigs cold stacked. That means they are not expected to be leased in the near future and have been mothballed until conditions change. Reactivation and probable reconfiguration could take 6-months to a year depending on the customer requirements.

Petrobras is either building or planning on building between 16 and 21 rigs to work offshore Brazil. Once completed they will replace some of the rigs currently on lease and add to the global fleet although they will be busy in Brazil for a long time.

Despite the rising number of inactive rigs the average day rate has risen from the low $260,000 range after the crude crash in 2008 to the mid $370,000 range. There is a lot of spread in that rate with the higher cost rigs well over $500,000 per day inflating the average.

There is one big question. What will demand be in the coming years and will it absorb the current 22% of the fleet that is inactive plus the 30+ rigs currently being built?

Obviously the big leasing companies like Transocean believe business is going to pickup because they have the most rigs on order. However, they are considering selling off some of their older rigs and spinning off their jackup business in order to modernize their overall fleet and concentrate only on deepwater.

Some recent events that will help the sector include the recent breakthrough of permit approvals in the Gulf of Mexico. The BOEMRE has now approved eight deepwater permits and claim there are more coming soon. The election cycle has already started and fuel prices are closing in on $4 per gallon so the administration has to appear committed to increasing production of oil in the USA. Time will tell if he is serious.

There are currently more than 320 permits waiting approval at the BOEMRE with more than 50 deepwater applications. BP has eight wells it wants to drill and they have the largest ownership position in the Gulf. Chevron, Conoco, BHP and even Petrobras plus a dozen or so independents are in line waiting for permit approval. Many of those applications are restarts of wells that were being drilled when the moratorium forced them to halt work. Those applications probably already have rigs committed and on standby. Reportedly there are 12 rigs on standby in the Gulf. There are also a couple dozen permits for new wells.

If the BOEMRE was serious about releasing permits there could be a serious increase in active rigs in the Gulf by early next year. Since future new production of an estimated 500,000 bpd will be delayed by up to two years the moratorium has been a very expensive political statement.

Cuba announced this week they are going to drill five deepwater wells in the Gulf by 2013 in water depths up to 1.6 miles. They have not disclosed who will actually be doing the drilling or what rigs are going to be used.

Mexico is embarking on a new exploration program but the next phase is gathering seismic and that will take up to two years. Rigs used to explore and develop in the Mexican portion of the Gulf are typically jackups but there are some deeper options. Mexico has reportedly agreed to use the same safety standards for deepwater wells that are now in effect in the USA. It will still be a long time before Mexican rig demand begins soaking up our excess rig inventory.

Statoil announced last week they made a new discovery in the Barents Sea that may hold 250-500 million barrels of oil. Norway estimates there could be 5.9 billion barrels of undiscovered oil and Statoil and partner ENI may accelerate their drilling schedule to determine the size of the new Skrugard find. Other companies in the area will probably dust off their maps and begin looking at similar formations in hopes of finding new oil. Unfortunately activity in the Barents Sea is very slow to develop. The Goliat field, developed by ENI is set to start producing in 2013, 13 years after it was discovered. The Snohvit field started production in 2007, 23 years after discovery. Still, this is going to accelerate activity in the Barents Sea and probably pull another 5-6 rigs out of unused inventory.

Saudi Arabia is also ramping up drilling activity including a couple offshore developments. Egypt is also expanding offshore activity. Noble reported they were going to add more rigs to their development effort in the Leviathan gas field off the coast of Israel. There are several new developments off the coast of Africa that should pull another 10-12 rigs back into service as the new discoveries are delineated and production plans drawn. The gas fields off the coast of Australia are also sprouting rigs and will take a decade to complete.

The bottom line is what appears to be a growing wave of offshore exploration that should at least match the growth in newbuild rigs. Whether it will become strong enough to pull the dinosaurs in cold stacked storage back to work is unknown. Many of the rigs currently off lease are more than 20 years old. Drilling technology and floater technology in general has jumped several light years into the future from the technology when those floaters were originally built.

Companies like Transocean, Diamond Offshore, Noble, Tidewater and others have their fingers on the pulse of the sector. The giant here is of course Transocean and while I am disappointed with their recent stock performance it is mainly a factor of the lingering Horizon liability. Once that is laid to rest I believe they will lead the sector for years to come. They are using this slow period to restructure their fleet and prepare for tomorrow. Offshore drilling is where the action is for big oil reserves and each new discovery is going to be deeper and more complicated than the last. This requires those high specification rigs and I doubt they would be ordering $500 million rigs if they did not believe the demand was going to be strong. Transocean remains my top pick of the offshore drilling sector.

Jim Brown

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