HOUSTON Sep 18, 2006 (Dow Jones Newswires)
The Gulf of Mexico remains a hostile environment for jackup rigs, which have fled the region in droves over the last year due to poor profits and increased hurricane activity, Noble Corp. (NE) Chief Operating Officer Mark Jackson said Monday.
Noble moved the last two of its 44 jackups, the Eddie Paul and Tom Jobe, out of the Gulf in May. But Jackson said it is "absolutely" possible that Noble could return its shallow-water, fixed rigs to the Gulf.
It isn't especially likely in the near future, however.
"The Eddie Paul and Tom Jobe ... those two units had the lowest after-tax margins in the world," Jackson said, speaking at a Bank of America conference in San Francisco. "It's not that we don't like (the Gulf), but why have those issues when we can operate in Mexico or someplace else?"
The Gulf jackup market already was cooling before Hurricane Katrina and Hurricane Rita blew through last summer.
With a shortage of jackups internationally, energy companies have become more willing to offer multi-year contracts, something they were reluctant to do in the Gulf of Mexico until the recent spike in energy prices, said Stacy Nieuwoudt, an oil-field services analyst at Pickering Energy Partners in Houston.
"Before the upcycle, you would never have seen a term contract signed in the Gulf of Mexico," she said. "Now that the jackup market is a more international market, (drillers) can leave when other markets are very strong."
Last month, TODCO's (THE) chief executive Jan Rask estimated that 102 jackups were available in the Gulf, while demand was stuck in the low 80s.
Sensing weakness in the market, energy companies in the Gulf are once again shying away from big contracts, preferring instead to take advantage of declining day rates with short-term deals.
"Customers will drive down day rates, and play (rig operators) off each other," Jackson said.
The aftermath of the 2005 hurricane season also helped push jackups out of the Gulf, he said.
In January, Noble chief executive James Day said that he was concerned that it would be impossible to insure jackups in the Gulf.
While insurers eventually relented and offered coverage for Noble and other companies, premiums as much as quadrupled in some cases. Strict damage caps meant that rig operators couldn't be sure they'd receive compensation should another major hurricane pass over the Gulf.
Other markets don't carry that risk, Jackson said. Rask and others in the industry predict that supply and demand will eventually balance out in the Gulf.
Energy companies should be more willing to enter into long-term contracts once the Atlantic hurricane season ends in November, Nieuwoudt said.
But she described the market as "choppy" for the rest of 2006, noting that further declines in natural gas prices could lead to lighter drilling activity.
Copyright (c) 2006 Dow Jones & Company, Inc.
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