Analysis: Drilling Contractors Bullish on Ultra-Deepwater Outlook

Drilling rig contractors are bullish on the long-term outlook for the global ultra-deepwater drilling sector, with rig demand beginning to recover following the global financial crisis of 2008 and ultra-deepwater rig demand appearing outside the "Golden Triangle" markets of West Africa, Brazil and the U.S. Gulf of Mexico.

The number of deepwater discoveries has picked up again as the global financial recovery and sustainable oil prices have prompted national oil companies, majors and independents to begin spending again on exploration. Drilling companies are finding that operators are opting for high-specification rigs, including rigs with dynamic positioning (DP) capabilities to meet more challenging geological plays as well as increased safety and operational standards.

Pride International President and CEO Lou Raspino told attendees at the inaugural Jefferies 2010 Global Energy Conference in Houston last week that he sees potential for its ultra-deepwater drillship Deep Ocean Molokai, which is scheduled for delivery in December 2011 and is not yet under contract, not only in the traditional Golden Triangle markets of Brazil and West Africa, but emerging deepwater plays such as offshore India, New Zealand, Malaysia, Indonesia, eastern Canada and eastern Africa.

The company also has favorable contracts for its other new drillships, including Deep Ocean Ascension and Deep Ocean Clarion, which were delivered this year and are under contract to BP at day rates above $500,000/day. The newbuild drillship Deep Ocean Mendocino will be delivered in January 2011, and is under contract to Petrobras at a day rate just above the $500,000 mark.

Fleet utilization remains effectively full through 2010 and looks tight for 2011 for ultra-deepwater rigs capable of drilling in more than 6,999 feet of water, with Pride seeing improved client demand and tenders and pre-tenders higher in this year's third quarter. Day rates for the sector remain above the $400,000 mark, Raspino noted. He estimates that 83 percent of the company's floating rig fleet will be contracted for deepwater work in 2011 and that deepwater work will comprise 75 percent of its revenue in 2013.

The company already has a significant presence in Brazil and Angola, with more than half of its revenues of $1,059 million for the nine months ended Sept. 30, 2010 coming from its Brazilian operations. Raspino anticipates seeing more demand for ultra-deepwater rigs from Petrobras, with shortages forecast in 2011 and 2012, even with Petrobras' recent announcement that it would move forward with plans to construct 28 drilling rigs to tackle its pre-salt offshore reserves. "The amount of drilling activity at Tupi and other areas will require more rigs than Brazil can possibly build," Raspino said.

Seadrill CEO and President Alf C. Thorkildsen said during company's third quarter 2010 earnings call that he is convinced Brazil will build rigs, but not that it will order up to 28 rigs, and estimates that the first rig would come out in 2016 due to lack of shipyards in Brazil experienced in this type of construction. Thorkildsen noted that many of these shipyards will need upgrades to tackle these projects.

"But I am of the opinion that the market in Brazil will absorb that, and also to a large extent some of the available capacity in the world and take up some of that," Thorkildsen said. Seadrill earlier this year said market demand prompted it to order two ultra-deepwater drillships from Samsung Shipyard at a US$600 million a piece.

Noble Corporation also expects to see rig demand recovery over the next several years, with progressive growth toward the end of the decade. The company sees major areas of growth in Brazil and West Africa, with floating rig demand strong in Norway as well. While deepwater and mid-water rig rates will remain under pressure in the near-term, the company noted that ultra-deepwater day rates are strong enough to encourage newbuild rig construction.

Noble also has been renewing its fleet since 2007, adding four semisubmersibles capable of drilling in 10,000 feet or greater, including three DP semis, and four DP drillships with 10,000 feet or greater drilling capacity. These additions do not include Noble's Frontier fleet acquisition in July, which gave the company a 5,000-foot DP drillship, two moored drillships, including one Arctic-class drillship, a moored semi and an DP FPSO, said Thomas L. Mitchell, senior vice president and chief financial officer at Noble, during a presentation at the Jefferies conference

While the future of deepwater drilling activity in U.S. Gulf of Mexico remains uncertain, operators face a wide range of possible scenarios, from less onerous regulations that allow smaller operators to still participate to stringent new rules that could result in a major exodus from the U.S. Gulf, creating a "Dead Sea", according to Noble.

Other drilling contractors such as ENSCO PLC also are investing in ultra-deepwater rigs. ENSCO is investing more than $3 billion in its ENSCO 8500 series of seven newbuild ultra-deepwater rigs. Last month, Athens-based Dryships Inc. entered an agreement with Samsung Shipyard in South Korea for the option to construct up to four ultra-deepwater drillships, which would be delivered during 2013 and 2014, at a cost of around $600 million each. "The ultra-deepwater market has turned a corner and we believe that this is the bottom of the newbuilding price cycle," said DryShips Chairman and CEO George Economou. "We see strong demand for state of the art ultra-deepwater drillships and are confident of customer demand for these drillships."

According to RigLogix, 30 drillships rated for drilling in water depths greater than 9,800 feet have been delivered this year or are scheduled for delivery through 2013, while 24 semis capable of drilling in greater than 2,461 feet of water will be delivered through to 2012. Thirteen of the drillships scheduled for delivery currently are without contract, while 10 of the semis set for delivery do not have contracts at this time. Petrobras has 17 of the newbuild rigs set for delivery through 2013 already under contract.

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