Despite US Woes, Drillers Spend Big On New Deepwater Rigs

HOUSTON (Dow Jones Newswires), Jan. 27, 2011

In 2010, the Deepwater Horizon disaster and ensuing oil spill resulted in one of the most challenging years the offshore industry has ever faced. But that hasn't stopped drillers from ordering billions of dollars in rigs that will allow them to dig even deeper.

Drilling contractor Noble saw its 2010 profits shrink by more than half, but last week the company ordered a pair of ships capable of drilling in up to 12,000 feet of water--more than twice the depth at which the Deepwater Horizon was drilling BP's Macondo well when it exploded last spring. The price tag: $1.21 billion. Those orders come on top of earlier commitments for two $550 million 10,000-foot rigs Noble expects to be delivered over the next 30 months.

Reshaping the company's deepwater fleet is "our top priority for capital allocation," Noble Chief Executive David Williams said Thursday when announcing a 78% drop in Noble's fourth-quarter profit. For the year, the company reported earnings to $773 million, down from $1.68 billion in 2009.

Despite the fact that the U.S. government is not yet allowing deepwater drilling in the U.S. Gulf of Mexico, since the end of September seven companies have ordered 10 drillships and semisubmersable rigs that are capable of drilling in up to 10,000 feet of water. Of those, eight will be able to penetrate the ocean floor beneath 12,000 feet of water. The companies also have announced option agreements to have an additional 12 of the so-called "ultra-deepwater" rigs built.

"We feel very positive about the long-term prospects of the sector," said Kate Perez, spokeswoman for Houston-based Pride International Inc. (PDE), which last month placed its fifth order for an ultra-deepwater drillship in as many years and disclosed an option to build a sixth.

Last Tuesday Pride announced its acceptance of the Deep Ocean Mendocino, a $725 million drillship built in South Korea and headed to Brazil, where it will be leased through mid 2016 by Petrobras at a rate of $502,300 a day. In December Pride is scheduled to take delivery of a similar vessel, though neither that nor the one ordered this month have guaranteed work waiting.

Pride is confident about the rigs' prospects even with U.S. deepwater drilling in limbo, Perez said. The company estimates that 80% of its revenue will come from deepwater work in 2012, up from less than 20% in 2004.

The rush to build new deepwater rigs is fed both by the hope of high energy prices and by shipyard costs that have come down by 20% since 2008.

The frenzy has also taken on the characteristics of an arms race--drillers feel obliged to update their aging fleets in order to win work and satisfy tougher U.S. safety rules. But in doing so they run the risk of flooding the market and driving day rates down, said analysts with Tudor Pickering Holt & Co.

The Houston investment bank estimates that the owner of a new $600 million drill ship needs to collect a day rate of $385,000 this year or $440,000 next year to see a 10% return on investment. The bank also said that "the recent slug of newbuilds certainly puts a cap on upside."

Drilling in depths over 1,000 feet was pioneered in the Gulf in the 1990s, leading to massive deepwater oil and gas finds that dot the globe, from Brazil and West Africa to the Mediterranean Sea and Mozambique. Announced deepwater discoveries surged to 35 in 2010, up from 25 the year before and nine in 2008, according to Wells Fargo Securities.

Still, drilling in 12,000 feet of water is uncharted territory. Transocean, the owner of the Deepwater Horizon, set a record for drilling an exploratory well in 10,011 feet in 2003. Shell's Perdido field in the Gulf of Mexico includes the deepest completed well on record at about 9,600 feet below the surface.

Other producers are eager to scour the depths with the new rigs, analysts say. "It's been the equipment that's prevented the exploratory push beyond 10,000 feet so far," said Wells Fargo analyst Tom Curran.

Many of the new rigs are being built on speculation, but others have customers waiting. Shell has committed to lease three of Noble's four on-order ultra-deepwater vessels, agreeing to pay the driller 25 years worth of day rates, bonuses and mobilization fees that could exceed $4.4 billion.

Copyright (c) 2011 Dow Jones & Company, Inc.

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