Leaner Market for Jackups in 'Picked Over' U.S. Gulf

Dow Jones Newswires

HOUSTON, Nov 7, 2006 (Dow Jones Newswires)

The Gulf of Mexico's continental shelf isn't the playground for natural gas drillers it used to be. But now that a third of the rigs plumbing the shallow waters off the Louisiana coast have fled to foreign seas, drillers say a more stable, if leaner, market is emerging from the rubble.

Until this year, drillers were reaping the benefits of a two-year exploration boom, fueled by record gas prices. With producers eager to hire shallow-water rigs - jackups - operators hiked their fees and demanded long-term contracts once unheard of in the Gulf.

But producers slashed their 2006 Gulf drilling budgets after many of those wells came up empty. With production off an average of 9% a year between 2001 and 2005, energy companies shifted resources to promising plays in east Texas and abroad. The move, which came on the heels of the tortuous 2005 hurricane season that destroyed some rigs, shows that the industry will desert an oil and gas play, even amid robust prices, if the bounty is seen as too paltry.

"From an area that's been heavily picked over, rig rates are exceptionally high," Chesapeake Energy Corp. (CHK) vice president Jeffrey Mobley said in a conference call with analysts on Oct. 27. "There's no mystery left on the shelf because the entire shelf has been shot multiple times with seismic."

The shallow Gulf's rig count currently stands at 97, down from around 115 at the start of 2006. Analysts expect another 11 rigs to desert the region by March 2007. At the same time, deepwater oil and gas drilling has expanded, in part due to the popularity of the "Lower Tertiary" play, which is home to a number of recent high-profile discoveries.

"It is unlikely that the Gulf of Mexico market will be as large as it was earlier this decade," said Carl F. Thorne, chief executive of ENSCO International (ESV), in a conference call with analysts. "But it can still be a very healthy market."

Not coming back

Few expect even a "very healthy market" to lure back drillers like Noble Corp., (NE) which pulled the last two of its jackups out of the Gulf in May.

"The (Gulf) shelf has the lowest jackup margins for us," Noble spokesman John Breed said. "We'd consider coming back to the shelf under the right conditions, but ... we have no plans to move any jackups back to the shelf any time in the near future."

Many of Noble's Gulf rigs went to drill for oil off the coast of Mexico. But other jackups have been hired by foreign producers of liquefied natural gas.

LNG imports are supplanting the Gulf of Mexico in providing North America with gas, said Cameron Gingrich, lead project analyst for Ziff Energy, a Calgary-based consultancy.

The Gulf's gas will fall from 25% of the total U.S. supply in 2000 to 8% in 2014, as total offshore output will drop from 13.9 to 5.8 billion cubic feet a day, Gingrich said.

Over that span, the Gulf Coast has federal approval to add seven to 10 billion cubic feet a day of liquefied natural gas processing facilities, close to what the Gulf of Mexico will lose this decade, Gingrich said.

"(The Gulf) is likely just going to be a niche player, extracting the last bits of gas," Gingrich said.

Gulf drilling could shrink even more if gas prices continue to fall, said Doug Becker, a Banc of America Securities analyst.

In one scenario feared by land and offshore drillers alike, warm weather would cut demand for natural gas, elevating already-high storage levels in the U.S. and sending gas futures plunging on the New York Mercantile Exchange.

Copyright (c) 2006 Dow Jones & Company, Inc.