Rig Shortage to Persist For Now, Underpinning Oil, Gas Prices

SINGAPORE Sep 5, 2007 (Dow Jones Newswires)

A shortage of deepwater drilling rigs is likely to persist for several years more, hampering oil companies' efforts to find new oil and gas reserves and underpinning prices.

High oil and gas prices and strong demand in recent years have pushed energy companies into exploring for and bringing into production oil and gas reserves that previously were considered too small or uneconomic, or too difficult to extract.

Many of these deposits are in deep offshore waters, and as a consequence demand for specialist rigs that can operate in waters as deep as 4,000 meters has spiraled.

"It is a fair observation that demand for deepwater structures is currently more noticeable with the oil and gas industry moving its (exploration and production) operations further offshore and into increasingly deeper waters," said Teri Liew, senior manager for corporate communications at Singapore's Keppel Corp. (BN4.SG), the world's largest builder of offshore oil rigs in terms of output.

Owners of deep offshore equipment worldwide are operating them at near full capacity, and fees to charter rigs, if any can be found without a lengthy delay, now can run to over $500,000 per day.

The present shortage has delayed a number of exploration projects, dashing potential producers' hopes for early revenue inflows, and oil consumers' wishes that new sources of oil will help bring down record prices.

Also, high price tags for deepwater rigs are raising overall exploration costs for developers, who in turn will aim to make good their higher spending by passing on the costs to buyers.

High exploration costs due to costly rig rentals "may well be one of the defining features of the high oil price environment typical of the last three years," said Steven Knell, an analyst for energy practice at Global Insight.

For the rig builders, it's boom time. As of June, Keppel had orders worth S$11.3 billion (US$7.4 billion) on its books, enough to keep its yards busy for three years.

Worldwide, more than 50 deepwater rigs are under construction, with the bulk due for delivery between 2009 and 2010. Until then, companies wanting deepwater rigs will have a tough time finding any to rent, and if they do, they'll have to pay top dollar prices.

Future availability may vary from region to region, and some expect relatively prosperous areas such as the Gulf of Mexico being the first to see rig supply shortages ease.

China, India Suffer

The shortages are even a problem for big and powerful consumers like China, which is trying to push its exploration frontier out into deeper waters in the wake of a major offshore gas find by Husky Oil China Ltd. last year.

In June 2006, Husky struck gas at its Liwan 3-1-1 exploration well in block 29/26 in the Pearl River Mouth Basin, about 1,500 meters under the South China Sea.

Husky said it could contain recoverable natural gas reserves of 4 trillion to 6 trillion cubic feet.

Even a company like parent Husky Energy Inc. (HSE.T), can't capitalize on the find just yet, as it will have to wait until next year for a rig. Chinese drillships can operate only at shallow depths.

A second deepwater gas exploration well in the South China Sea won't get drilled until the third quarter of 2008, said Jonathan Stringham, an investor relations official at Husky Energy.

China National Offshore Oil Corp, which lacks the expertise to operate in water deeper than 400 meters, signed a contract in August 2004 to allow Husky to drill three deepwater exploration wells in block 29/26 before 2011.

It has signed seven other deepwater offshore exploration contracts with other companies.

Rig supply for offshore China may continue to lag behind demand for at least another three years, while supply for the Gulf of Mexico may start easing sooner, said an official at China Oilfield Services Ltd. (2883.HK), a CNOOC unit.

Energy consultancy Wood Mackenzie says about one third of 57 new deepwater rigs to be delivered by 2010 will head to the Gulf of Mexico.

The longer-term outlook for rig supply and demand beyond the 2009-2010 period isn't yet clear, but one thing is for sure - oil companies will be under increasing pressure to find new oil and gas fields to replace their aging fields.

"New rigs are being commissioned all the time, but it is difficult to say whether these tight conditions will ease any time soon. For every new rig, there is a new exploration opportunity to pursue," Global Insight's Knell said.

The world still has large amounts of untapped oil and gas reserves, but much of it is in deep waters or hostile locations, such as far offshore or freezing polar regions.

Another emerging energy giant, India, is also being hit by deepwater equipment shortages.

India's Reliance Industries Ltd. may have to delay exploration projects, P.M.S Prasad, the company's president and chief executive officer of the company's petroleum business, was quoted by India's Mint as saying in July.

Copyright (c) 2007 Dow Jones & Company, Inc.

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