Shallow-Water Driller Sees No Comfort in $100/Barrel Oil

HOUSTON Nov 2, 2007 (Dow Jones Newswires)

New offshore drilling rigs face an uncertain market, and the prospect of $100-a-barrel oil may actually be hurting their chances of finding work, Jon Cole, chief executive of Scorpion Offshore Ltd. (SCORE.OS) said Thursday.

"It's actually stunting demand for our rigs" by encouraging governments to exert more control over reserves, which discourages new investment, he said, speaking on a panel at the International Association of Drilling Contractors' annual convention.

Companies plan to introduce 145 new rigs into the market by 2011, according to Noble Corp. (NE), an offshore driller. Half will explore for large-scale oil and gas reserves in deeper water, and are almost guaranteed to find lucrative contracts, panelists said. The rest, known as jackups, work in water less than 500 feet deep, and face an uncertain future. Shallow-water exploration has shifted from oil toward natural gas in recent years, and while oil prices are skyrocketing, gas has traded in a relatively narrow range.

About 70% of deepwater rigs are already under contract, compared with just 30% of jackups, said Lee Ahlstrom, vice president of investor relations and planning at Noble. Meanwhile, the market already is souring in some places - Ahlstrom noted that the price drillers in the shallow-water Gulf of Mexico charge has dropped to $90,000 a day today from $120,000 a day in 2006, while costs jumped to $35,000 from $20,000 in the same period. Demand for jackups and dayrates are both booming in other regions, including the Middle East, he said.

"We are not exempt from basic economics," said Cole, whose company operates one jackup in India and is building five more. "There will eventually be too many drilling rigs in every category."

Both Ahlstrom and Cole pointed to opportunities within the shaky jackup market. Cole said the new rigs will be the first major addition to the fleet in more than 20 years. Older rigs could therefore be cycled out of service to make way for new rigs.

Many of the new rigs are also being built by speculators, companies created to construct and sell rigs, rather than to drill with them. Established drillers will be able to expand by acquiring these startups, or entering into joint ventures, Ahlstrom said.

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