Construction Surges Possible in Marine Rig Fleets

Abstract: Despite market conditions, creeping old age could force a jack-up rig construction boom; deepwater E&P spending could swell rig demand there, too.

Analysis: Consider the situation in which offshore contract drilling companies find themselves these days.

Global oil demand, as usual, is thought to be rising steadily, but the effects of September 11, 2001, coupled with the fast-developing "Iraq Thing," has triggered economic slowdowns, particularly in the U.S. What's more, despite fits and starts toward a return to normalcy in recent months, there are now signs that those downturns could persist should the terrorism war reach a new crisis point and/or the Allies invade Iraq, both of which, regrettably, seem probable. Meanwhile, OPEC nations still have a viselike grip on the biggest valve of the world's oil supply "Christmas tree," and can open or close it to keep prices at levels they choose, or even to exert political power. They've done both.

Oil companies, like other businesses around the world, have reacted like deer on the highway when caught in the dual headlights of world terrorism and the Middle East crisis (and don't forget the newly activated spotlight from North Korea, to boot). Producers have reined back on spending across the board, but they've been particularly tight-fisted with that part of their budgets that goes toward expanding the "E" side of exploration and production (E&P).

In the offshore exploration sector, with its highest risks but most dramatic rewards, contractors are compelled to continue offering mobile offshore drilling units (MODUs) that make hole faster and cheaper, as well as safer for both personnel and the environment. For water depths up to 400 feet, they supply bottom-supported, self-elevating MODUs (jack-ups). For anything deeper, they supply floating MODUs (semisubmersibles or drillships).

Until the mid-1990s, contractors were successful for the most part in providing an even mix in the jack-up and floater fleets to satisfy demand and keep overall utilization high. New rig additions were made as needed to replace worn-out units or to satisfy demand growth niches. There were short-lived down cycles, as well. There always are.

Overall, contractors were able to anticipate demand for new equipment. In the 1980s, for instance, a boom in jack-up construction updated that fleet. The boom coincided with introduction of new drilling technology, as well as a renewed demand for jack-ups to tackle secondary exploitation, chiefly by smaller oil companies, of deep natural gas reserves beneath the outer continental shelf (OCS) of the U.S. Gulf of Mexico. To a lesser degree, other areas of the world also needed additional jack-ups.

Meanwhile, in the mid-1990s, as exploration continued to step out beyond the OCS into deeper water, the supply of floating MODUs also was given a boost. This helped to satisfy short-term demand, generally, though water depth increments expanded beyond the limits of even some of those rigs. But more about that later.

Shifting back to the jack-up fleet, there are indications that even with no significant increase in exploration budgets by oil companies, drilling contractors may have to start a new construction boom very soon if they want to remain competitive. The fact is the world jack-up fleet is aging--fast.

According to ODS-Petrodata (ODS), a Houston-based offshore equipment market intelligence firm, only 14 new jack-ups have been built in the past five years for a fleet that totals about 350 competitive rigs. None has been retired, except for those lost in accidents. Today, only 10 new jack-up rigs currently are under construction in shipyards around the world. That's only a blip on the screen.

However, according to a study ODS released just last week, even with this bit of new construction, contractors will soon face a significant challenge to replenish the jack-up fleet, given that the bulk of it was delivered in the early 1980s. The study, titled "The Jack-up Market: Scenarios for Newbuilding and Attrition to 2015," examines the age profile of jack-ups and concludes that 90 percent of the competitive fleet will be at least 25 years old by 2010. Therefore, says study author Stewart Wiseman, contractors will need to build a "massive" number of jack-ups during the next 10 years. The study expects a minimum of 59 new jack-ups to be built by 2015, and they call that a conservative estimate. Yet, even with such large additions (newbuild jack-ups average about $90 to $95 million apiece these days), the report predicts that the jack-up fleet could be smaller by then, barring demand upsurges. Such an upsurge could occur, for example, if Russia's vast offshore reserves (2! 0 percent of the world's offshore oil) were to be tapped, at long last. Seventy percent of Russian offshore oil reserves are located beneath water depths where use of a jack-up would be appropriate.

The study's logic is unmistakable. For the most part, contracting for a 25-year-old jack-up could be compared to renting a 25-year-old automobile: You could drive the car from New York to Los Angeles. But would you? Similarly, you could drill a deep gas well with the old rig. But would you?

In the past, most newbuild booms have been driven by oil company demand, says Wiseman. But this is unlikely to happen again soon, since the underlying demand doesn't exist currently. But Wiseman says safety and efficiency probably will be prime movers of such expansion. If working with outdated equipment proves dangerous, or if building new rigs can bring savings in drilling time, then capital will become available to replenish the fleet.

You can read more about the report on ODS's website:

But back to the floaters. The use of semisubmersibles for both deepwater exploration and development drilling, as well as for well completions, has prompted contractors to begin a sort of boomlet in new floating rig construction. This includes both purpose-built new semisubmersibles and retrofits of existing ones. Drillships, on the other hand, are primarily exploration tools, and are used to drill deepwater wells in stormy regions or where thruster-borne stationkeeping is required.

No new drillships are under construction currently.

According to ODS statistics, 11 new semisubmersibles currently are under construction in world shipyards. They are rated for water depths ranging from 3,280 feet to 10,000 feet. However, even with current mid-range utilization among the floating rig fleet, there are signs that world deepwater development could create a need for new rigs, as well as retrofits, even as producers strive to develop deepwater fields with floating production platforms not totally dependent on MODUs.

The latest update (the fourth) of a report prepared every four years by Douglas-Westwood Ltd. (DWL), a widely respected U.K. energy analysis consultancy, expects that nearly $58 billion will be spent during the next five years in developing deepwater fields. The bulk of the money will be divided among projects offshore West Africa (38 percent), in the Gulf of Mexico (32 percent), and offshore Brazil (23 percent).

Based on an analysis of data supplied by Infield Systems Ltd., another U.K. offshore consultancy, the report, titled "The World Deepwater Report IV--2003-2007," says oil companies currently are considering development of more than 140 deepwater fields during the period. They range from single-well tiebacks to massive multiple-well developments with both subsea and surface well completions and floating storage, processing, and offloading systems.

Using those data, DWL predicts that about 32.8 billion barrels of oil equivalent in deepwater reserves will come onstream by 2007 from those fields. That compares with development of 66 deepwater fields that brought an estimated 10.6 billion barrels of oil equivalent onstream during the previous (1998 to 2002) study period.

DWL's lead analyst, Dominic Harbinson, said about $21 billion is likely to be spent on deepwater floating production systems, $18 billion on drilling and completing subsea wells, and $11 billion on flow lines and controls. Subsea hardware and surface-completed wells could account for an additional $8 billion. As for producers' capital outlays, the report forecasts global capital expenditures for deepwater development in the 2003 to 2007 period to be $57.9 billion, with the highest share (38 percent) going to projects offshore West Africa. The U.S. follows with 32 percent, and Brazil with 23 percent. That more than doubles the previous report period's estimated capital expenditure of $25.6 billion, of which the Gulf of Mexico and Brazil accounted for 83 percent of the total.

Harbinson also noted that the use of floating production and subsea technologies would dominate development of the reserves in the period 2003 to 2007. "Although the number of wells we forecast for the period would appear to be well within the capabilities of the existing deepwater drilling fleet, the demand for the services of deepwater rigs for exploration, appraisal and intervention work could well create a tightness in the rig market," Harbinson noted. This could force rig day rates (rental) up in the medium-term future, he added.

But it also could result in construction of a number of new semisubmersible-type deepwater "development" oriented rigs, which are purpose-built to handle long-term projects with multiple well drilling and completion scenarios. Currently, Houston-based GlobalSantaFe Corporation has two such rigs under construction at a cost of $285 million each. Other contractors, such as Diamond Offshore Drilling, Inc., also Houston-based, are refitting existing exploration semisubmersibles to handle the high drilling fluid and pipe storage and completion equipment-handling tasks required of such rigs.

So, while there may not be a major future boom in deepwater rig construction, as such, it doesn't take many $285 million rigs to help world shipyards out of the doldrums--and strain the cash reserves of offshore drilling contractors.