Ultra-Deepwater Drilling Likely to Remain Profitable

HOUSTON (Dow Jones), Feb. 26, 2010

The economic recession has been hard on many oilfield-service providers as pinched oil and gas producers have cut back on drilling, but the ultra-deepwater drilling segment has been profitable throughout and is likely to remain so.

Transocean Ltd. (RIG), the largest offshore drilling rig contractor, saw its revenue from ultra-deepwater drilling jump 32% to $890 million during the fourth quarter from the same period last year. In contrast, revenue from its jackup rigs, which drill shallow water fields, fell 40% to $422 million. The company, which posted earnings Wednesday, said all of its rigs that can drill at depths greater than 7,500 feet are booked through 2010, even though more than 40% of its jackup rig fleet is idle.

The rift in the rig market underscores how oil companies that are hard-pressed to find new oil reserves are still willing to spend big, as long as it's in such frontier regions as offshore Brazil, West Africa and the deepwater U.S. Gulf of Mexico, where giant fields are thought to lie. Therefore, such companies as Transocean, Diamond Offshore Drilling Inc. (DO) and Noble Drilling Services Inc. (NE), which maintain a fleet of deepwater drilling rigs, have been relatively shielded from the recent volatility in oil and gas prices.

The projects on which these mammoth rigs can take years to complete, and hinge on a long-term view of commodity prices and energy demand rather than near-term market forces, which can drive down investment in smaller, short-term projects.

Phil Weiss, an analyst with Argus Research Co. in New York, said companies have yet to tap all the deepwater offshore drilling opportunities.

"Cheap oil has all been found. If you want more oil you are going to have to pay for it," Weiss said.

Ultra-deepwater rigs are massive structures that can accommodate hundreds of people and may stretch the length of a football field or more. That size, though, comes at a price.

Transocean's new ultra-deepwater drilling rig GSF Development Driller III, which can drill to a depth of 35,000 feet, went to work on a seven-year contract with oil giant BP plc. (BP) in the Gulf of Mexico. Although the exact terms of the rig contract were not disclosed, average day rates for the Transocean's ultra-deepwater rig fleet are $486,200, up about 15% from the previous year.

"Today there are opportunities in the Gulf of Mexico, West Africa and Brazil, and a number of operators are expressing interest in limited capacity we have available in 2011," Steven Newman, Transocean president and incoming chief executive officer, said Wednesday during a conference call with investors.

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