Tapering Utilization in Gulf of Mexico Likely

Today Anadarko Petroleum Corporation (APC) announced that it would be invoking force majeure provision for three of the four rigs it operates in the Gulf of Mexico. While the company did not identify the impacted rigs in it press release, our sources indicate that Noble's Amos Runner, Transocean's Discoverer Spirit, and Diamond Offshore's Ocean Monach were given notification. Recall that Cobalt International Energy (CIE), who had an assigned contract for the Ocean Monarch, earlier this week announced they would utilize the force majeure provision within their contract at a cost of $15 million.

Utilization prior to the moratorium for deepwater drilling rigs in the Gulf of Mexico was approximately 85%, according to RigLogix. Removing three rigs from the contracted status would depress utilization going forward to a rate of 76% in the Gulf of Mexico. Historically, when slack capacity within a region begins to build to this level, then the next shoe to drop is pricing. (We will be providing to our RigLogix subscribers a more in-depth analysis on the Gulf of Mexico on Friday June 4th, 2010.)

Looking out six months (assuming 2 rigs drilling relief wells are available), an exodus of some rigs into international waters would offset some tapering of utilization in the Gulf of Mexico. Taking five drillships and three semisubs out of the equation would be our projection to drive supply and demand in the region closer to equilibrium. Of the remaining 26 rigs in the region, we would anticipate operators will work diligently to line up work. Still, scheduling constraints, posed by both internal and external forces, lead us to view 70% utilization (18 deepwater rigs working) as the low-water mark that could be hit prior to the industry returning to more normalized levels.

Terms and and language of offshore drilling contracts typically vary from one to the next. Thus, the economic disincentives (i.e. termination costs stipulated in these force majeure clauses) for each of the three APC rigs are likely to differ from the amount Cobalt announced for its cancellation of the Ocean Monarch. Still, it is not unreasonable to assume that Anadarko's costs to extricate themselves from these three contracts is somewhere in the neighborhood of $40 to $50 million (or less) combined.

The Ensco 8500 is the fourth rig that APC has under contract working the deeper waters of the Gulf of Mexico. According to RigLogix, this rig is currently being shared by APC and ENI and is on location at Red Hawk conducting plug and abandonment work.