Utilization rates among mobile offshore rigs in the Gulf of Mexico and worldwide got a boost with Houston-based Transocean Inc.'s mid-July announcement that it was removing five jack up rigs, a "midwater" semisubmersible, and a self-erecting tender rig from drilling service.
Removal of the five jack ups dropped the total number of rigs available for work in the Gulf of Mexico to 175 from 180 previously, said officials at ODS-Petrodata, Houston. Since ODS-Petrodata does not include tenders in its weekly rig count, its worldwide count of available mobile offshore rigs was reduced by 6 to 659, with 520 under contract—including 126 rigs in US gulf waters—as of July 18.
Transocean's five commodity jack ups—acquired from the former R&B Falcon Corp., which merged with Transocean in January 2001—were all more than 20 years old and rated to a water depth of 250 ft or less. All had been cold stacked for more than 3 years. The second-generation semisubmersible, Sedco 708, had been cold stacked off West Africa since early 2002; the tender-assisted rig, Searex 15, also was cold stacked off West Africa in 1999, said Angeline M. Sedita, vice-president of oil service equity research at Lehman Bros. Inc., New York, in her July 21 weekly report.
In announcing its decision, Transocean said it would take a charge of $12 million after taxes against second quarter earnings on the retirement of its seven units.
Transocean officials also announced the same day that company subsidiaries were awarded drilling contracts by the Oil & Natural Gas Corp. (ONGC), the state oil company of India, for three jack up rigs—the Trident XII, Ron Tappmeyer, and Randolph Yost. The contracts are for 3 years each with an expected October 2003 commencement, following the completion of each unit's current drilling program and mobilization to India.
At mid-July, the Trident was working off Viet Nam; the Ron Tappmeyer was employed off Indonesia; and the Robert Yost was drilling off Equatorial Guinea.
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Jack up market outlook
The Gulf of Mexico jack up market is "the only market displaying meaningful day-rate increases" so far and "is on track for a supply-led recovery, while we expect the deepwater market to remain over-supplied through 2004," said James K. Wicklund, an analyst in the Houston office of Banc of America Securities LLC.
In addition to the 5 jack ups that Transocean eliminated from the gulf fleet, Wicklund said there is a strong possibility "that at least 6 jack ups will leave the Gulf of Mexico to complete term contracts with Pemex [Petróleos Mexicanos, Mexico's national oil company]. So by yearend 2003, there will be no more than 115 jack ups in the gulf," with the potential for fewer.
Wicklund said, "This implies jack up demand only needs to increase by 1-6 rigs to reach the 80-85% inflection point where day rates start to increase exponentially. With 92 jack ups contracted [as of July 18], demand stands well below the 3-year average of 114."
Although the demand for jack up rigs in the gulf this year may not reach previous peaks, he said, "There is potential for demand to increase from its current levels as three independents have already increased their Gulf of Mexico budgets."
Demand for jack up rigs in the gulf "is now creeping up" from a collapse of that market 2 years ago, said ODS-Petrodata officials.
"But production of natural gas from shallow waters is in steep decline, and many companies purport to have fewer offshore prospects to drill. So although the price of natural gas has been high enough to generate decent levels of cash flow—which historically would have translated into more activity—the latest upswing in demand could come to an abrupt halt," they warned in the Offshore Rig Monthly report for June.
The recent focus on deep natural gas reserves in the shallow waters of the Gulf of Mexico "offers the promise of additional drilling and could dampen the effects of the decline of traditional drilling on the shelf," said ODS-Petrodata analysts. "But it could become a niche play for a small number of companies that have the financial wherewithal to accommodate a run of dry holes.
"Even if the activity does ramp up significantly over the next few years, the bulk of wells are likely to target deep reservoirs first, rather than ultradeep ones, which means the current supply of US jack ups should be able to meet demand," they said.
More than "200 deep wells have been drilled in the shallow waters of the US gulf [in] 2000-02, and standard US jack ups, [equipped] with two mud pumps [each], drilled the majority," ODS-Petrodata reported. "However, the deeper and more complex wells were drilled by ultrapremium jack ups."
Those more complex deep gas wells have a higher mechanical risk index based on factors such as depth, casing joints, and increased mud weight. A set of three mud pumps is "one of the basic minimum requirements" for rigs drilling such wells, said ODS-Petrodata.
"Currently, there are only 29 jack ups in the US gulf that are fitted with three pumps," it said. "But some of these rigs do not have the engine capacity to drive three mud pumps and a top drive simultaneously, and some have not yet brought the third pump into operation."
Nevertheless, it concluded, "Not all wells in the deep gas play will be complex, and the current fleet of US jack ups has already shown its ability to drill deep wells."
Producers' spending
In a July 18 publication, Wicklund reported indications that the cash flow among exploration and production companies in the US "could be up as much as 90% this year over 2002." However, he said, "The industry does not have the people, time, or capacity to spend the cash flows" generated by higher prices this year for oil and natural gas.
"Money not spent this year will be spent eventually," said Wicklund. "It is thought that only about 60% of cash flow will be spent on exploration and development this year, compared [with] 87% for the past few years. That allows for a great deal of balance sheet repair while still pushing the rig count up."
He said, "We estimate that drilling activity will be up another 15% or so next year, fueled by spending a higher percentage of cash flow, more in line with the last few years. This does not include any leftover funds from this year's high cash flow levels."
As a result, said Wicklund, "The independents are very likely to more aggressively acquire properties, have the acquisitions funded by Wall Street or their banks, and use reserved cash to optimize production from those properties through increased drilling."
"Despite price uncertainty and the general agreement that high prices will not hold over the life of most wells, drilling in the US continues to be attractive. Currently, a producer or consumer can lock in 12 months of oil or natural gas at $28.81[/bbl] or $5.19[/Mcf]," said James L. Williams, president of WTRG Economics and publisher of Energy Economics Newsletter.
Williams said he expects drilling activity to grow "for at least 2 months. Gas drilling activity should reach 1,000 [rigs] in 2 months. Oil drilling is below the level justified by current prices but is suffering competition from gas drilling."
Increased permitting
Filings for drilling permits increased by 2.5% during June among the 30 states monitored by Lehman Bros. analysts. Leaders for the month were California, up an adjusted 45% from May; and Wyoming, which rose 34%. "The modest rise in permitting activity in recent months suggests a flattening of the domestic rig count in the third quarter," analysts said.
Analysts at Jefferies & Co. Inc. in New York said in mid-July, however, "Notwithstanding the sluggish improvement in the Gulf of Mexico, we anticipate rising drilling activity over the next several quartersU.The underlying fundamentals in the oil service business appear solid."
In early July, other Jefferies analysts in Houston reduced their day-rate projections for deepwater and ultradeepwater drilling rigs, with units working the ultradeep waters of the Gulf of Mexico targeted for the biggest cuts.
Except for the West Africa market, world demand and day rates for deepwater rigs "have been relatively soft as state and major oil companies have been slow to evaluate and develop their deepwater reserves," said S. Magnus Fyhr, a Houston-based Jefferies analyst.
As a result, he said, "We are reducing our [US] ultradeepwater (5,000 ft or greater) day-rate assumptions to $70,000 from $87,500 during the second half of 2003 and to $75,000 from $100,000 in 2004." For ultradeepwater rigs in international markets, Fyhr reduced day-rate projections to $85,000 through 2004 from earlier expectations of $90,000 in the second half of this year and $100,000-110,000 in 2004.
"Ultradeepwater bid activity in the US Gulf of Mexico, which is the largest ultradeepwater market in the world, appears to be declining in part due to major operators like BP [PLC] and Shell [Offshore Inc., part of the Royal Dutch/Shell Group] reducing their level of exploration work," said Fyhr.
"With the average size of [gulf] deepwater fields smaller relative to those [off] West Africa, we believe that prospects in the gulf may be losing investment dollars to other regions as major oil companies shift their focus to potentially larger finds in other markets."
Although utilization among US ultradeepwater rigs has been 92%, he said, "several rigs are working on wells below their rated water depths just to maintain utilization." As a result, Fyhr said, "Two or three ultradeepwater rigs could leave the gulf during the second half of 2003 for work in West Africa, where a significant amount of development activity is materializing for 2004."
