Drilling Market Focus
Third-quarter results show a strong drilling market in the US and abroad, as rollover day rates increase and capital budgets are padded.
Rig utilization rates are increasing. In September, Prabhas R. Panigrahi, managing director of energy research at Ehrenkrantz King Nussbaum (EKN Inc.), said the "supply/demand balance in the critical Gulf of Mexico for jack ups has been tightening, implying prospects for strong price (and consequently, earnings) improvement."
In a Reuters report in mid October, Pierre Conner, analyst with New Orleans-based Hibernia Southcoast Capital Inc., said drillers such as GlobalSantaFe Corp., Noble Corp., Diamond Offshore Drilling Inc., Transocean Inc., and ENSCO International Inc. "have performed spectacularly so far this year."
According to a report on 10-year petroleum trends (1994-2003) issued last month by Houston-based IHS Energy, a subsidiary of IHS Group, international operators have spent a decreasing amount of their budgets on exploratory drilling but have spent a higher percentage of exploration budgets in North America. In their stead, smaller companies are filling part of the niche in international wildcat drilling.
This shift toward development drilling is borne out by Vintage Petroleum Inc.'s revised 2004 capital budget, presented at the Deutsche Bank Global Oil & Gas Conference in October 2004. Vintage allocated $182 million for exploitation and only $68 million for exploration, but the majority of the exploration budget—$43 million—was being spent in the US, along with $13 million in Canada and $12 million elsewhere.
Morris Foster, president of ExxonMobil Development Co., discussed the $5 billion worldwide drilling program at the Lehman Bros. conference in September. Drilling and well completions constitute a third of upstream capital expenditures, and using advanced drilling technologies has saved the company about $1 billion in drilling cost reductions over the past 4 years. Foster listed the Middle East, Caspian Sea, and West Africa as the company's "primary growth regions."
Although international wildcat drilling has been flat 1999-2003, IHS pointed out that 1,130 new-field wildcat wells were drilled outside the North America in 2003, up 10% from 2002. The success rate of wildcat wells, however, dropped from the record high of 45% in 2002.
IHS says that 1,584 wildcat wells were drilled in North America in 2003, up 6% from 2002. The success rate for new-field wildcat wells reached 45% in 2003, up from a previous record of 39% in 2001.
US drilling
The American Petroleum Institute released estimates of third-quarter well completions on Oct. 14. According to calculations, overall US drilling increased 9%, to 9,877 wells, compared with third-quarter 2003, with oil well completions rising 2%, to 2,329; gas wells increasing 13%, to 6,435; and dry holes falling 3%, to 1,113.
Exploration wells were estimated to have fallen 8% from the previous year, while development wells increased 10%, and total estimated footage increased 12%, to more than 53 million ft.
"Land drilling is a $6.5 billion market" in the US, according to analyst James H. Stone at UBS Investment Research. In a recent survey of US oil services asking which land driller provided the best service, results showed "there is little differentiation" in the land drilling market. Snyder, Tex.-based Patterson-UTI Energy Inc. received about 28% of the votes, but the category "Other" scored 30%, higher than any individual contractor, including: Grey Wolf Inc., Helmerich & Payne Inc., Key Energy Services Inc., Nabors Industries Ltd., Parker Drilling Co., and Precision Drilling Corp.
Stone noted that Patterson-UTI (361 land rigs) has been "an aggressive consolidator" in the last 5 years and has grown to be nearly equal in size to Nabors' US.fleet (411 land rigs).
Survey results showed that US spending will increase through the end of the year; 60% of North American operators plan to increase spending, 30% had no change, and 10% plan to decrease.
Drilling activity should be relatively flat for the next several months with a "slight upward bias;" 54% of North American operators plan to increase drilling, 36% plan no change, and 10% plan to decrease. Growth is partly constrained by the decreasing availability of rigs and crews.
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Workover activity will also rise as discretionary budget monies are made available toward the year-end; 47% of North American operators plan to increase the number of workovers, 49% plan no change, and 4% plan to decrease.
US price increases are likely for drilling rigs, wireline logging, drillbits, DD/MWD/LWD services, drilling fluids, tubulars, pressure pumping, downhole completions, and surface production.
In early October, EKN analyst Panigrahi said "Oilfield services is a very strong segment, particularly now with higher exploration and production spending."
Rig counts, dayrates
Baker Hughes' North American rig count increased to 1,623 for the week ending Oct. 29, up 17 from the week before, and up 140 rigs compared with a year earlier. This reflects an increase to 1,251 rigs in the US, up 1 from the week before and an increase to 372 Canadian rigs, up 16 rigs from the week before. The US rig count was 144 higher than the year before, but the Canadian count was 4 rigs lower than 2003.
Most rigs in the US were drilling for natural gas (86%), while only 14% were drilling for oil. Most were drilling vertical wells (787; 63%), 26% were drilling directional wells (331), and about 11% were drilling horizontal wells (133).
Baker Hughes' international rig count showed 866 rigs operated in September 2004, up 10 rigs (1%) from August and up 74 rigs (9%) from a year earlier. Most (631) were land rigs (73%); only 235 (27%) were offshore rigs. The largest group was drilling in Latin America (231 land, 63 offshore); followed by the Middle East (214 land, 34 offshore); Asia Pacific (125 land, 87 offshore); Europe (28 land, 35 offshore); and Africa (33 land, 16 offshore). Asia Pacific has been the heaviest user of offshore rigs, as Latin America has been for land rigs.
On Oct. 19, Tulsa-based Helmerich & Payne Inc. announced the retirement of one of its 12 US-based platform rigs. Only half of the platform rig fleet had been active in the Gulf of Mexico in September.
H&P President and CEO Hans Helmerich commented, "Although a steady performer since the early '80s, our offshore platform rig business has experienced reductions in rig utilization and profitability which reflect the industry-wide downturn in Gulf of Mexico rig activity levels. High commodity prices have not stimulated improved rig activity, resulting in a reevaluation of our asset base in the offshore platform rig market."
In mid-October, GlobalSantaFe Corp. reported that the company's worldwide SCORE, or Summary of Current Offshore Rig Economics, for September 2004 was 45.7, up 4.2% from the previous month. The worldwide SCORE is up 98.1% (nearly double) from 5 years earlier.
On a regional basis, the score was up month-to-month for the Gulf of Mexico (5.7%), North Sea (9.7%) and West Africa (3.2 %), but down for Southeast Asia (–6.8 %).
The SCORE for jack ups has been creeping upward monthly from a low of about 44 in May 2003, reaching 55.6 in September 2004, an monthly increase of 1.4%/month. The September jack up SCORE is up 19.2% from a year earlier, and up 144.2% from 5 years earlier.
The SCORE for semisubmersibles was 37.1 for September 2004, up 9% from August, up 2.8% from a year earlier, and up 59.4% from 5 years ago. The semisubmersible SCORE hit a low of about 31 in November 2002 and has not really risen above 35 in the past 2 years. It has sunk from a high of about 43 in February 2002.
The SCORE says it compares the "profitability of current mobile offshore drilling rig day rates to the profitability of day rates at the 1980-81 peak of the offshore drilling cycle."
Rowan rigs
Houston-based Rowan Cos. Inc. announced a 14% increase in drilling services for third-quarter 2004. EKN's Panigrahi said Rowan's results were a harbinger of good things to come from its peers.
Rowan's Gulf of Mexico rigs had a 97% utilization rate in third-quarter 2004, up from 88% in second -quarter and up from 93% a year earlier. The company's average day rate for Gulf of Mexico rigs rose to $46,500, up 10% from second quarter, and up 19% from a year ago.
The company had 23 rigs working in the gulf, nearly its entire offshore fleet, including 5 of the 7 Gorilla jack ups, all 17 other jack ups, and 1 semisubmersible. The two remaining Gorilla rigs were working in the North Sea.
Rowan also has a fleet of 18 land rigs; utilization was 83% in third-quarter 2004, up from 82% in second -quarter and up from 72% a year ago. The company's average land rig day rate was $12,400, up 9% from second quarter 2004, and up 13% from a year earlier.
Rowan Chairman and CEO Danny McNease said, "We are encouraged by the positive trends occurring in the drilling industry, and in our operations. Worldwide demand for premium jack ups has effectively caught up with the available supply. Rowan's fleet of 24 jack ups has remained near fully utilized since early June, and we are continuing to obtain day rate increases as our contracts turn over. We are optimistic that such trends will continue in the fourth quarter."
About a third of all mobile offshore jack up rigs were designed or built by Rowan subsidiary LeTourneau Inc.'s drilling products division, including all of those operated by the company.
In mid October, Rowan announced that it was selling subsidiary Era Aviation Inc. to Houston-based Seacor Holdings Inc. (formerly Seacor Smit) for $118.1 million. Seacor plans to combine ERA Aviation with its Tex-Air Helicopters Inc. subsidiary for a larger presence in the Gulf of Mexico helicopter market, with a combined fleet of 128 helicopters, 16 fixed-wing aircraft, and 14 operating bases.
Seacor's Chairman and CEO Charles Fabrikant said the helicopters serve "the drilling crew change market andUcan support deepwater operations." Seacor also operates a fleet of anchor-handling and supply vessels.
Tubulars
Tenaris, the world's largest producer of seamless steel pipes, is doing better than small producers, having supplied pipe to major projects such as the Camisea pipeline in Peru, the Ormen Lange gas field in the North Sea, and the Na Kika deepwater project in the Gulf of Mexico.
The company increased its net sales of seamless pipe 25% in second-quarter 2004 from a year earlier, due to a strong demand in North America and recovery in demand in the Middle East and Africa, and a 12% price increase from a year earlier. Tenaris shipped 683,000 tonnes of seamless pipe in second-quarter 2004.
Smaller oil field tubular producers such as Dallas-based Lone Star Technologies Inc., St. Louis, Mo.-based Maverick Tube Corp., and N.S. Group Inc., which make tubing and casing for drilling, production, and well servicing, are not doing as well as the drillers (or behemoth Tenaris) because of high steel prices and manufacturing costs. Lone Star said steel prices rose 20% in 2003.
Gregg Eisenberg, president and CEO of Maverick Tube said, "Inventory held by distributors and end-users in the US" was less than in 2003, and "Aas a result, "domestic OCTG [oil country tubular goods] shipments in the US were down."
Gulf of Mexico damage
Several drilling rigs were lost and others damaged in the recent hurricanes that lashed the Caribbean and Gulf of Mexico. Hurricane Ivan whipped through the Gulf of Mexico in mid-September, causing about 27 million bbl of shut-in oil production and 110 bcf shut-in gas, from Sept. 11 through Nov. 1, 2004.
Overall, seven platforms were destroyed (two of which were non-producing), and another six platforms had major damage. The US Minerals Management Service reported that 12 large- diameter pipelines (10 in. or larger) were damaged in federal waters. Five drilling rigs sustained major damage.
MMS regional director Chris Oynes said most of the damage was fromcaused by waves and underwater mud slides.
There was little damage to rigs elsewhere in the Caribbean, although BP Trinidad and Tobago evacuated more than 500 employees from the company's 17 platforms off Trinidad in early September, according to BPTT's communications officer Paul Charles.
The MMS estimates that 150 platforms and 10,000 miles of pipelines were in the direct path of Hurricane Ivan. In mid October, the MMS requested all lessees and operators submit lists of all OCS platforms and other structures subjected to winds 74 mph or greater during Hurricane Ivan, along with inspection plans and timetables to complete all inspections by May 1, 2005.
Houston-based Citigroup Inc. analyst Kyle Cooper said, "With prices at these levels, oil companies have every incentive to make repairs and increase production as quickly as possible."
Transocean, Diamond, ENSCO
Transocean Inc.'s Deepwater Nautilus semisub broke free of its anchors in Lloyds Ridge Block 399 and drifted 70 miles northeast during Hurricane Ivan. It had been drilling the Cheyenne prospect for Shell Offshore Inc., setting a water depth record for a moored rig in 8,951 ft of water. The rig was located by air on Sept. 16, and taken to Ewing Banks Block 393 for repairs in 700 ft water. In mid-October, repairs to mooring and communications systems were nearly complete and the Varco drawworks were receiving a software upgrade. Transocean spokesperson Guy Cantwell told OGJ it would be heading back to location in late October.
Two semisubmersible drilling rigs owned by Diamond Offshore Drilling Inc., the Ocean Star and the Ocean America (OGJ, July 19, 2004, p. 33), broke free of their moorings and lost anchor chain and wire. The 336-ft Ocean Star semisub (Fig. 1) was found 12 miles from its drilling location on the Triton prospect, in 2,423 ft of water in Viosca Knoll Block 869 (OGJ Online, Sept. 17, 2004).
Diamond's Ocean Warwick jack up sustained damage to the legs and jacking system. Two other jack ups, the Ocean Drake and the Ocean Columbia, were in the path of Hurricane Ivan but undamaged. Wave action from Ivan, however, destabilized the Ocean Drake's drill site.
The ENSCO 64 jack up drifted about 40 miles south from its drilling location in Main Pass Block 280, where it was working for Dominion Exploration and Production Inc. It was found about 80 miles southeast of Venice, floating without legs or derrick. Dallas-based ENSCO International Inc. said the rig had been evacuated before it apparently broke free. The rig is insured for $65 million, with deductibles of $5.5 million, according to a company announcement on Sept. 16.
As of mid-October, the rig was being evaluated in the AMFELS yard in Brownsville, having suffered damage to the legs, jacking system, and quarters. ENSCO spokesperson Michelle Anderson told OGJ there was "no breach in hull integrity except in the leg well areas." The company will salvage the leg sections and spud cans before taking a final decision.
Noble rig damage
Three semisubmersible drilling rigs in the Noble Drilling Services Inc. fleet were damaged during Hurricane Ivan: Noble Jim Thompson, Noble Lorris Bouzigard, and Noble Therald Martin. On Oct. 1, the company said that "financial liability for all damage to these rigs is estimated to be limited to Noble's $10 million insurance deductible in the aggregate."
According to a company statement issued Sept. 17, the Noble Jim Thompson broke its mooring lines in about 6,000 ft water and drifted about 30 miles southeast. In its fleet status report issued Oct. 1, Noble said the rig was being repaired in shallow water in October, and would mobilize to Mississippi Canyon Block 383 to recommence drilling operations for BP America Production Co. at about $100,000/day. Subsequently, the rig will earn a 10% higher rate for 200 days work in the Gulf of Mexico for Shell on the Kepler prospect in Mississippi Canyon Block 383 at about $110,000/day.
The Noble Lorris Bouzigard semisub was damaged while working for Stone Energy Corp. in Viosca Knoll Block 773 in about 4,000 ft water, repaired, and back to work on Sept. 29 at about $42,000/day. Sometime in December, it will go to work for Pogo Producing Co. for about 45 days at a rate around $50,000/day, according to Noble's fleet status report.
The Noble Therald Martin semisub was damaged while working for Mariner Energy Inc. in about 4,000 ft water in South Pass Block 96, but was back to work on Sept. 18 at about $41,000/day. Based on the fleet status report, the dayrate has increased significantly for future contracts with ATP Oil & Gas Corp. (35 days, about $50,000/day) and Pogo (45 days, about $55,000/day).
Drilling delays due to rig repairs exacerbate the tightening rig market.
Platforms
Tulsa-based Helmerich & Payne Inc. had six active platform rigs exposed to Hurricane Ivan, but only one was damaged. According to a company announcement on Sept. 24, Rig 205 would be under repair for about a month.
The ENSCO 25 platform rig sustained damage to accommodations but is being fixed on location at the Petronius platform in Viosca Knoll Block 786 (south of Mobile). ENSCO also told OGJ that the rig would remain on standby to ChevronTexaco Corp. while under repair, probably through the end of year.
Petronius is the tallest man-made structure in the world, constructed for ChevronTexaco and Marathon Oil Corp. at a cost of $500 million. The compliant tower with derrick is 2,100 ft (640 m) tall, from seabed to the top of the spire.
The multideck topsides are 64 m by 43 m by 18.3 m high and hold 21 well slots, and the entire structure weighs around 43,000 tons. ChevronTexaco spokesperson Matt Carmichael said that Petronius was hit by 65-ft waves during Hurricane Ivan.
Petronius suffered its first mishap in December 1998 when a $70 million deck module weighing 3,605 tons fell while being installed and sank in 1,754 ft of water (OGJ, June 26, 2000, p. 55).
According to the MMS, Noble lost three eight-pile platforms in shallow water on Main Pass blocks 293, 305, and 306. El Paso Corp. lost a four-pile platform on Main Pass Block 293. And two braced caisson platforms were lost: ChevronTexaco's on Viosca Knoll Block 294 and Forest Oil Co.'s on Main Pass Block 98.
Taylor Energy Co. CEO John Pope said its production platform in Mississippi Canyon Block 20 was toppled and its pipeline damaged by an underwater mudslide during Ivan, akin to a "mud avalanche," taking down everything in its path.
Nabors Industries Ltd.'s MODS 141 platform workover and re-entry rig was severely damaged while working at Murphy Oil Corp.'s Medusa SPAR platform in Mississippi Canyon Block 582, according to a statement issued by Nabors on Sept. 21.
Other damaged platforms include those operated by Dominion Oil Co. on Mississippi Canyon Block 773 (Devils Tower deepwater spar); Shell's four-pile shallow-water platform on Main Pass Block 252 and Ram Powell TLP on Viosca Knoll Block 956; and Total SA's Virgo platform on Viosca Knoll Block 823.
According to an MMS on Nov. 1, only 9 of the 575 platforms that were evacuated for Hurricane Ivan remained empty.