DRILLING MARKET FOCUS: $2.5 billion going to Korean yards for new drillships

In addition to the five newbuilds (Table 1), eight other drillships are undergoing shipyard modifications to enhance their capability and marketability (Table 2), two more are cold-stacked, and the majority, 28, are drilling under contract.

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Utilization, day rates

The worldwide fleet of 33 drillships was about 82% utilized from October 2005-January 2006. In February-March 2006, utilization reached about 85%. Of the 26 drillships capable of working in water deeper than 4,000 ft, the average contract rate for the 22 working vessels was about $165,000/day in mid-April 2005. Fifteen of the 26 deepwater ships were built 1998-2001 (Table 1).

For six of the 12-drillship fleet capable of working in waters to 4,000 ft deep, the average contract rate was $43,000/day in mid-April, according to Rigzone.com.

GlobalSantaFe Corp.’s worldwide summary of current offshore rig economics (SCORE) for February 2006 was up 3.3% from the previous month’s SCORE. The overall worldwide SCORE was about 110 for February, up from 106 in January. This shows that the profitability of MODUs is finally higher than the index years (1980-81 peak, SCORE averaged 100). While based on day rates for jack ups and semisubmersibles rather than drillships, this measure reflects the booming market shared by all drilling vessels.

Houston-based Transocean Inc. issued a fleet update on Mar. 30, 2006, showing that its eight, fifth-generation drillships are currently contracted at rates of $145,000-$286,500/day. Future contracts for the same ships are substantially higher, up to $520,000/day (December 2007).

Three other Transocean drillships are currently working in deepwater at $125,000, $145,000, and $300,000/day. India’s ONGC has a particularly good contract rate on the Discoverer Seven Seas for only $125,000/day, scheduled to increase to $315,000/day in October 2007.

Noble Corp. operates three dynamically positioned drillships, all working off Brazil for Petróleo Brasileiro SA, according to a fleet status report issued Mar. 17, 2006. The Noble Leo Segerius, Noble Muravlenko, and Noble Roger Eason are under contract through 2008, 2009, and 2010, respectively, for rates ranging $119-138,000/day plus 10-15% performance bonuses.

Diamond Offshore Drilling Inc.’s only drillship, the Ocean Clipper, is also working off Brazil for Petrobras. According to Hoover’s Inc., Petrobras accounted for slightly more than 12% of Diamond Offshore’s revenues in 2004.

GlobalSantaFe Corp. operates three dynamically positioned, ultradeepwater drillships. The GSF Explorer was under repair mid-March to mid-April and began a 1-year contract for about $230,000/day, to be followed by a 2-year contract in Angola for about $360,000/day.

The GSF C.R. Luigs is working in the Gulf of Mexico for BHP Billiton Ltd. through the end of this month for about $180,000/day, to be followed by a 1-year contract in the mid-$220s and a 2-year contract in the low $390s.

The GSF Jack Ryan is working off Angola for BP plc through September for about $245,000/day; subsequent contracts are for $260,000, $290,000, and $420,000/day.

Pride International Inc.’s Angolan subsidiary Sonamer Ltd. is a joint venture with Sonangol. Pride has two dynamically positioned drillships working on long-term contracts for Total E&P Angola: the Pride Angola and the Pride Africa (Table 1). According to Pride’s Apr. 3, 2006, fleet status report, both rigs are working under contract through 2010 for about $170,000/day. Pride expects that revenues from the current contract (10-year aggregate 2005-10) will be about $610 million.

Who’s building?

Three companies are building new drillships: Aberdeen-based Stena Drilling Ltd., a subsidiary of Sweden’s Stena AB; Mosvold Drilling Ltd., now owned by John Fredriksen-controlled SeaDrill Ltd.; and Houston-based Transocean Inc.

All five drillships are being built in South Korean yards; four at Samsung Heavy Industries Co. Ltd. and one at Daewoo Shipbuilding & Marine Engineering (Table 2).

South Korea became a leading producer of ships and oil-drilling platforms in the 1970s-80s. The country’s major shipbuilder was Hyundai Heavy Industries Co. Ltd., which built a 1-million-tonne-capacity dry dock at Ulsan in the mid-1970s.

In 1980, Daewoo joined the shipbuilding industry and it built a 1.2-million-tonne facility at Okp’o on Koje Island, south of Pusan, that was finished in mid-1981. But by the mid-1980s, the industry declined because of the oil glut and a worldwide recession.1

For instance, in 1998, the West Navion II drillship construction project at the Samsung yard in South Korea was cancelled. The West Navion project was a joint venture between Smedvig ASA and Navion Shipping and Offshore Co. (80% of the latter owned by Statoil ASA). The cancellation costs contributed to Statoil’s weak financial results following third-quarter 1998.2

The West Navion II drillship was eventually finished and delivered to Smedvig ASA in February 2000 (Table 1).

According to a report from UK-based analysts Clarkson PLC, as of the end of February 2006, South Korean ship builders lead the world, accounting for 35% of the global industries’ orders:3

• Hyundai Heavy Industries Co. Ltd.: 10.82 million compensated gross tons (CGT).

• Daewoo Shipbuilding & Marine Engineering: 7.82 million CGT.

• Samsung Heavy Industries Co. Ltd.: 7.44 million CGT.

Two drillships were built at the Hyundai yard in 1999, the Pride Africa and the Pride Angola, for $470 million each.

No drillships have yet been completed at the Daewoo yard; the Discoverer Clear Leader project is the first.

The Samsung Heavy Industries yard is one of the largest marine construction yards in the world. The last new drillship to join the worldwide fleet, Transocean’s Deepwater Discovery, was completed there in 2001, following three newbuilds in 2000 and two newbuilds in 1999 (Table 1).

Stena Drilling

In August 2005, Sweden’s Stena Drilling negotiated a $526-million contract with Samsung Heavy Industries Co. Ltd. to build the first Stena DrillMAX ship (Table 2). The new ship is under construction at the Geoje Shipyard in South Korea to be completed in December 2007 (Fig. 1). Stena Marketing Manager Kyle Ramsay-Lewis told OGJ that the total cost of this and a sister ship would be $600 million each. He said that the DrillMAX ships would be similar to the Saipem 10000 design but good for harsh environments.

The dual-activity (twin derrick) ship will be capable of drilling in 10,000-ft ultradeepwater, to 36,000-ft TD, with zero discharge. It will have a Class 3 dynamic-positioning system with six thrusters, variable deck load of 15,000 tonnes, total displacement of 105,822 tonnes, and 183⁄4-in. Cameron 5 ram blowout preventers. The ships will also have hydraulic drilling packages from National Oilwell Varco (ex-Hydralift), similar to that on the Stena Tay.

In September 2005, Samsung gave a contract for the topsides engineering to Norway’s Grenland Group ASA, which employed about 30 engineers for 8 months, through April 2006. The 30-million-kroner contract includes detailed design and engineering for the full topside, mud module, and drilling package.

Despite the large number of new jack ups, semisubmersible, and other drillships on order, the Stena DrillMAX is one of only three harsh environment rigs under construction (the other newbuilds are the West E-Drill and SeaDrill Daewoo GVA 7,500 semisubs). The ship is designed to operate in harsh environments such as the Norwegian and Barents Sea, down to -20º C.

Although originally planned without a firm contract in place, Tom Welo, managing director of Stena Drilling in Aberdeen, said last year that high demand and prices were sustainable for oil and gas, and the company was confident the ship would get a “profitable contract and productive employment on delivery.”

On Mar. 10, 2006, Samsung announced that Stena Drilling had placed an order for a second drillship, 750 ft long, to be completed in 27 months, by June 2008 (Table 2). Stena apparently plans to use the $550-million ship off South Africa.

Samsung will execute the turnkey project, taking charge of design, purchase of materials, installation, and test runs.

On Apr. 3, 2006, Zurich’s ABB Ltd. announced that it had an order to supply the total electrical power system package for the second Stena drillship, which ABB said would be delivered first-quarter 2009.

Mosvold, SeaDrill

Two ultradeepwater sixth-generation drillships are under construction for Norway’s SeaDrill Ltd. (Table 2). Mosvold Drilling Ltd. originally negotiated the contracts.

The first ship was ordered in October 2005, with an option for a second drillship that could be exercised under the same terms until Feb. 15, 2006. Mosvold booked the second contract using proceeds from a private placement in January 2006. Mosvold also had an option to order a third drillship at terms to be agreed.

In fourth-quarter 2005, John Fredriksen-controlled SeaDrill Ltd. acquired 40.08% of Mosvold for $94.6 million and tendered an offer for additional shares. By March 2006, SeaDrill owned about 94.6% of the shares and Mosvold was delisted.

The two Mosvold/SeaDrill drillships are under construction at Samsung in South Korea. The first is scheduled for delivery in June 2008; the second will be delivered in December 2008.

Samsung’s contract for first ship is worth $453 million; the second drillship contract is worth about $464 million.

These ships are based on the Saipem 10000 design. The original Saipem 10000 drillship was delivered to Saipem SPA from the same yard in 2000, built for $270 million (Table 1).

Mosvold contracted with OSM Offshore AS, a subsidiary of OSM Ship Management AS in Kristiansand, Norway, to supervise construction of the first Mosvold drillship at Samsung on a cost-plus basis. The project began Nov. 1, 2005, managed by Finn Sodal. Among the related contracts:

• Grenland Group received a contract worth about 25 million kroner to design the topsides and drilling package for the Mosvold drillships in January 2006. The work will be completed in Tønsberg, Norway, this summer.

• Norway’s ABB AS will supply generators, thruster motors, main switchboards, and transformers.

ABB will also supply the total electrical power system package for the second drillship.

2009: Discoverer Clear Leader

On Mar. 1, 2006, Chevron Corp. announced a 5-year drilling contract with Transocean Inc. to build an enhanced Enterprise-class drillship, to be called the Discoverer Clear Leader (Fig. 2). Chevron anticipates a 30-month shipyard construction phase, followed by sea trials, and expects to begin the 5-year drilling contract during second-quarter 2009.

Transocean can earn up to $493 million during the first 3 years of the contract; the last two contract years are linked to the standard WTI oil price with a floor of $40/bbl and a ceiling of $70/bbl that could result in potential revenues of $292-365 million.

Transocean signed contracts for the construction of the new drillship on Mar. 13, 2006, in South Korea, with representatives from Daewoo Shipbuilding & Marine Engineering. The Daewoo yard is located at Okp’o on remote Koje Island, south of Pusan.4

At the Howard Weil Energy Conference on Mar. 20, Transocean President and CEO Robert L. Long said this was the “best business cycle” in 30 years. Transocean’s diverse customer base includes 31% national oil companies, 31% independents, and 38% major oil companies. Long said that Transocean’s total drilling contract backlog as of Mar. 2 was $16.8 billion, through 2014, and $13.3 billion (79%) of that was allocated to its high-specification fleet.

The construction cost of Transocean’s new dynamically positioned, double-hull drillship is to be $650 million, with $470 million going to Daewoo on turnkey. It will be the first drillship built at the Daewoo yard, with delivery in September 2008.

The Discoverer Clear Leader design is an enhanced version of Transocean’s three existing Enterprise-class drillships (Discoverer Enterprise, Discoverer Spirit, Discoverer Deep Seas; Table 1) that have set deepwater drilling records in recent years. Transocean’s Chip Keener said in a presentation Nov. 30, 2005, that the Discoverer Deep Seas consistently outperforms the other two Enterprise-class drillships.5

The Discoverer Clear Leader will feature Transocean’s dual-activity drilling technology, which allows for parallel drilling operations in forward and aft work areas, each surrounding a rotary table. The new drilling system will include an enhanced top drive system; a high-pressure mud-pump system; and expanded completions capabilities that will enable wells to be drilled to 40,000 ft TD.

The ship will have an available deck load of more than 20,000 tonnes and be capable of drilling in water depths to 12,000 ft.

The new drillship will be classed by DNV, which maintains an office in Koje City, South Korea.

Upgrade projects

Eight drillships were under repair in April 2006, in shipyards in the US, Argentina, Malta, Greece, Turkey, Indonesia, and Singapore (Table 3).

Aban Loyd Chiles Offshore Ltd. is upgrading the Aban Abraham drillship (previously named Peregrine III, owned by Transocean) at a shipyard in Singapore so that the rig can operate in water up to 6,000 ft deep. The upgrades will cost $180-200 million. The rig will then go to work for Kosmos Energy LLC off West Africa.

When the contract was announced Feb. 23, 2006, James C. Musselman, Kosmos chairman and chief executive officer, said “Rigs are in tight supply,” and it “will continue for an extended period.”

The Gazprom I drillship, built in 1998, is undergoing modifications at a shipyard in Malta.

Neptune Marine Drilling, a subsidiary of Neptune Marine Oil & Gas Ltd., operated two drillships, both currently being reactivated, managed by Singapore-based Neptune Marine Projects. The Neptune Discoverer drillship arrived at the Pan-United Shipyard Pte. Ltd. yard in Singapore Feb. 26, 2006, and should be complete by mid-May.

The Neptune Explorer drillship is in Pan-United’s yard in Batam, Indonesia, for ultrasonic thickness (UT) gauging and will move to the Singapore yard in late May.

The Deep Venture drillship owned by Premium Drilling Inc. (joint venture between Awilco ASA and Sinvest ASA) is undergoing reactivation upgrades in Porto Belgrano, Argentina. In third-quarter 2006, it will begin a 3-year contract worth $290 million in the Gulf of Mexico.

The ship, previously called the Valentin Shashin, was built by Finland’s Rauma Repola Oy in 1981 and upgraded extensively in 1998 (added a top drive, crown-mounted compensator, iron roughneck, additional riser tensioners, and a third mud pump). The current work includes vessel classification and installation of a full size (183⁄4-in.; 10,000 psi) blowout preventer.

Norway’s Songa Offshore AS, directed by Songa Management AS, bought the drillship Glomar Robert F Bauer from GlobalSantaFe for $45 million in November 2005. The ship was built in 1983 and had been stacked off Egypt since May 2002.

Gunnar Hvammen, one of the founders of Songa Offshore, told OGJ that before taking delivery, the company had estimated $30-45 million for repairs. The company decided to add another 800-1,000 ft of water-depth capacity (to about 3,300 ft) and add sponsons to the hull. In February 2006, Songa revised the upgrade estimate to $70 million.

The ship is in the Tzula shipyard in Turkey for steel repairs to the hull (chain lockers, decks, and sundry hull compartments), a new level of quarters, new helicopter deck, and new topside equipment added. It has been renamed the Songa Saturn, the third floater in the Songa fleet.

In third-quarter 2006, the Songa Saturn will begin a contract with Noble Energy Inc. to drill three wells in Equatorial Guinea for about $50 million, excluding mobilization and demobilization. Noble also has an option to drill two additional wells.

Transocean has three other drillships tentatively scheduled for modifications this year. The Discoverer Seven Seas has 50 days in India for shipyard work in April-May; the Deepwater Expedition will mobilize from Brazil to Egypt and begin 75 days of contract preparation in May; the Deepwater Discovery may enter a Nigerian yard for 30 days in August.

Hazards

Drillship construction seems to encounter more cost overruns than semisub construction and has led to a greater emphasis on newbuild semisubs over the last few years (OGJ, July 4, 2005, p. 55). The West Navion drillship, for instance, cost $660 million, 164% over budget. But this spurt of new drillship contracts and substantial upgrades will renew and bolster the fleet.

Part of the expense is due to design features deemed necessary to operate safely without accidents or negative environmental effects.

Deep water is a harsh environment and rigs can encounter unforeseen mechanical problems with tragic consequences. In November 1999, the Pride Africa drillship lost its BOP and riser while working off Angola. In 2000, the Glomar Explorer required BOP repairs after working off Angola. In the same year, the draw works brakes failed on the Deepwater Pathfinder drillship while working in Atwater Block 116 Gulf of Mexico for ExxonMobil Corp. The ship lost 20 joints of marine riser, the lower marine riser package, and the subsea blowout preventer stack.6

In March 2001, the P-36 semisubmersible production platform listed and sank in the Roncador field off Brazil, following three explosions. Eleven people died and many others were injured.

Drivers

As Transocean’s Robert Long points out, expanding activity around the globe will sustain deepwater rig fleets.

Lease expirations in the Gulf of Mexico will drive short-term demand for deepwater drilling units. Ultradeep wells, beyond 34,000-ft, tax the capabilities of the current fleet.

Drilling successes in Brazil and the influx of international operators will drive increased activity there. Several new development programs in West Africa, the rapid expansion of exploration offshore India, and continuing work in Malaysia, Indonesia, and Australia will all require additional deepwater drilling capability offered by the drillships now under construction.

Additional capacity may be needed for frontier areas such as deepwater Mexico, the Orphan basin in Eastern Canada, East Africa, Pakistan, and the South China Sea.

Special rigs will be needed to explore harsh environment and environmentally sensitive areas, such as the Barents Sea, so that the new Stena DrillMAX ships should find a ready market. Drilling contractors will be hard pressed to find and train staff for the new floaters.

References

1. www.globalsecurity.org.

2. “Weak result in difficult market,” Statoil press release, Oct. 30, 1998, www.statoil.com.

3. “Report: Korean Shipbuilders Dominate Global Orders,” Apr. 10, 2006, www.marinelink.com.

4. Reuters, “S. Korea Eyes Cruise Building Market,” Maritime News, June 4, 2001, www.marinelink.com.

5. Keener, C., “Deepwater Drilling: It’s Gotten Deeper!,” presentation at IADC Drilling Gulf of Mexico Conference & Exhibition, Nov. 30, 2005, Houston.

6. “Drillship Draw Works Failure,” MMS Safety Alert No. 191, Dec. 7, 2000; www.gomr.mms.gov.