Offshore rig market getting tighter off Northwest Europe

Heavy-duty jack up Santa Fe Monitor is shown drilling development wells in cantilever mode through a steel jacket in Texaco Ltd.'s Erskine field on U.K. North Sea Block 23/26a. Similar rigs are being built in anticipation of growing demand for heavy-duty North Sea work in as much as 400 ft of water. Photo courtesy of Texaco.

Sedco 707 semisubmersible is being used by Conoco (U.K.) Ltd. as an early production system in Banff field in U.K. North Sea Block 29/2a. A rising number of such projects and increasing use of extended well testing to gain reservoir performance data ahead of development is putting extra strain on an already tight drilling rig market. Photo courtesy of Conoco.

Rigs are in short supply for the first time since the 1980s boom.

A comparable trend is under way in the U.S. Gulf of Mexico, which was covered in Part I of this special report (OGJ, Nov. 25, p. 24).

There is evidence petroleum companies are having to defer drilling programs because rigs are simply not available, although some operators have secured rigs on long-term charters.

Some contractors are so confident of their prospects that they have ordered newbuild rigs, and designers are even working on new rig concepts. Yet there is a fear that an investment rush could kill off the boom, as in the 1980s.

The situation both in the Gulf of Mexico and Northwest Europe was neatly summed up by J. Michael Talbert, chairman and CEO of Transocean Offshore Inc., when the company recently disclosed third quarter results.

"The offshore drilling business is experiencing fundamental change," said Talbert. "Floating rigs are being utilized increasingly for longer-term development work, resulting in an expanded average contract duration per rig, with some operator commitments extending to the end of this decade.

"Current indicators of future deepwater and harsh environment drilling activity remain positive and suggest increasing demand for high-specification drilling rigs."

Rig shortage

Norwegian Petroleum Directorate (NPD) said Norway's operators have drilled fewer wells than they anticipated this year because of the lack of rigs.

However, the delays are not expected to cause problems over license obligations because, said NPD, "we have a very flexible approach to postponement, so it will not be an issue."

Norway's state firm Den norske stats oljeselskap AS (Statoil) reports no major problems from rig shortages, because of its recent policy of securing rigs on long-term contracts.

A Statoil official said, "The rig market is tight and will tighten a bit further. Our drilling program flexibility lies in exploration wells, which can easily be rescheduled. We expect drilling rig demand off Norway will be even higher around the end of the century."

A U.K. company source said the market for fourth-generation semisubmersibles is perhaps tightest, with demand buoyed by current drilling programs in the West of Shetland area.

U.K. operators are reportedly falling behind with obligation drilling programs and are trying to escape commitments under exploration licenses.

U.K. Department of Trade & Industry refuses to confirm this, but the source said there have been occasions recently where his company's drilling plans have had to be curtailed.

Current market

Scott Webster, rig markets manager at Petrodata Ltd., Aberdeen, said Northwest Europe's rig market has been tight for a while but has slacked off a little the past 2-3 months.

"This is because operators saw earlier in the year that they couldn't get rigs," said Webster, "and they deferred some drilling programs.

"So a few contracts were canceled, and rigs became available. Then there was a scramble to fix them again, but this is completed now."

Petrodata reckons there are 44 semisubmersible rigs and 35 jack ups currently operating in and around the North Sea, and almost all are working.

"The only rigs not working are those in yards for short maintenance programs," said Webster. "Santa Fe 135 semisubmersible, for example, has just left a yard, and Glomar Arctic semisubmersible is on its way in."

Wood Mackenzie Consultants Ltd., Edinburgh, said a total of 95 drilling rigs is being marketed in Northwest Europe at the moment, including accommodation units and stacked rigs.

A few jack ups are slated to return to the North Sea under contract shortly. Webster said Rowan Gorilla IV is due this month to begin drilling for Phillips Petroleum Co. U.K. Ltd.

Neddrill Trigon jack up was reported en route from Argentina, to begin work for Denmark's state firm Dansk Operatorselskab IS (Danop).

Similarly, Jack Bates semisubmersible is to arrive in April from Australia, and West Delta semisubmersible is mobilizing to the North Sea.

Charter rates

First-, second-, and third-generation semisubmersible rigs are currently chartered at rates of $80,000-102,000/ day, according to Webster. Fourth generation unit owners can get $95,000-137,000.

"Day rates have been rising since late 1995," said Webster. "Although the rise has slowed in recent months, it still continues, and there is new evidence that rates are perking up again."

Jack ups have been particularly buoyant of late, with first- and second-generation rigs currently hired out for $40,000-48,000/day and new heavy-duty jack ups getting $85,000-110,000/ day.

"It's too early to say whether there is a ceiling ahead, and what it will be," said Webster.

Long-term contracts

Many operators have guaranteed access to rigs for years ahead, by fixing them in long-term contracts.

In September, Amerada Hess Ltd. extended its charter of Transocean 8 semisubmersible rig from Trans-ocean's Tananger, Norway, unit.

Amerada already had the rig booked for 2 years beginning May 1, 1997, but the extension runs from about Nov. 1 this year for 5 months, after which the rig will be upgraded for deepwater drilling.

Transocean said the charter extension will cost Amerada $17 million, while upgrading the rig to drill in as much as 4,500 ft of water is expected to cost $47.5 million. The upgrade will prepare it for operation in U.K.'s harsh-weather West of Shetland area.

In a 3-5 year contract that may come to be seen as a milestone in contractor/operator relationships, Global Marine Drilling Co., Aberdeen, has effectively become the drilling department of British Gas plc off the U.K..

Beginning last month, Global Marine will undertake all U.K. offshore drilling for British Gas. Work starts with a high-temperature/high-pressure well on Block 15/23 with the Santa Fe 135 semisubmersible, currently under contract to British Gas.

Disclosing the contract award in September, Global Marine said the deal comes as the oil and gas sector continues to explore new alliance and partnership approaches.

Voicing sentiments common among North Sea fabricators today, but new to the drilling contracting sector, Global Marine Pres. James McCallum said, "Our strategy of developing people and systems focused sharply on maximizing the efficiency of the drilling and completion processes is intended to give us a clear advantage in developing close, long-term client/supplier relationships.

"Many new relationships are being discussed among operators and contractors. With the eyes of the industry on us for the next 5 years, we have the opportunity to demonstrate that our approach will work in the field, to the substantial benefit of the entire industry."

Cold storage

"Most of the rigs that could be brought out of cold storage have now been upgraded," said Webster. "Day rates are now at a comfortable level, and everyone has been looking to upgrade.

"A few upgrade prospects still remain, but contractors are wary of upgrading on a speculative basis. This is the first time contractors have controlled the market since the early 1980s. Then there was a rush to build new rigs, and this led to oversupply."

Rigs being brought out of cold storage include Neddrill Kolskaya, converted for use as an accommodation rig several years ago, but due to be converted once again, to drill for Danop in mid-1997.

Similarly Scarabeo 7, formerly Safe Supporter accommodation rig, is to be converted for deepwater drilling, with its first charter most likely to be in the Mediterranean.

The recent North Sea trend for using drilling rigs in early production systems and for conducting extended well tests to gather reservoir data for development planning, is also significantly affecting the rig market (OGJ, Nov. 11, p. 27).

"Six or seven extended well tests are planned next year," said Webster, "and these will affect rig availability. Although some of the rigs used for these applications have not drilled for a long time and would need upgrades for 'proper' exploration and appraisal work, the overall pool of rigs is reduced."

Newbuilding

The cost for a newbuild semisubmersible rig would be $200-300 million, according to Webster, and day rates have so far not gotten high enough to make newbuilding attractive.

Petrodata reckons a contractor would need a firm contract, guaranteeing $130,000-150,000/day for 5 years, to make investment in a newbuild semisubmersible rig worthwhile.

Earlier this year Statoil revealed plans to build a revolutionary light drilling vessel, with a catamaran-like hull, to save on rig hire costs.

This was intended to perform well workovers in Aasgard field, which will have 60 subsea wellheads.

Statoil let a 5-year contract worth $150 million to Smedvig AS, Stavanger, to build and operate the small waterplane area twin-hull (Swath) vessel on its behalf. But the Swath rig design failed to meet stability requirements during wave tank tests of a scale model, and Statoil canceled the contract (OGJ, Sept. 30, p. 30).

The only recently confirmed semisubmersible newbuild contract involves completing a hull for a fifth-generation rig that employs two existing pontoons.

Deep Sea Stavanger, as the new rig is named, is being built for Odfjell Drilling AS, Bergen. However, Odfjell has not yet received the firm contract it needs to justify construction of topsides (OGJ, Apr. 29, p. 29).

An Odfjell official said the Deep Sea Stavanger hull, a Bingo 8000 design unit, is due to be delivered Dec. 20, and the company is negotiating with a number of operators for drilling contracts.

Mike Dubose, assistant operations manager at Rowan Drilling (U.K.) Ltd., Aberdeen, said the outlook for contractors is very bullish at the moment, and that Rowan has the advantage of owning rig builder Marathon Le Tourneau Marine Co., Houston.

The company is building Rowan Gorilla V heavy duty jack up at a cost of $170 million. The rig is due to be delivered in 1998. Rowan has not secured a contract for the rig yet.

"We have also announced our intention to build Rowan Gorillas VI and VII," said Dubose, "both heavy duty jack-ups to operate in up to 400 ft of water.

"We don't see this as rushing in. We hope to have the rocket off the pad when opportunities arise. We are trying to maintain the businesslike approach we took throughout the downturn.

"Rowan has continuously upgraded rigs during the downturn, for example by installing skid-off packages and top drives."

Petrodata's Webster said, "Rowan recently announced plans to build Rowan Gorillas VI and VII heavy duty jack-ups, and hopes to secure $170,000-200,000/day in new drilling and production contracts for them, higher than prices at the moment."

Off Norway

Off Norway, development of Aasgard fields and oil reserves in Troll West's gas province is expected to require long-term commitment of a number of semisubmersibles.

So Statoil, Norsk Hydro AS, and Saga Petroleum AS have joined forces to see if they can justify joint use of a new fifth-generation semisubmersible.

A Hydro official said a fifth-generation semisubmersible is one with dynamic positioning, eliminating the need for anchoring, and which can drill in more than 1,000 m of water.

The companies have worked with Smedvig Drilling Co. AS, Stavanger, on specifications for the rig, which could be chartered for at least 5 years.

Drilling 50 new development wells in Troll West alone could account for 4-5 years of rig time, said the Hydro official.

Troll West field licensees, led by Hydro and including Statoil and Saga, have asked about 10 drilling contractors for bids to provide a rig for 3-5 years, for drilling in 800-1,200 m.

"It would not have to be a new rig," said the Hydro official. "It could be a rebuilt rig or an existing rig. A newbuild would take 2 years, a rebuilt rig would take less, and an existing rig less again.

"But we would require a rig for quite a number of years in Troll West, and we also have a need for a fifth-generation semisubmersible for drilling in deep water on 15th round licenses."

At OGJ press time, Odfjell was completing a tender for the Troll West drilling work, based on completion and deployment of its Deep Sea Stavanger fifth-generation rig.

Designers' view

Hugo Heyman, managing director of GVA Consultants AB, Gothenburg, Sweden, said all the large drilling contractors have been dusting off plans for newbuild rigs.

GVA is a rig design company, responsible for the GVA 4500 semisubmersible design-to which rigs such as Sonat George Richardson were built.

Heyman said GVA has been receiving inquiries about new GVA 4500 type designs and the larger harsh-environment GVA 5800 design, which would have deck capacity of 6,000 metric tons.

Several of the inquiries have been for newbuild rigs to bid for the Norsk Hydro Troll West drilling contract: "All the contractors are chasing this project."

Heyman said he has just returned from Houston, where he has been meeting a number of drilling contractors considering newbuildings.

He said a newbuild semisubmersible contract award is very close somewhere in the industry.

Heyman said GVA is also hoping to get further rig conversion work, but there are currently none left that require conversion. GVA did design work for conversion of Scarabeo 7 from accommodation to drilling unit.

Both Heyman and Petrodata's Webster said that a hull for a Bingo 9000 design unit is being built in China. Heyman said a letter of intent for the rig has been issued.

The Bingo 9000 hull has apparently been ordered by a private Norwegian owner, who is also rumored to be preparing to order another, again to a Bingo 9000 design.

Aker AS, Oslo, designs rigs and is currently completing takeover of Maritime Tentech AS of Kristiansand, Norway, designer of the Bingo series of rigs.

An Aker official said the company has witnessed a considerable rise in interest in newbuild rigs of late and is considering dusting off shelved designs and coming up with new ideas.

Aker Maritime is looking into new-generation drilling rig designs, said the official, and has just started to evaluate various types of fifth-generation rig concepts.

Aker Maritime is already in the process of designing a new drillship for a joint venture of Conoco Inc. and Reading & Bates Corp.(OGJ, Nov. 11, p. 34).

Aker's U.S. subsidiary is also looking into designing a deep water drilling version of the spar buoy, a platform concept currently being used in two Gulf of Mexico fields. The deep water spar conceptual work is being carried out for Shell Offshore Inc.

What's ahead

"There will be more of the same next year," said Petrodata's Webster, "and the trend will continue for long-term contracts. With these, operators are fixing rigs without full drilling programs, and a sub-market of rig farmouts has developed."

Webster said BP, for example, has farmed out Stena Forth and Stena Dee semisubmersibles: "BP is big enough and flexible enough to find work for the rigs if it cannot farm them out."

Webster said that while some rigs are returning to the North Sea area, some are also leaving, and the size of both semisubmersible and jack up rig fleets in the region is expected to be fairly constant throughout 1997.

Rowan's Dubose said, "For the short term, through second quarter 1997, we see day rates staying where they're at, possibly rising slightly higher. Beyond this it's anybody's guess.

"To some extent, the outlook depends on the severity of this winter. Another cold winter like last year and the oil prices will stay high, and consequently rig demand will stay high also."

Northwest Europe's operators are generally sanguine about the future of the rig market. One company source said the rig sector is currently at the top of a cycle, which will be corrected as the market enters a downturn: "The drilling sector has been cyclical in the past, and we don't suspect this up-and-down pattern will change."

One area where change may be sought by operators, however, is the way contracts are agreed on the basis of day rates. Just as operators have changed the way they deal with platform fabrication contractors, like British Gas, they may increasingly seek to change their relationships with drilling contractors.

A paper presented earlier this year by Greg Bourne, general manager of BP Exploration, to an International Association of Drilling Contractors conference, stated that the day rate approach may not be the most efficient way of operating, for petroleum companies or drilling contractors.

The BP Exploration official explained, "The industry has become wedded to day rates. However, as the industry stands, rig owners always have to invest at the wrong time of the rig market cycle."

The official said the current tight market is likely to tempt contractors to rush in and invest in new rigs, depressing the market once again: "We do not know what the answer is yet, but it will need an industry-wide initiative."

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