Drilling contract terminations mushroom

Contract drillers have experienced a spate of early contract terminations in recent weeks, accelerating the financial deterioration of the oil field service/ supply sector.

The cancellations were driven by extended low oil prices in many cases and by mechanical difficulties in others.

Among those thought to be related to low oil prices were:

Apache Corp. unit Apache Darag Corp. terminated a drilling contract with Santa Fe International Corp., Dallas, for drilling in the Gulf of Suez.
Occidental Petroleum Corp. canceled a 1-year contract with Santa Fe International for drilling off Qatar.
Petroleos de Venezuela SA bought out the contracts on six barge drilling rigs from Ensco International Inc., Dallas.
The Terra Nova consortium terminated a contract with Transocean Offshore Inc. for the Transocean Explorer semisubmersible for drilling off Newfoundland (OGJ, Jan. 4, 1999, p. 30).

In addition, British Petroleum plc unit BP BP Exploration terminated a contract with Diamond Offshore Drilling Inc., Houston, for the Ocean Clipper deepwater drillship, which was drilling in the Gulf of Mexico.

These cancellations have thus far been met with a friendly response from the contractors involved.

However, disputes have arisen over two of three contracts terminated as a result of equipment problems.

Amoco U.K. Exploration Co. terminated its contract with Rowan Cos. Inc., Houston, for North Sea drilling with the Rowan Gorilla V. And Mobil Corp. canceled a contract on Houston-based R&B Falcon Corp.'s Jack Bates semisubmersible, which was drilling in the West of Shetland area. Rowan and R&B Falcon plan to fight the terminations.

Santa Fe contracts

Apache terminated its offshore Egypt drilling contract with Santa Fe International. The 3-month contract carried a day rate of $43,000.

Apache had intended to drill two wells in the area.

Santa Fe is looking for possible alternative contracts for the rig in the area.

In a separate incident, a unit of Occidental paid Santa Fe $2.4 million to terminate a contract for drilling off Qatar. The payment was equivalent to 88% of the cash flow that would have resulted from the work.

The Qatar contract was for Rig 127, a 250-ft cantilever jack up.

Pdvsa-Ensco

Pdvsa subsidiary Pdvsa Petroleo Y Gas last week terminated four barge drilling contracts with Ensco, following the recent termination by Pdvsa of two similar contracts.

To buy out the first two contracts on rigs, scheduled to expire in May and June of this year, Pdvsa paid Ensco a total of $5.2 million. The other four contracts, all of which were to expire in the third quarter of this year, were bought out for a combined $13.5 million-an amount equivalent to about 91% of the cash flow Ensco would have earned on the contracts through their expiration dates.

The rigs involved were Ensco V, VI, XI, XII, XIV, and XV. They were owned and operated by Ensco's Venezuelan subsidiary.

Pdvsa cited a significant decline in cash flow, resulting from low oil prices, as the reason for the terminations.

Ensco will market the rigs to other potential customers in Venezuela.

Amoco-Rowan

A dispute has arisen over Amoco U.K. Exploration's cancellation of a contract with Houston-based Rowan for Rowan Gorilla V.

The Super Gorilla Class jack up was under contract with Amoco for development drilling on Arbroath field in the central North Sea. It was slated for delivery in third quarter 1998 under a 1-year contract with a 1-year extension option.

According to Rowan, Amoco alleged a performance breach related to certain equipment problems.

"The company (Rowan) believes it did not breach the contract and will pursue all legal remedies to enforce its rights under the contract," said Rowan.

Rowan had expected to receive about $67 million in revenues during the initial 1-year term of the contract. According to Reuters, a Rowan official said the cancellation could reduce its 1999 earnings by 29¢/share.

Mobil-R&B Falcon

Mobil and R&B Falcon are in a disagreement over the Jack Bates rig, which is being repaired at Cromarty Firth, Scotland.

The rig suffered damage to two of its spread anchors in mid-December, just after it had been moved to a new location on Tranche 61 in the West of Shetland area.

Because it expected the repair to the mooring system to take a considerable amount of time, Mobil elected to terminate its contract with R&B Falcon. Mobil is now mulling how to handle its Atlantic Frontier drilling program, given a dearth of rigs suitable for drilling in the ultradeepwater, harsh environment.

R&B Falcon plans to contest the termination in court.

'Friendly' terminations

The Terra Nova alliance, led by Petro-Canada, paid $40 million to terminate its contract with Transocean for the Transocean Explorer.

The semi was being upgraded in preparation for a $77 million, 2-year contract for drilling in Terra Nova field on the Grand Banks. But partners in the Terra Nova group said the cost of retrofitting the rig had risen 25% to $100 million (Canadian).

The group plans to seek tenders for a newer unit.

Exploration canceled its contract for Diamond Offshore's Ocean Clipper because of performance problems in the blow-out preventer.

Diamond Offshore is replacing the drillship's BOP control system. The repair, and additional upgrades, are slated for completion in the second quarter.

The cancellation was apparently made under friendly terms.

Outlook

On Jan. 22, the worldwide offshore rig count recorded a nine-rig decline from the previous week, reported Offshore Data Services (ODS), Houston. For the first time since March 1995, utilization of these rigs sunk below 80%.

More than half of the decline is attributable to a reduction in Venezuelan drilling, said ODS's Tom Marsh.

The situation is not expected to improve any time soon.

In the Gulf of Mexico, the rig count will continue to decline, predicts ODS: "Over the next 90 days, approximately 74 rigs will reach the end of their current known contract commitments. Virtually all of the softness is in the shallow-water jack up market, although more semis, which work in deeper waters, will go idle by early July.

"Deepwater field development projects continue, but operators are postponing or scaling back new developments."

ODS's Terry Childs said, "Low commodity prices are clearly the biggest factor in these cancellations. I would expect more to occur, without any doubt.

"Based on the terminations that have occurred to date, the potential is there (for this to happen) in any area of the world. No region seems to be immune from it."