By OGJ editors
HOUSTON, Sept. 9 -- There will be a small but steady growth in overall offshore rig demand in coming months, with North America jack ups accounting for the bulk of the increase, said Tom Kellock, a senior research analyst for ODS-Petrodata, Houston.
However, unprecedented uncertainty in the energy marketplace makes it extremely difficult to predict the drilling industry's outlook a year ahead, he told a joint meeting of the American Association of Drilling Engineers and International Association of Drilling Contractors on Thursday.
Among the uncertainties facing the industry, Kellock said, are the extent and effects of a possible "double-dip" US recession, a near-term increase in oil demand and price, rapid depletion of US gas supply, a cold winter test of record US gas stocks, and the action to be taken by members of the Organization of Petroleum Exporting Countries when they meet Sept. 19.
From an increasing trend that began in April, the US rig count has stalled and for the past 4 months has remained relatively steady just below 850 rigs.
Kellock explained that normally there is a clear trend to the US rig count, either increasing or decreasing. But he said the current count is as flat as he has ever seen it and attributed the lack of a trend to companies not knowing what might happen next.
He said, "In my opinion, OPEC has done a splendid job of providing price stability." Kellock pointed out that the organization has successfully kept the oil price within the target $22-28/bbl price band. Even after oil prices plunged following Sept. 11, 2001, OPEC brought the price back to within the target band by the second quarter of this year.
Kellock explained that production from OPEC's member countries typically exceed quotas by 1 million b/d, but recently the overproduction has grown to 1.5-2 million b/d, raising questions as to whether the period of OPEC-driven price stability may be coming to an end.
Offshore markets
Including jack ups, semisubmersibles, and drillships, Kellock expects the US Gulf of Mexico (GOM) rig demand to ramp up from just less than 130 rigs running currently to 155 rigs by first quarter 2003, with the count remaining flat through midyear.
Northwest Europe offshore rig demand will fluctuate around 60 active rigs through midyear 2003, with a slight "seasonal" decline during first quarter 2003, Kellock said.
He expects a worldwide trend similar to the GOM, increasing from more than 440 competitive rigs currently active to almost 480 rigs by the end of the year and growing further to almost 500 rigs by midyear 2003.
Concerning offshore rig utilization, the US GOM and the North Sea are most variable, according to Kellock, highlighting that offshore drilling markets are not homogeneous.
During the past year, North Sea offshore rig utilization has declined steadily, dropping to about 75% currently from more than 90% in 2001. The GOM has exhibited the opposite trend, until recently, bottoming at about 55% utilization as 2001 came to a close and then peaking at slightly less than 65% utilization at mid 2002. This volatility occurred even with jack up rig mobilizations in and out of the US gulf market.
Kellock expects national oil companies to offer a measure of stability to offshore rig markets by providing an activity baseload. He cites Petroleos Mexicanos SA (Pemex), which contracted 7 rigs in 2001 for GOM and has since contracted 21 more through yearend 2002. Kellock commented that the Pemex contracts, measured in years, were long term by GOM standards.
India's state-owned Oil and Natural Gas Corp. (ONGC) also contracted 18 rigs in 2001, with contracts for more than 28 rigs expected by yearend 2002. Kellock said, "India with its burgeoning population, has a real deficit in energy." The country consumes 1.29 million b/d more oil than it produces, he explained.
Kellock also highlighted Brazil and China as economies that will have an increasing impact on offshore drilling. Brazil, with an annual economic growth of 4.5%, consumes 0.57 million b/d more oil than it produces.
China's admission into the World Trade Organization will require that it consume clean energy for its export push, which it can no longer find domestically. Kellock suggested that LNG might provide the solution, with the country signing a contract with Australia. Talks are also underway between China and BP PLC about gas imports from Indonesia, said Kellock.
Long-term issues
Several issues will have longer-term impacts on the offshore rig fleet. Kellock listed jack up retirements, deepwater rig oversupply, the increasing importance of gas, and industry consolidation as issues that will have a long-term impact on the offshore drilling industry.
Based on a rig-by-rig examination of the jack up fleet, Kellock predicted that the industry will retire 93 rigs by the decade's end. He said, "A lot of rigs are well past their design life. Unlike semisubmersibles that lend themselves for upgrade to bigger and better rigs, most jack ups have only a limited capability of expanding variable deck load." This, he explained, will require new rigs to be built, rather than refurbishing or rebuilding old rigs.
According to Kellock, drillship or deepwater rig construction that began during the 1990s has left the market oversupplied. Deepwater rig demand will remain flat through 2010.
He cited examples of deepwater rigs drilling wells in water much shallower than that for which they were designed. During August, 23 rigs were drilling wells in 4,001-6,000 ft; Of those, he said, 15 were designed to operate in more than 6,000 ft , including 7 designed to drill in water deeper than 8,000 ft.
Operators holding long-term contracts for deepwater rigs have found that they have excess rig time available and have sublet rigs. For rigs rated for water depths over 7,500 ft, there were 22 sublets in 2001, and to date in 2002 there have been 28 sublets, according to Kellock.
Highlighting the importance of natural gas, Kellock cited a forecast that gas demand will double over the next 30 years. Drilling for gas has become commercial, even in remote areas where the field discoveries are large enough to support LNG trains, he explained.
Over the past 10 years the amount of natural gas discoveries has almost doubled that of oil discoveries on a barrel equivalent basis. According to Kellock, gas discoveries have totaled 138 billion boe compared with 77 billion bbl of oil.
Kellock said industry consolidation would continue for both operators and drilling contractors. During 1992-2002, the number of drilling contractors has declined to 11 from 39. He said that he expects the number to drop to single figures within the next 2-3 years.
