By OGJ editors
HOUSTON, Apr. 1 -- Despite the uncertainty surrounding the jack up market in the Gulf of Mexico, US offshore drilling activity is expected to recover by the second half of this year, according to a recent Jefferies & Co. Inc. industry update note. This recovery will be driven by "firm commodity prices and declining domestic natural gas production," which will "stimulate and increase in natural gas drilling activity," said Jefferies oil service analyst S. Magnus Fyhr.
"Although (exploration and production) companies have been focused on reducing debt—and given conservative guidance for 2003 guidance for 2003 budgets—we believe that sustained natural gas prices above $4.50-5.00/Mcf should fuel a significant increase in drilling activity by the second half of 2003 and (in) 2004, as operators are likely to reinvest free cash flow into the drillbit," Fyhr noted.
As the majors and supermajors shift their focus from North America to international markets, Fyhr said, "We expect independent E&P companies to drive an increase in drilling activity as they increase their drilling programs in the coming months due to better-than-forecasted cash flow."
Jack up demand strong
The gulf rig count is up 8 rigs during the past 2 weeks, said Fyhr in the Mar. 26 research note, as certain independents such as Ocean Energy Inc. and LLOG Exploration Offshore Inc. have contracted additional rigs for their respective drilling programs.
Fyhr added, "The demand for premium jack ups remains strong, as utilization is close to 92% compared (with) only 61% for commodity-type jack ups. As the reserve size in the shallow water gulf continues to get smaller, we expect demand for premium jack ups to remain strong, as operators search for new production in more nonconventional niche markets."
According to Jefferies, deep gas drilling will be one of the "most promising prospects" for growth in reserves for the majors and larger independents drilling in the gulf's mature, shallow water. "However," said Fyhr, "due to the significant cost and risk association with deep gas plays, operators require high-specification rigs that are capable of drilling and completing high-temperature, high-pressure wells at depths exceeding 15,000 ft."
Currently, the US Minerals Management Service is moving to offer royalty relief for deep gas drilling offshore (OGJ Online, Mar. 26, 2003).
Jefferies estimates that there are currently 25-30 jack ups in the gulf that are capable of drilling these deep gas wells.
Fyhr concluded, "After peaking at 154 jack ups in summer 2001, the supply of jack ups in the gulf has declined 16% to 130 rigs, as contractors have mobilized rigs to more attractive international markets for long-term commitments. The primary destination for US jack ups over the last 15 months has been Mexico, where (Petroleos Mexicanos) has been extremely active in its offshore drilling program to help that country boost its oil and gas reserves."
According to Jefferies, Pemex has contracted 15 jack ups during 2002-03 and has tendered for another nine jack ups to start work over the next year. "With possibly seven or eight additional jack ups leaving the gulf for work in Mexico and two or three jack ups also leaving for work in Trinidad (and Tobago), the supply of jack ups in the gulf could decline below 120 units for the first time since the early 1990s," the analyst said.