DRILLING MARKET FOCUS: Contractors' earnings fall amid brighter deepwater forecasts

Sept. 14, 2009
Offshore drilling contractors reported declines in second-quarter 2009 net earnings and continued stacking rigs, while oil companies coped with less cash flow to finance drilling during an economic downturn and slowing growth in world oil demand.

Offshore drilling contractors reported declines in second-quarter 2009 net earnings and continued stacking rigs, while oil companies coped with less cash flow to finance drilling during an economic downturn and slowing growth in world oil demand.

Drilling giant Transocean Ltd. of Geneva, Switzerland, reported seven rig leases were canceled or terminated as of early August and its rig utilization rates are down across all rig categories. Deepwater drilling remains the strongest.

Chevron USA Inc. is using the specially built Discoverer Clear Leader under a 5-year contract with Transocean Ltd. on Gulf of Mexico deepwater projects, including Tahiti and Jack/St. Malo fields. The drillship can conduct parallel drilling operations from a single derrick and drill to 40,000 ft in as much as 12,000 ft of water. Photo from Chevron.

On Aug. 13, Chevron USA Inc. announced Transocean's Discoverer Clear Leader began operations in the Gulf of Mexico. The dynamically positioned, double-hulled Discoverer Clear Leader is the first of five Transocean ultra-deepwater Enterprise-class drillships scheduled to begin operating in 2009 and 2010 (OGJ, Mar. 6, 2006, Newsletter).

The drilling contractor is scheduled to commission a second drillship for Chevron, the Discoverer Inspiration, early next year.

Deepwater markets hold robust promise, according to reports issued this year by Douglas-Westwood Ltd. and Energyfiles, a forecasting service for oil and gas production, consumption, and drilling activity.

The reports are entitled "World Offshore Oil & Gas Production and Spend Forecast 2009-2013" published in August and "The World Offshore Drilling and Spend Forecast 2009-2013" published in April.

Analysts forecast overall lower offshore drilling expenditures during 2009-10 followed by a return to previous growth levels.

Total world offshore expenditures are expected to reach $330 billion in 2013 compared with $240 billion in 2008, forecasters said. During the last 5 years, an estimated average of $278 billion was spent on offshore drilling.

Offshore to rebound after 2010

Crude oil price volatility led to uncertainty and project delays resulting in what Michael R. Smith, chief executive of the UK-based Energyfiles, calls "across-the-board cost deflation" in 2009.

Global upstream oil and gas budgets for 2009 were cut by 21% with more than 20 planned large projects postponed, he said.

"By 2013, the [estimated annual global offshore drilling] market will be worth nearly $90 billion, having grown from $37 billion in 2004 and $72 billion in 2008," Smith said. Deepwater projects are expected to drive the biggest future growth.

He said development spending increased more rapidly than exploration spending since 2004, although the trend slowed in 2007-08. Smith expects the 2009 spending decline will mark the beginning of a permanent jump in the relative share of development spending in oil company budgets.

Separately, Baker Hughes Inc. reported the worldwide rig count for July 2009 was 2,080, up 93 from the 1,987 counted in June 2009 but still down 1,356 from the 3,436 counted in July 2008.

The July international rig count (outside the US and Canada) was 974, up 7 from the 967 counted in June 2009, and down 118 from the 1,092 counted in July 2008, Baker Hughes said. The international offshore rig count for July 2009 was 275, up 6 from the 269 counted in June 2009 and down 37 from the 312 counted in July 2008.

Smith of Energyfiles said new offshore oil supplies outside deep waters and the Persian Gulf are scarce, meaning the industry must explore and invest in far-flung, high-cost regions.

"Malaysia and Indonesia have significant ongoing deepwater projects, and India is developing deepwater gas fields off its eastern coast," Smith said. "The Asian market will return to strength by mid-2010 with a wide range of opportunities, especially as China, India, and Vietnam look to exploit their more-distance offshore shelves."

Western European offshore spending generally is expected to be lower through 2011, after a sharp decline in 2009. Prospects are expected to recover slightly upon tax relief and improving oil and gas prices, which is likely to boost commerciality of smaller projects, Smith said.

"Deepwater spending is modest due to a lack of prospective deepwater basins outside limited areas of Norway, the UK, and the Mediterranean," he said.

In Africa, progressive exploitation of deeper and deeper waters previously drove growth. "However, a dip occurred in Africa in 2008, and this is expected to be repeated in 2009 before steady growth returns up to 2013," he said.

The same pattern is expected in Latin America with Brazil and Mexico being the most active. The Middle East was the only region where drilling demand increased during 2008, but that has dipped this year.

"Growth is forecast to return through 2013 with low-cost drilling in field developments dominating in the Persian Gulf, and higher-cost deepwater or environmentally difficult wells dominating elsewhere," Smith said.

Diamond Offshore buys semi

Diamond Offshore Drilling Inc. completed its $460 million acquisition of the semisubmersible PetroRig I from Jurong Shipyard Pte Ltd., a subsidiary of Sembcorp Marine. The semi was renamed Ocean Courage.

Previously, PetroRig I was scheduled to work in the Gulf of Mexico for Petroleo Brasileiro SA. Those plans were scrapped, and the semi was sold after three Singapore subsidiaries belonging to Norwegian PetroMENA AS filed for reorganization under Chapter 11 bankruptcy protection in the US Southern District of New York.

Court records show PetroRig I had bond debt, and that PetroMENA struggled to arrange financing to complete the semi's construction. Reuters news service reported in late April that Sembcorp Marine said Jurong Shipyard terminated the rig-construction contract with PetroMENA for lack of a final payment.

Lawrence R. Dickerson, Diamond Offshore president and chief executive officer, reported Ocean Courage was acquired without any drill pipe. Several potential customers have inquired about Ocean Courage, which he expects to be available in 2010. As of Aug. 17, Ocean Courage had no drilling contract yet.

In response to questions during a conference call, Dickerson said he anticipates a day rate in the $400,000 range for this type of semi. Negotiations will hinge upon contract length and where the semi ends up working, he said.

Diamond Offshore reported second-quarter 2009 revenues of $946.4 million compared with $954.4 million for the same period a year ago. Dickerson noted 88% of the company's current revenues came from contracts signed more than 1 year ago.

Second-quarter profits were $387.4 million compared with $416.2 million for second-quarter 2008.

Contractors stacking rigs

Transocean's net income for the quarter ended June 30 was $806 million compared with net income of $1.065 billion for the same quarter a year ago. The latest second-quarter revenues were $2.88 billion compared with $3.1 billion for the same period last year.

Pritchard Capital Partners LLC analysts said Transocean had 18 idle jack ups, of which 15 are stacked. That compared with 9 idle jack ups that Transocean reported at the end of the first quarter and 3 idle jack ups as of yearend 2008.

Transocean executives expect to have stacked 25-26 jack ups by yearend 2009. Previously, the contractor estimated 15-20 jack ups stacked by year end. The company also told analysts that it's optimistic there will be long-term demand for deepwater floaters off Libya, Israel, and Mexico, Pritchard Capital said.

Chad C. Deaton, Baker Hughes chairman, president, and chief executive officer, said the decline in international rig activity appears less severe than the dipping US rig count.

"We were awarded new work or renewed international contracts in the second quarter for more than $1.5 billion," Deaton said. This included contracts for intelligent completions in Brazil and directional drilling off Nigeria.

He believes drilling activity in Russia and the Caspian region reached bottom and has started to rebound. Meanwhile he expects "activity in the Middle East, Asia-Pacific, and Latin America regions will increase modestly."

Baker Hughes reported second-quarter 2009 net income of $87 million compared with $379 million for the same quarter a year ago. Second-quarter 2009 revenue was $2.34 billion, down 22% compared with the same period a year ago.

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