UDW drilling in deep water?

March 9, 2015
A March report from the US Energy Information Administration forecasts increased production from the Gulf of Mexico over the next 2 years (OGJ Online, Mar. 3, 2015).

Michael T. Slocum
Upstream Technology Editor

A March report from the US Energy Information Administration forecasts increased production from the Gulf of Mexico over the next 2 years (OGJ Online, Mar. 3, 2015). According to Petroleo Brasileiro SA (Petrobras), Brazil production surpassed 3 million boe/d in January, thanks to new wells in the offshore presalt. Southeast Asia and Mexico as well are hot spots for offshore development, the latter opening up leases to foreign operating companies for the first time in 2016.

On the surface, offshore seems to be weathering the storm of $50/bbl oil, with long-term investments trumping short-term pricing. The outlook, however, is less rosy the deeper one goes-both figuratively and literally.

Rigs idle

Deepwater drilling is capital-intensive and technically difficult. Only a handful of operators can absorb the high costs and long preproduction timelines to make deepwater-and especially the ultradeepwater (UDW)-commercially viable.

Leading indicators point to a sharp downturn in UDW development. Looking at rig activity-or inactivity, as the case may be-and the current plight of rig owners offers some insights into the near future.

The shallow-water rig market, such as for jack ups, is expanding, according to Ensco LLC's Carl Trowell, who sees lower oil prices mainly driving out older rigs in that segment. In February, Ensco reported increases in jack up revenues and utilization.

The opposite was reported for Ensco's floating segment in which declines in revenue led to share prices falling nearly 8%. Ensco is shutting down a UDW rig this month due to lack of demand, perhaps a sign of things to come.

In a February report, RigLogix, an offshore data provider, forecast idle times ahead for drilling companies such as Ensco, Transocean Ltd., and Diamond Offshore Drilling Inc. Operators are not renewing contracts and, in some cases, exercising their early-termination rights. In addition to retiring older rigs, drilling companies are having to cold stack or idle previously active rigs.

RigLogix also forecast net attrition of about 30 rigs in 2015, even with 87 new rigs scheduled to enter the fleet this year.

Market glut

The problem for UDW, however, is not attrition, but a glut.

Orders for UDW rigs are equal to half of the existing fleet. One third of these, however, due to be completed in the next 3-4 years, have no drilling contracts, according to a September 2014 Reuters article detailing the offshore drilling market. This comes at a time when existing UDW rigs are being idled for the first time ever.

According to UBS Investment Research, Transocean has idled 8 of its 31 rigs and has another 9 up for renewal in 2015. Even if the renewals come through, 8 idle rigs will cost the company $728 million/year. This stark fact led UBS to slash its earnings per share estimates for Transocean by 49% in 2015 and 283% in 2016 and Moody's cut the company's credit rating to junk. UBS expects conditions to worsen in the market as a whole.

Transocean is by no means alone in its current suffering. Seadrill Ltd. shares are down 56% in the past year, and the company has taken steps to delay delivery of rigs without contracts.

Dayrates decline

Some in the industry are more bullish on deepwater and UDW. Joseph Bryant, chairman and chief executive officer of Cobalt International Energy, took this position in comments to company shareholders last month. While acknowledging the difficulties of operating in a high-cost, low-price environment, he pointed out that costs will come down.

Service and supply companies can't operate as if they are still in a $100/bbl world, he said. Projects may be delayed until costs come into line with market realities, but they will move forward.

Rates for the most advanced UDW rigs reached $650,000/day in 2014. Already this year they have declined to as little as $375,000/day.

Seadrill's Chief Executive Officer Rune Magnus Lundetrae expects the rig market to be difficult for the next 18-24 months but thinks dayrates will level off and deals will start getting done.