DRILLING MARKET FOCUS: Spending increasing on new yards, new rigs, company acquisitions

Three regions registered decreasing contract lengths:

• Far East, down 34% to 272 days from 410.
• Mexico, down 23% to 888 days from 1,150.
• South Asia, down 8% to 1,716 days from 1,870.

As of last November, the longest duration contracts (average more than 2.5 years) were being written in South Asia (1,716 days), Brazil (1,066 days), the Persian Gulf (1,049 days), and the Red Sea (988 days).

These longer contracts, as well as higher rates, are an incentive to move in rigs from other regions. Petrobras, in particular, is apparently willing to lock in rigs for long-term drilling commitments, giving it the ability to negotiate lower day rates.

The shortest duration contracts (average less than 1 year) were being written in the US Gulf of Mexico (245 days), the Far East (272 days), and Australia (317 days). Rig rates are particularly low in the gulf, compared with worldwide pricing, and in combination with short contracts have led to a continuing exodus of rigs.

The length of drilling contracts is dictated by rig type. Rigzone’s data indicated that drillships (38 in the world fleet, + 12 under construction) have the longest contracts, averaging 910 days. Surprisingly, contracts for jack ups (400 in world fleet, + 62 under construction) are the next longest, at 713 days, followed by semisubs (167 in world fleet, + 34 under construction) at 561 days. Jack up contracts are now 27% longer than semisub contracts, on average. The gap is slipping, however: 18 months earlier, jack up contracts were 35% longer than semisub contracts.

Looking at regional desires for rig types, the longest contracts in the world are being written in:

• India, for drillships (1,850 days).
• India, for jack ups (1,711 days).
• Persian Gulf, for jack ups (1,049 days)
• Mexico, for semisubs (1,380 days).
• Brazil, for semisubs (1,198 days).

It appears that national oil companies (NOCs) are more comfortable with committing to long contracts in their own waters.

Conversely, the shortest contracts are being written in:

• US gulf, for jack ups (173 days).
• US gulf, for semisubs (370 days).
• Southeast Asia, for drillships (395 days).
• Southeast Asia, for semisubs (265 days).
• Australia, for semisubs (301 days).

These data suggest that international operators appear to write shorter contracts, overall, than national oil companies.

New yards

A new modular fabrication facility is planned for Sohar in north Oman to fabricate integrated decks from 10,000 to 20,000 tonnes, jack up drilling rigs, and FPSOs. The 400,000 sq m yard will have waterfront captive jetties able to accommodate oceangoing vessels of 10-12 m draft. The L&T Modular Fabrication Yard LLC is a joint venture of Larsen & Toubro Ltd. and the Zubair Corp. Larsen & Toubro operates the Hazira facility, a rig repair and inspection yard on the west coast of India.

In November 2006, the JV signed an SUA (sub-usufruct agreement) for the Sohar yard construction project with Sohar Industrial Port Co.

On Dec. 20, J Ray McDermott announced beginning construction on a $220 million construction yard at the Altamira port in Mexico’s Tamaulipas state. McDermott’s Mexico country manager Juan Manuel Pineda said the company should be able to begin deepwater platform construction by July 2007.

The first phase of yard construction will cost $20 million, to be followed by another $60 million in 2007-08. McDermott has a 30-year lease on the site from the Mexican government.

Newbuilds

In early January, there were at least 117 drilling rigs under construction worldwide, including 62 jack ups, 34 semisubmersibles, 12 drillships, 4 inland barges (all for the Gulf of Mexico), 3 tenders (all for SeaDrill Ltd.), and 2 platform rigs (both for Nabors Offshore).

A variety of yards in Mexico, Singapore, and China has recently announced new contracts.

On Dec. 18, China Oilfield Services Ltd. announced an agreement with Mexico’s Goimar SA de CV to build and service four new “module” drilling rigs for the Mexican offshore market. The rigs are expected to be completed in second-quarter 2007 and will work under 3-year contracts. COSL will provide staff for two of the four rigs.

Goimar is an oil field services company that provides services and equipment to Mexican state oil company, Pemex.

Singapore’s Keppel FELS announced that it would build the first KFELS N-class jack up rig for Norway’s ProdJack AS, part of the Skeie Group. The new design will be the largest jack up ever constructed in Singapore, with the ability to both drill and produce. ProdJack plans to market the innovative rig in marginal fields in the North Sea. The KFELS N Class rig is designed to operate in harsh weather and in water up to 400 ft deep. It is capable of drilling to 35,000 ft.

The new rig will cost $371 million and Keppel will retain a 10% equity stake. Delivery is scheduled for the end of first-quarter 2010.

China’s Yantai Raffles Shipyard Ltd. will begin building jack ups. YRS already has contracts for five submersible drilling rigs, one semisubmersible decommissioning rig, and one drilling production semisubmersible. In December, YRS announced a new contract to build a Friede and Goldman Super M2 jack up at its yard in Yantai, Shandong, China.

The new jack up rig will cost Uni-Arab Group Holdings only $135 million due to owner-furnished equipment. Construction will begin in first-quarter 2008 and is to be complete in early 2009.

Ability Drilling ASA has a plan to build 42 state-of-the-art fourth-generation land drilling rigs and 42 workover rigs with Sense EDM. Two of the drilling rigs were already under construction when Ability announced the third in early December, along with start of the first workover rig, a trailer-mounted, rack and pinion design.

Ability will own and market the rigs in the Middle East and North Africa through its new subsidiary on Malta.

Rebuilds

UAE-based Lamprell PLC announced in December that it received rig refurbishment contracts totaling $84.5 million. The Lamprell yard will rehabilitate the Nabors 660 jack up (formerly the Ocean Warwick), refurbish four Global SanteFe jack ups, and fabricate FPSO topside modules for Akers FP.

The Ocean Warwick jack up was damaged during Hurricane Katrina, when it floated 66 miles from Main Pass Block 299 to beach on Dauphin Island, off Alabama. The rig, renamed Nabors 660, was transported aboard the Hamriyah Pride semisubmersible barge, left the gulf on Aug. 13, and arrived at the Lamprell yard on Nov. 11.

The rig will be outfitted with a replacement drill floor, legs, spud cans, sponsons, drilling package, and five new engines, and the living quarters will be refitted, by November 2007. The first phase of work for Nabors Drilling International Ltd. will run about $43 million, with possible additional work worth $25 million.

GlobalSantaFe will spend $36.4 million to refurbish four jack ups: Main Pass 1 and 4 and the High Island 2 and 4. The rigs will arrive in UAE this month aboard two heavy-lift vessels. Work is to be complete in April, after which the rigs will move to Saudi Arabia to begin long-term contract work for Saudi Aramco.

Shopping

Cyprus-based Essar Shipping and Logistics Ltd. will invest $400 million to acquire onshore and offshore drilling rigs through its newly formed subsidiary, Essar Oilfields Services Ltd. (EOSL), based in Dubai.

In its Dec. 18 announcement, Essar Shipping explained that “contract drilling rates have nearly doubled in the last 3 years and we forecast they will remain robust.”

Norway’s Seadrill Ltd. acquired a large position in Grimstad, Norway-based Eastern Drilling ASA when it purchased privately held offshore drilling contractor Smedvig ASA in second-quarter 2006.2 Smedvig was the largest single investor in Eastern Drilling, with 39.75% (OGJ, June 19, 2006, p. 35).

Seadrill may make another offer for outstanding shares of Eastern Drilling, based on a review by the Appeal Board of the Oslo stock exchange in December.

The West E-drill, a sixth-generation semisubmersible, has been under construction for Eastern Drilling since March 2006, under a turnkey contract with Samsung Heavy Industry in Korea.

Scotland’s Qserv, based in Aberdeenshire, announced in late December that it had purchased the wireline division of international drilling contractor KCA Deutag, including the transfer of 25 employees. This follows Qserv’s June 30, 2006, purchase of the Weatherford Group’s coiled-tubing division.

Petrolia Drilling ASA, which manages two offshore rigs, the Petrolia semisub and the D/S Deep Venture drillship, will move into the equipment-rental market. In December, Petrolia announced that its subsidiary, Petrolia Shashin AS, will acquire Independent Oil Tools AS, a subsidiary of IOT Holding ASA, for $59.3 million.

E&P spending

Lehman Bros.’ Original E&P Spending Survey shows that the 299 operators surveyed plan to increase upstream spending by 9% in 2007, to $292 billion from $268 billion in 2006.

Larger increases are expected outside North America (13%), led by NOCs.

Upstream capital expenditures in the US will grow only 5.1%, to $73 billion in 2007 from $69 billion in 2006.

Exploration and production spending will decrease 7% in Canada, to $22 billion in 2007 from $24 billion in 2006.

Companies are basing forecasts on an average price of $42.40/bbl oil and $4.80/Mcf natural gas.

International spending

In mid-December, Pemex’s exploration and production unit, Pemex Exploracion y Produccion, awarded $412 million in drilling contracts to three companies: Swecomex, Servicios Integrales GSM, and BJ Services. The joint drilling contract is in two parts ($132 million and $280 million) for southern region fields.

Hess Corp. plans to spend $550 million on drilling in 2007. The overall 2007 capital expenditure plans, announced on Dec. 19, 2006, include $3.5 billion for exploration and production; $1.4 billion for field development, $1.2 billion for production, and $0.9 billion for exploration.

Drilling plans include:

• 10-12 wells and construct onshore and offshore facilities at Ujung Pangkah, East Java.
• 18 development wells and completion of offshore production facilities at Okume, Equatorial Guinea.
• Development drilling and facilities expansion at the JDA Phase 2 gas development in the Gulf of Thailand.

Canada’s Husky Energy Inc. will spend about $160 million internationally in 2007, including $100 million in China and $60 million in Indonesia. The company will drill an exploration well in Block 04/35 in the East China Sea and study potential development of the Liwan gas discovery. In Indonesia, Husky will work toward developing Madura BD offshore natural gas field and evaluating recently acquired East Bawean II block.

According to a report from Britain’s Hannon Westwood, as many as 50 of 107 wells scheduled to be drilled on the UK continental shelf in the next 2 years will require farm-in funding.3 The report details 23 farm-in opportunities in the Central North Sea, 14 in the Southern Gas basin, 2 West of Britain, and 9 targeting heavy oil or HPHT plays.

A founding partner of Hannon Westwood, Charles Westwood, said “Since the late 1990s, the number of acreage holders in the North Sea has doubled, changing the dynamics of the North Sea. There are now 143 companies holding North Sea assets, offering an abundance of investment opportunities as well as intense competition for rig slots.”

References

1. “Measuring contracts,” Rigzone.com, Nov. 30, 2006.
2. “Smedvig is history, from today it’s Seadrill,” Scandinavian Oil-Gas Magazine Online, June 2, 2006, www.scandoil.com.
3. Hannon Westwood, “Potential Farm-in Opportunities,” December 2005, www.hannonwestwood.com.