Simmons: Offshore rig shortage looms

Delays and cost overruns are straining the offshore rig construction system as the rig-building cycle gains momentum.

Costs for 25 new rigs have now escalated by $1 billion, and delivery date slippage for 28 rigs now totals 207 months. Lead time for a rig ordered today is 2-3 years.

That is the analysis Matthew G. Pilon presented earlier this month at the Simmons & Co. international oil and gas service and equipment industry seminar in Houston.

"The world needs to build more rigs," said Pilon, Simmons & Co. vice-president. The utilization rate of the global offshore rig fleet is very high, leaving few "competitive" rigs available-those able to move from one body of water to another and do exploratory drilling.

"The newbuild cycle is just beginning," said Pilon. The number of new rig orders and upgrade projects has jumped in the past 2 years.

But shipyards that haven't done rig work in years lack expertise and "highly uncertain demand is limiting capacity expansion" of the yards, said Pilon. "Personnel shortages are the major problem at every stage of the newbuild value chain."

He lists 18 shipyards in North America, Europe, and Asia where newbuilds or significant upgrades are under way.

Pilon cites several problems in adding what he feels is the required rig capacity. "Oil companies have the best knowledge of drilling needs, but contractors must bear most investment risk," he said. "Oil companies tend to think the market will cool off and drilling contractors tend to think day rates will move up."

Still, says Pilon, industry should be able to meet the demand for new rigs. But large amounts of capital will be needed.

How much?

Pilon says as many as 400 offshore rigs of all types-deepwater, non-deepwater, development/workover-may be needed over the next 10 years to meet increased demand and replace units lost to attrition. Large amounts of capital will be required.

For example, the cost of rigs currently being built or upgraded is about $12 billion, says Pilon. That compares to a market capitalization of about $42 billion for all public U.S. offshore drilling companies.

Pilon pegs the cost of a 350-ft jack up in current dollars at $115 million and the cost of a deepwater semisubmersible at $325 million.

Matthew Simmons, president of Simmons & Company, thinks there will be "a chronic rig shortage for a long time." He notes that each deepwater rig, for example, can drill only about 20 deepwater wells in 5 years.

"Everything is tight now-rigs, boats, barges," says Simmons. The only exception is offshore platform rigs.

"But the hardest thing to cope with is the need for people, people, people. That shortage will also take the longest to correct."