Deepwater rig market expected to boom

Deepwater Rig Count [62,951 bytes] An expansion wave is expected in deepwater drilling rig construction in the next 2 years. According to Michael Smith, president of R.S. Platou (USA) Inc., Houston, the timing of the expansion will track discoveries in deepwater locales. Smith says that, in the Gulf of Mexico alone, oil companies have committed about $10 billion for exploratory drilling in 5,000 ft of water or more (R.S. Platou's definition of deepwater). This includes multiyear contracts

June 15, 1998

3 min read

Deepwater Rig Count [62,951 bytes]

An expansion wave is expected in deepwater drilling rig construction in the next 2 years. According to Michael Smith, president of R.S. Platou (USA) Inc., Houston, the timing of the expansion will track discoveries in deepwater locales.

Smith says that, in the Gulf of Mexico alone, oil companies have committed about $10 billion for exploratory drilling in 5,000 ft of water or more (R.S. Platou's definition of deepwater). This includes multiyear contracts for rigs on order and ancillary drilling services.

As discoveries are made and oil firms have to contract rigs to perform development drilling, the deepwater rig market will take off. But, until then, Smith expects newbuilding commitments to slow from their recent pace awaiting these finds.

This pause will be good for the industry, said R.S. Platou.

"We do not expect oil companies to commit to drilling rig contracts today for the future (rig) demand resulting from exploratory drilling," said Smith. "However, the pent-up demand created by discovery successes will be the catalyst for the next wave of deepwater rig orders."

The first rig of the current class of deepwater rigs will not begin work until later this year, says Smith. But, as more of these rigs are delivered, he expects the number and quality of discoveries to be "impressive," thus triggering the next expansion wave.

A rebound in oil prices also would help spur the expansion.

Meeting rig demand

There will be a great market for new deepwater drilling rigs, but drilling contractors may "see 12 months of tough times" ahead, with oil prices remaining near current levels. Improvement will come in 1999.

New rigs entering this booming market will have to work faster and cheaper, and with a smaller workforce.

That's the view expressed by James C. Day, CEO of Noble Drilling Corp., at a meeting of the Houston chapter of Nomads last week.

"There is no way-even with soft oil prices-that we can keep up with the demand for drilling products," said Day. There are only so many times you can upgrade a rig, he said. Some must leave the market "just from sheer age."

He estimates that attrition rate at about 10%/year. Worldwide mobile rig utilization now stands at 95%, according to Day.

Delivery time for a new semisubmersible is now about 3 years, said Day, but subsea equipment is the "pinch point." He estimates delivery of the vessel alone would require only about 2 years.

Noble plans to spend $500 million this year and the same in 1999 on newbuilds and upgrades. Asked how he decides to make large, long-term capital commitments, especially in this oil price environment, Day said, "You can't spend that kind of money without good contracts" from operators. The contract situation looks "pretty steady" for the next few years, he added.

According to Day, what concerns investors is when capital for a new rig is not expected to be returned during the contract period.