Recovery slow to take hold in drilling market

July 26, 1999
Although it is getting easier for exploration and production firms to think of the oil price revival as an enduring recovery, it will be a while before the effects of the upturn trickle down to the contract drilling market.

Although it is getting easier for exploration and production firms to think of the oil price revival as an enduring recovery, it will be a while before the effects of the upturn trickle down to the contract drilling market.

The extended price collapse was so long and severe that operators are hesitant to be too swift in readjusting their spending plans based on the increase in oil prices. Although a few have announced such plans for the second half of 1999, many will take a more conservative approach, which means drilling contractors will have to endure a little more slump before activity and day rates pick up again.

Decline slows
According to the most recent summary of current offshore rig economics (Score) by Global Marine Inc., Houston, the decline in rig markets is continuing, but at a slower pace.

Global Marine`s worldwide Score for May fell by 11.3% to 26%, compared with a 25.3% decline to 29.4% in April. Declines in the Gulf of Mexico, the North Sea, and Southeast Asia were less than the global average, while West Africa`s Score fell 26%.

The global Score decline slowed again in June, with the measure falling 10.8%.

Semisubmersible rigs fared better than jack ups in the May totals, with semis falling 7.7% from the previous month to reach 27.0%. Jack ups experienced a 13.8% decline in May to reach 25.0%. For June, the worldwide Score for jack ups declined 8.9%, while the rating for semis fell 12.8%.

"Notwithstanding the June decline in the Score for the U.S. Gulf of Mexico," said Pres. & CEO Bob Rose, "we believe the jack up marketellipse(there) has bottomed out. Some tightening has been reported in the premium end of the jack up categories in the U.S. Gulf of Mexico, although overall utilization has not yet improved to the level that will support higher day rates in any of the jack up categories."

Global Marine`s average day rate for a jack up rig in the Gulf of Mexico during the second quarter was $19,270. In West Africa, the average jack up day rate was $35,150, and in the North Sea, $83,300.

For floaters in the Gulf of Mexico, Global Marine`s day rates averaged $152,900 last quarter, and in the North Sea, they ran $66,000.

"Several independent oil and gas companies have reported plans for increased drilling activity in the Gulf of Mexico in the second half of the year," Rose said, "apparently in response to higher oil and gas prices and improved access to capital markets. By comparison, few majors have indicated an intention to increase capital expenditures for the balance of the year. Since (majors)ellipseare responsible for most of the drilling activities in the international markets, we expect those markets to lag the improvement we believe to be occurring in the U.S. market."

Global Marine plans to move two rigs-most likely two 116-Cs-from West Africa and put them to work in the Gulf of Mexico by yearend, Rose told reporters in Houston earlier this month. At this time, there are no contracts in place for these rigs, but the company expects to have them in place once the rigs arrive in the gulf.

Northwest Europe slump
The drilling outlook for Northwest Europe is less rosy in the near term. The budget cuts that swept through the exploration and production industry in 1998 and early 1999 will significantly curtail offshore activity in the region this summer, said Offshore Data Services Inc., Houston, in its latest market outlook for Northwest Europe.

"As oil companies continue to rein in costs, service and supply companies will be pinched the hardest," said Susanne Pagano, editor of the firm`s Offshore International Newsletter.

Offshore Data Services predicts that drilling contractors will have a difficult summer, as an oversupply of mobile rigs is expected to increase significantly from mid-June to mid-September.

"Rig utilization is 86.5%, compared with 95.7% a year ago," said Pagano on June 18. "By September, 20 rigs will reach the end of their current known contract commitments. Many of these rigs will be unable to find new contracts."

Offshore Data Services expects North Sea rig day rates to continue a downward slide. By mid-June, day rates for heavy-weather jack ups were $28,000-82,000, down from $82,000-160,000 in April. This compares with a 1998 average of $115,000-178,000.

Rates for third and fourth-generation semisubmersibles also have declined. New contracts for these rigs are averaging $35,000-51,000 vs. 1998 averages of $94,000-116,000 for third generation semis and $142,000-189,000 for fourth-generation semis.

Licensing rounds are planned this year off Norway, the U.K., and the Faroe Islands, but operator interest levels are hard to predict, says Offshore Data Services.

"Lower crude prices have not prompted oil and gas companies to abandon new field development projects in the North Sea region," said Pagano. "However, adjustments have been made in the timing and/or scope of some projects. Few new development projects are being initiated."

Deepwater bright spot
The effects of rebounding oil prices will be felt more quickly in deepwater markets, predicts Offshore Data Services. "Deepwater enthusiasm was dealt a temporary setback by the low oil prices of 1998 and early 1999, but most operators espouse a long-term approach to the deepwater market segment," said the firm`s Robert Moers.

But recent oil price rises have buoyed optimism, according to the company, and the offshore drilling fleet will take on a much different appearance in the coming months as new deepwater and ultradeepwater rigs are delivered.

At the end of May, the rig fleet included 57 units rated to drill in 3,000 ft or more of water. This segment will swell to 93 by early 2001. Of this increase, 19 are scheduled to be added this year, 14 in 2000, and 3 in early 2001.

The size of the ultradeepwater fleet-rigs capable of drilling in 7,500 ft or more-will quadruple over the next few year, says Offshore Data Services. Thirteen new rigs will be added to the current fleet of six by the end of the year, followed by ten in 2000 and one in 2001.

World-class discoveries are drawing interest to the deep water.

"Worldwide, operators currently have nearly 100 field development projects under study or under way," said Moers. "Giving the green light to these projects is a major commitment in any oil price environment, but the pace at which these projects have moved forward undoubtedly has been hampered by low oil prices over the last year."

If oil prices remain at $17-18/bbl through the third quarter, says Moers, operators will likely "loosen their purse strings."