Rig market up, up and away
  from: Offshore Engineer
  by: Jennifer Pallanich
  Friday, May 16, 2008

It’s become something of a joke on the offshore circuit these days. Q: How can you tell if your 2011 rig count estimate is out of date? A: Well, is it on paper? Demand for rigs has never been higher, and based on the number of newbuilds under construction with and without signed contracts, companies are speculating that the up cycle will continue at least a few more years. Jennifer Pallanich reports.

As of press time, a total of 154 jackup and floating rigs were expected to join their aging brethren by the end of 2011. Rarely a week goes by without the announcement of a rig winning or extending a contract or a shipyard receiving an order for yet another drilling unit.

With all the vessels expected for delivery over the next three years, ‘delays are going to be an important issue,’ said Lawrence Dickerson, president and COO of Diamond Offshore, during ‘Outlook 2008 and Beyond’ – sponsored by National Ocean Industries Association and Texas Sea Grant College Program – in Houston in March. As examples, he cited the schedule slippages on a number of rig deliveries including Discoverer Enterprise (22 months late), Development Driller I (26 months), Development Driller II (12 months) and Ocean Confidence (14 months). None of these vessels, he stressed, was built during a peak demand time.

‘I don’t see how all the orders, no matter who’s building, are going to come out on time,’ declared Dickerson. He further said he doesn’t see Chinese shipyards as being able to handle some of the rigs being ordered, adding he had recently visited a Chinese shipyard and they seemed to be ‘dealing with the (technology) shortfall with massive amounts of labor’.

Dickerson envisaged shipyards continuing to take orders for delivery in 2011 and beyond. Based on strong US Gulf of Mexico lease sales in 2007 and early 2008, he said he expects to see continuing solid levels of activity in the Gulf market. He also said he believes the current up cycle to continue at least through 2011, although unforeseeable circumstances, such as natural disasters, political changes or a deepwater blowout, could turn the cycle.

‘The longer we play, the more likely that one of those events will occur,’ Dickerson said.

The global jackup fleet includes 299 rigs that are a quarter of a century old or more, 346 more that are 20-24 years old, and only 64 that have been around for less than two decades. As of press time, 84 jackups were expected to be delivered to the industry from January 2008 through the end of 2011. Many of these already have secured contracts.

Bret West, senior vice president and manager for Wells Fargo’s energy group, services and equipment, said he expects upcoming jackup deliveries to soften day rates as well as reduce the likelihood of cold stacked assets returning to active duty.

The floater fleet presents a less grim picture with 106 rigs at the 25+ year mark, 157 more between 20 and 24 years old, and 59 that are 19 years old or younger. As of press time, 45 semis and 25 drillships were under construction for delivery from January 2008 through the end of 2011. Most of these rigs also have contracts.

Unprecedented demand

‘The deepwater markets, which we define as rigs working in water depths of 4500ft or greater, continue to experience unprecedented demand,’ Kevin Robert, senior vice president of marketing and business development at Pride International, confirmed in a recent analysts’ conference call. ‘The worldwide deepwater fleet, although on track to grow from 89 rigs today to about 156 rigs by 2012 has 92% of the available rig days under contract in 2008. The worldwide deepwater fleet is 83% under contract in 2009, 77% in 2010, and 86% in 2011.’

According to Robert, this illustrated that ‘rig demand is visible well into 2011 with longterm contracts for the deepwater fleet extending into 2017.We believe that utilization and visibility this far in advance indicates that we will continue to enjoy a strong market for many years.’

Robert said he expects to see Brazil,West Africa and the US Gulf of Mexico remaining the deepwater powerhouses over the next few years with possibly India, the Mexican sector of the Gulf, the Mediterranean and the Black seas, and parts of Southeast Asia joining these ranks. He also said he expects to see a continued interest by operating companies in developing deepwater assets with drillships rather than semis instead of hiring drillships only for exploratory work.

‘The capital construction cost of both units are about the same and a lot of operators have crossed the bridge that used to inhibit their use of a drillship,’ explained Robert. ‘They now have the confidence that dynamic positioning systems can perform the very complex completion operations that used to drive them toward a semi.’ And water depth is a major factor, he added. ‘Once you get above 7000-8000ft, the mooring technology requires you to go to a lighter weight mooring system, and we're getting heavier and heavier pay loads out there to require a tool like a drillship,’ Robert said.

Pride, which has recently completed its exodus from onshore markets, defines midwater markets as between 1000ft and 4500ft of water.

‘The worldwide mid-water floater fleet will grow from 111 to 116 rigs from now and 2011. In 2008, 82% of the days available are already under contract. In 2009, 71% of the available days are contracted and in 2010, 74% of the days available are already under contract,’ Robert noted. ‘The mid-water fleet is also experiencing a period of high demand.’

West said he expects continued high rig rates to create a need for lower-cost solutions, such as with intervention vessels handling work typically assigned to rigs. ‘I see the drill count continuing, especially with the announcements from some of the independents in the last few weeks,’ he added.

West cautioned that the rig market is in a re-tooling phase that started in the 1990s only to be interrupted by $10/bbl oil and the Enron debacle. The break in re-tooling means a lot of old iron is trying to help meet drilling demands.West expects many new rigs will replace the older units but reminded the industry there is a limit to the number of rigs that can be built or staffed. The main question revolves around what happens with the spec building.

‘There’s a huge amount of speculation in the floating market and jackup market,’ said West, who expects this to lead to consolidation in the market.

Pride’s Robert, whose company is currently exploring opportunities to add more rigs to its fleet, believes this could help out the drilling company. ‘Obviously the longer a rig gets constructed by someone else without the love and care of an established drilling company, the more of a concern it becomes and the more due diligence you need to do and the tougher negotiation that might be, so from that perspective we would prefer to do it from a blank sheet of paper using our own technical and quality control standards,’ Robert said. ‘However there are going to be opportunities out there as this world develops for some of the rigs that are owned by speculators or companies that cannot perform long term on the execution of their contracts.We think there will be some opportunities out there, which is one of the reasons we're excited about some potential for growing the fleet even further, either through newbuilds or through acquisitions or joint ventures with speculators or through outright acquisitions.’

Diamond’s Dickerson noted how jam-packed shipyards are in their drive to meet seemingly insatiable demand for new rigs. ‘We don’t want to go through overrun again,’ he said.

Dickerson compared the 45-month cycle starting in 2004 to that of the 40-month cycle in 1995 through 1998. In the 1990s, oil prices ranged from highs of $18/bbl to $25/bbl before dropping to $11/bbl. From 2004 through now, oil prices have risen steadily from $40/bbl to over $110/bbl. In that same time, Diamond, which posted less than $500 million in revenues in 1995, effectively doubled that amount with its 2004 revenues.

While showing a steady upward trend, Diamond topped out in 1998 with revenues of about $1.2 billion. Their 2007 revenues exceeded $2.5 billion. Also affecting the market, Dickerson said, is a blurring in the pricing between some vessel types. For instance, fourth generation vessel rates are nearing the rates for fifth, he said. ‘There’s almost no discount between them.’

In the 1990s, fifth generation rigs were commanding rates of $180,000-$200,000. Today, it’s $450,000-$520,000. Then, fourth generation rigs cost $150,000- $180,000 while now they’re at $425,000-$500,000. Third generation rigs in the 1990s cost $130,000-$160,000, and now they charge $350,000-$450,000. Second generation rigs then were at $100,000-$125,000; now they’re at $300,000-$350,000.

In a recent fleet update, John Rynd, executive vice president and COO at Houston-based Hercules Offshore, said the company’s international segments are performing well but that demand and utilization in domestic markets has been weak.

‘We are beginning to experience what appears to be a considerable improvement in demand for our domestic offshore rigs as we enter the second quarter, which should bode well for utilization levels for the remainder of 2008,’ he added. Hercules, like many companies, has recently bought several new rigs.

Delays are affecting more than just the rig market, pointed out Heerema Marine Contractors (HMC) general manager Bruce Gresham. He said he could count on one hand the major projects that all companies in his sector are chasing.

‘They keep slipping to the right,’ he said of the delays. ‘Because these projects haven’t been sanctioned, they’re just not going forward, and we’re on the tail end of it.’ Based on this, he said, he doesn’t expect major installation activity in the Gulf of Mexico until about 2012 aside from projects that have already been announced. ‘I’m not painting a picture of gloom and doom. I’m saying there’s a dip.’

Gresham sees 2009 as being a problem year for fabrication yards but expects engineering firms to be hit first by the low number of projects planned for the GoM. Unlike the fabrication yards, however, HMC has a survival strategy in that it can move to other regions where there is work. ‘We will get through that dip,’ Gresham said, ‘but it will pick back up.’

The cyclical nature of this business raises concerns about the industry’s ability to retain or sustain work levels. Gresham said he expects drilling rates to hold and for emerging markets like Malaysia, India and Australia to add pressure to an already strained supply of rigs.

‘We can’t seem to have a steady workload,’ he said. OE

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