Critical issues in drilling & completions with David Williams, chairman, president and CEO, Noble Corp
By Jerry Greenberg, contributing editor
What are the primary issues facing the offshore contract drilling business and what can the industry do to meet those challenges?
There are three: permitorium, permitorium and permitorium. The key issue for us going forward is what’s going to happen in the US GOM. The problem is the US government doesn’t yet know how it wants to deal with offshore drilling. They say they want to allow it, but their actions don’t support it.
The questions are: What are the rules that are going to be in place that our customers have to meet, and what rules are drilling contractors going to have to meet in order to get back to work? How much time are we going to have to meet those guidelines?
The industry went from operating 33 deepwater strings one day to zero. So far, five rigs have left the Gulf, and I’m certain there will be more. We cold-stacked one deepwater rig, and we may cold-stack another unit. We also are likely to take at least one deepwater rig out of the Gulf, maybe two.
Globally, we have maintained about 80% utilization of our jackups throughout this year, even in the face of a good number of new assets coming into the market. US Gulf drilling went down to nothing, so internationally our business is pretty good. We have four out of five jackups working in West Africa, and we are nearly fully utilized in the North Sea. We put more rigs back to work in the Middle East, and we have four rigs in India. Other contractors have had good success as well.
So the jackup business has held its own except in the GOM, where onshore shale developments and the offshore permitorium have had negative impacts. The deepwater market continues to grow except in the Gulf, so the primary looming issue for us is what happens here?
The other part of that question is, what are we going to do about it? At Noble, we are going to continue to fight the fight. We were able to conclude very successful deals with Frontier Drilling and Shell. The Frontier acquisition added a lot of floating assets to our fleet and, combined with the Shell drilling contracts, it doubled our backlog from about $7 billion to $14 billion. We have an outstanding safety culture that is valued by our customers. We believe Shell wants to work in the US GOM, and they have a great portfolio. We will continue to support our customers once work does resume in the Gulf. It also appears the federal government has cleared the way for Shell to work in the Arctic in 2011, so hopefully we will be able to do that work with the Noble Discoverer. What we need is clarity on what the rules are going to be in the GOM and a process that gets permits moving again.
Strategically, with oil at $90 per barrel, there is nothing wrong with the macroeconomic model that supports our business. What’s wrong is an arbitrary policy that precludes a normal level of drilling in the Gulf.
What irritates us is, while we literally had nothing to do with the incident, we have been negatively impacted both here and abroad. We have the best safety record in the industry, we are a 90-year-old company with a history and a culture of strong safety performance, but we have been horribly impacted by events with which we had nothing to do.
Any thoughts as to when the Gulf would even begin to get back to normal?
If you talk to the government officials in Washington, they say they lifted the deepwater drilling moratorium two months ago (October 2010). That’s almost a comical statement. At the higher levels, they don’t know what the policies need to be. At the lower levels, they are afraid to make a mistake, so the net effect is absolute gridlock.
Companies are submitting paperwork for drilling permits, and the government says they will get them approved when they meet the guidelines, but it seems they don’t really know what the guidelines are. So nothing is happening.
If the government woke up tomorrow and said they want the industry to get back to work, we could do it very quickly. We could easily see a return to some level of normalcy by the end of the first quarter 2011.
My guess is that’s not going to happen. There has to be a desire on the part of the government to want to do this.
And you think the desire isn’t there?
I’m not saying there is an agenda against us. I’m saying it appears there is no real desire to support us. There has to be a desire on their part to put us back to work. The issue is jobs. We have not laid anyone off yet, but we can’t keep going like we have. Five deepwater rigs have left the Gulf. If you take three or four more rigs out, that’s a lot of jobs this area is going to lose. In the end, history shows drilling can be done safely and well, but the administration seems unwilling to protect the jobs our industry creates.
When we bought Frontier Drilling, we had expected that we would have a good bit of turnover in the Frontier fleet. We also have four rigs under construction and one in the final stages of acceptance testing. In normal times we would have been hiring like crazy. Instead we have taken people off stacked rigs and back-filled all of the potential jobs with existing employees. We have downmanned a couple of rigs in the Gulf, and we have a couple of rigs in the shipyard we have downmanned. From the fleet, we have been able to fill a couple hundred jobs that we would have gone out and hired in the market.
Are there opportunities in other regions for rigs leaving the Gulf?
Yes. Oil is at $90, and almost everything works at $90 oil. If oil companies can’t invest in the GOM and they have other projects abroad in which they can invest, I think they will. There are opportunities in the Mediterranean, West Africa and Southeast Asia. That doesn’t take into account Petrobras, who said they may build as many as 28 rigs. It appears those bids are not as competitive as they had hoped, so we believe they are going to have to source rigs from the market. They have to be licking their chops at opportunities to get rigs that are going to be released or made available as a result of the GOM situation. That is long-term work there, and it will be to the detriment of the people in the US because, once those rigs go to Brazil, they are never coming back.
A couple rigs have been taken out of the Gulf by operators for short-term work or farmed out to someone else for a relatively short-term program to make them available to come back to the Gulf once the permitorium is resolved and the industry has more vision of what’s going to happen. But if there is not more clarity, the rigs won’t come back. My guidance is that once a rig goes to Brazil, the odds of it coming back are very low. Once a rig goes to long-term development, say one of the West Africa development programs, it’s probably gone for several years. Once a rig goes to Asia, it’s probably not coming back.
But you look at the lease sales here the past couple of years, they have been very prolific and involved significant investments. Operators have a huge portfolio of available seismic features that they want to drill. They want to drill them, but they need to know what the rules are.
Let’s move further south in the Gulf of Mexico. Pemex has a good number of rig tenders out, but they haven’t been able to convert them to drilling contracts. What’s the situation there?
We have one floater and 12 jackups in Mexico. We have some stacked rigs, and we have other rigs that are coming off contract. Pemex has been saying they are coming out with bids, but they have been very slow to come to the market with those bids. We have been able to extend three rigs through the end of 2010, but we are getting to a point where we are no longer going to be able to wait. We are looking at rigs as they come off contract to move them out of Mexico and cold-stack them.
You need to take them out of Mexico, and the US is the easiest place to take them. We are not going to bring them back here and try to work them. We will cold-stack them and bid them in other foreign markets unless there is some movement on the tenders soon. Pemex says they want them, they talked to us about extending the contracts, and they talked to us about keeping them there. We have not moved any yet. We have three rigs stacked there, and we will have more by the end of 2010. We will have to make a decision whether to move them.
The bids we are seeing call for work to start up in April. It becomes a math problem if we leave an idle rig in Mexico. We can’t cold-stack them there, so you have to leave them manned. How much cash do we burn letting them sit until April waiting on Pemex to come out with tenders? And if it gets delayed 30 to 60 days, how much cash do we burn there versus bringing them back here, redeploy the crews and cold-stack the rig? Where do we lose the least money?
Are there opportunities for additional floaters there?
We have the Noble Max Smith there. To date, that rig is the only deepwater rig there. We are outfitted for 7,000 feet of water. The rig contact expires in Q3 2011. There is an indication of a shallow-water floater requirement, but nothing new for deepwater as far as we know.
The Middle East market has softened. Are there future opportunities to put some of your idle rigs back to work in the region?
We have 13 rigs in the region and four in India. The four in India are contracted, and a number of rigs are down in the Gulf region. That market has softened some, but relatively speaking, rates have held up well. We have been fortunate to obtain some jackup accommodation work. We are bidding the idle rigs for work in that area and other areas. We have a mix of rig sizes idle, and we see opportunities there.
One thing we are excited about is the fact the Noble Roger Lewis and Noble Scott Marks, two of our three newbuild jackups, have been contracted for three years each for Saudi Aramco. This is our first time to work in Saudi Arabia, even though we have been in the Middle East for many years. It will be a good program for us. The Noble Scott Marks is in the North Sea, and the operator has worked with us to complete the contract using other rigs.
The West Africa jackup market has been soft for some time. What would it take to see a strengthening of that market?
It has been soft. Even when oil was $120 per barrel, which from a jackup perspective drives that market, it was soft in Nigeria. And it is for political reasons. Operators can’t get permits, can’t get acreage awarded. They have their own internal issues there, so that market has a lack of clarity for different reasons than the GOM. For some time there hasn’t been a lot of activity in Nigeria. We have had rigs down, but today we are running four out of five jackups in Nigeria.
Having said that, I would say activity is actually better in West Africa than it was a year ago, and we feel better about it. I think West Africa at any point could be a bright spot in the future. There is a lot of work to do there, a huge resource base on which to build. You just have to have the opportunity to go out and do it, and we are starting to see more of that opportunity. I think West Africa could be a bright spot for us.
Any concluding thoughts on 2011?
One phrase we’ve used in talking with our investors is “onward through the fog.” I think that describes the situation right now very well. Europe is suffering in terms of finances, and unemployment in the US is just under 10%, but oil is still pushing $90 per barrel. At that price, as I said, all projects make economic sense. We’re seeing increased opportunities abroad, and many players in the industry have had enough confidence in the long-term cycle to have ordered jackups and floaters to be delivered in 2012 and beyond. Things have the potential to be very positive in 2011.
The real uncertainty is the US political environment. The decisions made by the US government in the next few months will determine whether we can put the disastrous impacts of the Macondo events behind us or if we’ll continue to stumble onward through the fog.