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Aging fleet, market bifurcation mean it’s really different this time

Posted on 24 May 2011

Industry must work hard to ensure nothing like Macondo ever happens again, said IADC 2011 chairman Matt Ralls. “It’s our moral obligation to the people who work for us,” he said at the IADC Critical Issues Middle East Conference in Dubai on 10 May.

Industry must work hard to ensure nothing like Macondo ever happens again, said IADC 2011 chairman Matt Ralls. “It’s our moral obligation to the people who work for us,” he said at the IADC Critical Issues Middle East Conference in Dubai on 10 May.

“It’s different this time” is a phrase that the industry has heard numerous times through past boom and bust cycles over the decades. This time, however, it really is different, IADC 2011 chairman Matt Ralls said during his opening keynote address at the 2011 IADC Critical Issues Middle East Conference & Exhibition, held 10-11 May in Dubai.

The industry certainly is overbuilding again, he believes, which means that it’s adding capacity beyond what the market can absorb as a whole. However, what’s different is that new market elements carrying significant implications have come into play. First, there’s the fact that the worldwide fleet is old and getting older. More than two-thirds of the world’s jackups are 25 years or older; for semis and drillships, the percentage of 25 year-plus units are 58% and 31%, respectively. “With the significant influx of new equipment, we think that upgrades are probably just not going to make sense. Our expectation is that you’ll see a slow attrition of the worldwide rig fleet related to age,” Mr Ralls said.

Second, the bifurcation of the rig market between newer and older units will continue, with modern units enjoying superior utilization at the expense of the older units. “It’s very clear to me that operator specifications continue to get more stringent in every asset class in every market,” he said, with higher equipment requirements putting aging rigs at a disadvantage. “We’re seeing some differentiation in what the buyers are looking for and what they’ll pay for those types of assets. … Our expectation is that you’ll see fairly well-supported dayrates for those new speculative assets, notwithstanding the overall capacity excess. Then over time, we’re going to see attrition this time that we expected to see in previous cycles but didn’t.”

Mr Ralls believes that the regulatory response to last year’s Macondo incident will support the market bifurcation as well, with operators wanting newer or upgraded equipment now more than ever. “It definitely puts pressure on rig equipment, on the maintenance and certification process and on personnel, particularly with regard to competency and experience levels,” he said.

Turning to the topic of safety, Mr Ralls reiterated his commitment to HSE, both as chairman, president and CEO of Rowan Companies and as chairman of IADC. “Safe well construction operations are definitely the province of the people in this room. It’s up to us to set the right standards and have the right attitudes. Our customers are demanding it, and they’re supporting it. This is a can-do industry. It’s not enough for us to just talk about safety; we’ve got to show that priority.”

And while Macondo has resulted in a host of changes for the industry, particularly on the regulatory side, Mr Ralls believes the test is how industry will adapt to those changes. “I do believe Macondo was a unique event for our industry as far as the Gulf of Mexico, and we shouldn’t be painted with the same broad brush across the entire industry. But we definitely need to work hard to make sure it never occurs again. It’s our moral obligation to the people who work for us.”

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