CATEGORIZED | 2007, November/December

Japan Drilling ready for major expansion with new jackup, semi upgrade, Qatar joint venture

Posted on 29 October 2009

For an indigenous Asian drilling contractor far away from the traditional activity centers of offshore drilling, being “international” has been more than a growth strategy for Japan Drilling Company (JDC). It has been a necessity.

Ever since its very first drilling project in Indonesia in 1969, JDC has worked to establish an international presence, from up in Russia’s Sakhalin Island to the Australian Down Under, from the Middle East to Africa to Mexico.JDC’s international scope may have helped it survive the industry downturn of the past two decades, but asset divestitures during the bad times also meant that JDC was left with only about half the number of rigs it had in the early ’80s.

Now, like many in the drilling industry, JDC is ready to grow again.

First, it is building a new jackup, Hakuryu-10, at the PPL Shipyard in Singapore — the first new rig JDC has built in more than 20 years and the first it has built outside Japan, according to Shigehito Uetake, executive officer of JDC’s project engineering department.

The Hakuryu-10 is a Baker Pacific Class 375 design cantilever jackup. It will be capable of operating in water depths up to 375 ft (extendable to 400 ft) and of drilling up to 30,000 ft. The design’s bigger spud cans (55.4-ft diameter, 31.9-ft high) mean it will be able to work in very soft formations, Mr Uetake said. Additionally, the rig will be equipped with a single 15,000-psi BOP stack, the biggest in JDC’s fleet. JDC got the high-spec BOP simply because the client required it, said Toshio Harada, director, executive officer and general manager of the operations department.

The order for Hakuryu-10 was placed in May 2005, putting it among the earlier group in this round of industry building, Mr Uetake said. As of September 2007, construction appeared to be on track, and the rig was expected to be delivered by May 2008.

JDC has not announced a contract for the Hakuryu-10, but Minoru Murata, JDC president and representative director, said he has no worries because of the abundance of upcoming drilling projects. JDC will pick a suitable project for the Hakuryu-10 by prioritizing long-term, stable work rather than competing for short-term operations, he said.

Jackup vs semi

Mr Murata explained that there were a couple of reason why JDC decided to build a jackup rather than a deepwater rig. First, they saw a promising market for jackups. With JDC’s other jackups working in fixed areas on long-term contracts, the contractor lacked a jackup it could market around. Building cost was also “reasonable” back in 2005 when JDC placed its order.

Secondly, JDC felt that before they approached building a new deepwater unit, they had to prioritize life-enhancement upgrades for its existing semisubmersible — namely, for the Hakuryu-5.

JDC began working on upgrading that semi from 1,640-ft water depth to 3,500 ft using a “deepdish” concept designed by JDC and Houston-based engineering firm Exmar. According to Mr Uetake, the “deepdish” concept will allow JDC to significantly cut down the number of days required for the modification. By allowing the upgrade parts to be prefabricated, more than two months can be shaved off the time the Hakuryu-5 will need to stay in dry dock.

There is one disadvantage to this upgrade, Mr Uetake noted: The “deepdish” will significantly increase water resistance and therefore slow the towing speed, a potential operations headache. However, because the structure will also make the entire rig much more rigid and resistant to waves, “our analysis shows that this upgrade can make the rig work 15-20 years more,” he said.

He added that the rig will use a chain and wire mooring system rather than adding dynamic positioning capabilities.

Now that Exmar has completed the basic design, Japan-based IHI Marine United is undertaking the upgrade’s detailed design. In September 2007, the rig was completing operations offshore Japan for Teikoku Oil. It was then planned to move to the Philippines to drill for Japan Petroleum Exploration and return to Japan for a few more wells. The first stage of the conversion is expected to begin by October 2008. Installation will be done in Japan over an estimated four and a half months, Mr Uetake said.

And this is only the first step in a two-stage deepwater upgrade for the Hakuryu-5. Step Two is an upgrade to 5,000 ft water depth, and Exmar is already drawing up a basic design for the modification, again using the “deepdish” concept. However, Mr Uetake emphasized that whether JDC will actually go through with Step Two depends on whether they can secure a contract supporting it.

Further to the Hakuryu-5 upgrades, JDC intends to broaden its abilities to service deepwater contracts as offshore drilling continues to move further from shore. “We are keenly interested in deepwater. And we need to be. As a drilling contractor, we should be,” Mr Murata said.

Deepwater activities in Asia — although only just starting — are very promising, he said. Mr Murata revealed that JDC is working on a possible entrance into deepwater activities but said they are not ready to announce anything publicly yet.

Niche growth

Compared with Europe or the US, there aren’t many Asian indigenous offshore drilling contractors, Mr Murata said. There are some in China, Indonesia and India — and JDC is the only one without a big area to drill nearby its own country. A niche growth area that JDC has fostered in recent years is establishing joint ventures or other partnerships with national companies. This allows JDC’s presence and resources to be localized, he said.

Back in 1984, JDC already established a joint venture with China National Offshore Oil Corp (CNOOC), China’s offshore E&P company, which later formed China Oilfield Services (COSL), a drilling and oilfield services company. The partnership lasted two decades, ending in 2004.

Now, two JDC subsidiaries have long-term operations in Iran and Malaysia. In Qatar, a third joint venture was established in 2004 with Qatar Petroleum. Gulf Drilling International (GDI) is JDC’s largest joint venture to date, said Yuichiro Ichikawa, JDC representative director and senior managing executive officer. GDI owns five jackups and four land rigs. One of the jackups, Al-Khor, was delivered early this year from Keppel FELS in Singapore. Another similar-design rig, Al-Zubarah, is under construction at Keppel FELS and expected to be delivered around the end of 2007.

Challenges

One of JDC’s biggest challenges — like many other drilling contractors around the world — is training and expertise, Mr Murata said. “JDC has always been appreciated by the operator because of the diligent manner of our working staff. But these days we are more and more in shortage of diligent workers. The training of good people is the biggest challenge for JDC.”

Mr Harada agreed that there is a dilution of experience in the industry, but he noted that JDC’s shortage has been less severe than other companies because of the Japanese employment system. Japanese employees often work for just one company their entire career, so job-hopping is less common. Even for foreign crews working on JDC’s overseas rigs, the majority of them have long histories with the company “because even when the market is down, we try to keep them. We know that having long-term crews is important,” Mr Harada said.

More difficult than keeping the long-term crews is hiring new ones. In order to fill the drilling superintendent and barge superintendent positions on the newbuild Hakuryu-10, Mr Harada said he had to take employees from one of JDC’s existing rigs.

According to JDC, rig crews are increasingly becoming combinations of veteran personnel with younger ones, Japanese nationals and expatriates, and those in training with those giving the training. Naturally, communication becomes critical in such work environments, and JDC’s managers and senior supervisors are under constant instruction to maintain and improve a high level of communication and to follow internal procedures and tools.

Kazuhisa Otomo, deputy manager of JDC’s safety and environment department, said he and his department give top priority to improving intra-crew and inter-company communications in many ways — not just verbal conversation but also signaling, procedural and safety leadership skills. This is a big challenge for HSE management, he noted.

Ongoing employee training is necessary to sustain core operations in any company in any industry. In a tight labor market, however, it takes on added importance, especially in an industry where HSE are central issues. Mr Otomo pointed out that while employee familiarization and competence have required more concerted attention, JDC’s long-term contracts and long-serving crews have been essential to maintaining and driving down LTI rates.

As of August 2007, the Naga-1, a semisubmersible owned under JDC’s Malaysian joint venture, had gone 2,643 days without an LTI. Jackups Sagadril-1 and Sagadril-2, both in Iran, had gone for 1,029 days and 749 days, respectively, without an LTI. The Hakuryu-5, 373 days without an LTI, had a small incident with a pinched finger in 2006. Since JDC has been largely successful in achieving LTIs below the industry average, the company has turned its attention to incidents of lesser-severity. As all in the business know, this requires persistent effort and focus, Mr Otomo said.

This year, JDC revised its HSE system into an HSQE system to include quality aspects, Mr Ichikawa added. The revamped policy incorporates considerations of new technologies, environmental protection and new working condition rules.

The outlook

Exploration and drilling activities continue to expand all over Asia, particularly in Vietnam, Malaysia, India and Indonesia, Mr Murata said. More deepwater exploration activities are expected in areas such as Indonesia; Sarawak, Malaysia; and Timor Leste (East Timor). Brunei, South China Sea beyond the continental shelf, Western/North Australia, and even the Japanese waters of Nankai Trough hold deepwater potential, he said.

“We will be expanding our business from now on,” Mr Murata said. “We think the future is bright for the drilling industry for at least 20 or 30 years because there is no substitute energy source to replace hydrocarbons.”

In the more near term, JDC will focus on the maintenance and refurbishment of its existing units so that they can respond to clients’ requirements. This is especially important for aging rigs, he said. “As opportunities arise, we’d also like to go further into newbuilding because sooner or later, the time to retire our old rigs will come,” he continued. “We’re always looking at the right time to do it.”

The number of newbuild rigs that will enter the global drilling market over the next 2-3 years should not give drilling contractors “a big headache” like in the 1980s, Mr Murata said, due to several reasons.

First, the high oil prices are expected to be sustained — industry forecasts show oil prices staying near $50 a barrel even in the “low” scenario. Second, consumption continues to expand worldwide. Third, rigs are getting old, with attrition for many units right around the corner. Finally, operators will require new technologies on higher-standard rigs for deeper, HPHT operations.

Mr Murata acknowledged that indigenous Asian drilling contractors do have challenges to work through on the global level — they’re still not as competitive internationally. Their presence are mostly limited to domestic markets, where they have comparative advantages. Even JDC, which has been international since its inception in 1968, has never operated in the US Gulf of Mexico, the North Sea, South America or the Mediterranean.

At JDC, though, they have their eye on having a truly multinational, global rig fleet serving customers worldwide, Mr Murata said. “We are small, but we want to be a drilling contractor that can contribute to our industry, not only in Japan and Asia but to the world.”


Sidebar: JAPEX works to fulfill Japan’s energy demands amid technology, people challenges

As one of Japan’s biggest upstream companies, Japan Petroleum Exploration Company (JAPEX) pursues a two-pronged approach to its operations — improving recovery on existing fields and finding new reserves in frontier areas. In reality, however, JAPEX has been so busy trying to meet Japan’s demand for oil and natural gas that it has little time to look for new reserves, said Takahashi Hideaki, general manager of the operations department of JAPEX’s development division.

Facing a demand for gas that keeps expanding, JAPEX has devoted most of its resources this year to fulfilling that demand. “The drilling activity in Japan is very active, but active for improving recovery. We have several rigs drilling in-fill wells or doing workover jobs. We are afraid that there is very little time to drill wildcat wells in new areas to maximize our reserves these days,” he said.

JAPEX’s main domestic operating fields are in Hokkaido (up north), and Niigata and Akita (both on the Sea of Japan coast in northern Hounshu). Each of these areas have long histories rivaling JAPEX’s own 50 years. “They each have their own market that requires our gas. We are trying to fulfill those markets day by day,” Mr Takahashi said.

According to Takemura Mitsugu, manager of the engineering department, JAPEX is currently drilling with three land rigs and one platform. The land rigs are owned by JAPEX’s 100%-owned subsidiary SK Engineering Company. They actually have six land rigs, he pointed out, but only enough manpower to operate three rigs at the same time. “Currently we have only Japanese crews, so we can’t expand too quickly,” Mr Takemura said. “It takes 10-20 years to train good people.”

Domestically in 2007, JAPEX has conducted 3D seismic surveys in Hokkaido and Niigata and drilled two exploratory wells to try to locate new pay zones. Three to five more developing wells have been drilled this year as well.

Because Japan is a relatively small country, there may be no real “frontier” areas left to explore, Mr Takahashi said, since the region has already been actively explored over the last 50 years. So the bulk of JAPEX’s frontier work in recent years has been carried out overseas — Indonesia, Vietnam, Cambodia, China, Azerbaijan, Australia. Successes, however, have been few.

As of September, JAPEX had not done any exploratory drilling overseas for 2007, although one exploratory well was planned for offshore the Philippines. The project, located between the islands of Negros and Cebu, is based on results of seismic surveys conducted in 2005. JAPEX has already contracted the Hakuryu-5 semisubmersible from Japan Drilling Company for operations to begin by November 2007.

Next year, JAPEX will step up its overseas exploration activities with drilling projects in Libya and Indonesia. These involve both land and offshore operations, and Mr Takemura noted that the use of a helicopter rig may be required in Indonesia in 2009.

Technology,challenges

One of JAPEX’s biggest challenges is fractured reservoirs, both Mr Takahashi and Mr Takemura agreed. Yufutsu, one of their biggest producing fields in north Japan’s Hokkaido area, is a very deep, granite fractured gas reservoir seated at about 4,500 m (14,760 ft). To get to the gas (stored in cracks in the granite and overlain conglomerates), the well must hit the fractures in a formation several hundreds of meters thick.

“First, the difficulty is how to select the well course to cross bigger and more fracture, since it’s still hard to predict where the fractures are,” Mr Takahashi said. “The second challenge is to drill through the fracture with minimized damage as it often takes a huge amount of drilling mud. The third challenge is, once we damage it, how do we remove the damage? How do we remove the plugging material from the fractures? Each of those is not easy.”

As far as adopting new technologies to overcome such challenges, Mr Takemura said rotary steerable systems are “working OK.” Most of JAPEX’s wells are directional, so rotary steerables have been necessary on some very deep wells that go beyond 4,000 m (13,120 ft). “We have tried rotary steerables, but in the future we want to try it in deeper and more abrasive rocks to see if it could be helpful. Japan is a volcanic island, so the geology is not the easiest,” he said.

Mr Takemura also said he recognizes the importance of managed pressure drilling, but because oil/gas fields in Japan are located close to cities, there are more restrictions to adopting these techniques. “There are very big safety and environmental concerns that pose big challenges for us,” he said.

If possible, he would like to try MPD or underbalanced drilling in deep gas zones, perhaps the deep, fractured reservoirs on Yufutsu. The success rate could be very low in the beginning, he said, and JAPEX must wait for the right opportunity.

The future

In the last five years, some small discoveries have been made in Japan, including new zones or new structures in or near the existing fields. According to Mr Takahashi, one of these newly discovered zones produces heavy oil, and “it’s a little hard to make heavy oil feasible right now. But we’re trying to make it feasible for the future.”

Whether heavy oil makes it or not, unconventionals will be the focus for the future, he continued. “It’s getting more and more difficult to maximize reserves of conventional oil and gas (more than we already have). The industry has developed many drilling technologies for that. The next step will be to turn unconventionals or unfeasible hydrocarbons into conventionals. For example, heavy oil or marginal gas. Perhaps we will have to improve multilaterals, or horizontal drilling, or a new recovery technology. Those will be critical for the next 5-10 years, rather than any new drilling technology.”

Methane hydrates is another potential resource that Japan hopes to make feasible. It has been estimated that Japanese waters contain a significant amount of hydrates — tempting news for a country with high energy demands but relatively little hydrocarbon. The Japanese government has spearheaded a research program for years. Many in the Japanese petroleum industry have been involved, including JAPEX as a leading operator. Several years ago, JAPEX successfully explored methane hydrate layers in domestic waters by coring and logging for the first time in the oil industry.

Mr Takahashi, who has co-written several industry papers on the topic, said the industry has already helped to transfer many traditional oil/gas drilling technologies into the exploration of methane hydrates. It can become a true energy source in the next 20 years if there is a technological breakthrough, he believes.

On the environmental side, Mr Takahashi urged the drilling industry to think more seriously about waste management innovations. In some Japanese drilling operations near cities or sanctuaries, no waste dumping of any kind, not even water, is allowed. The industry still lacks a disposal system that has zero impact on the drilling location, he said.

Regional prospects

Asia includes not only Japan, one of the biggest energy consumers in the world, but also China, a still-growing giant. “One would benefit to explore gas in this area because it’s near such big markets. Some marginal gas may become feasible because of the short transportation distance required,” Mr Takahashi said. “I think that is some motivation for exploration. In particular, exploration for gas for LNG here will be active in the future. I hope we can provide sufficient manpower and quality building technologies at less cost, like what we’re seeing in Korea and Singapore.”

On the other hand, he continued, getting frontier technologies and engineering services from Europe or the United States into Asia continues to be tough. “They’re still relatively costly to operate in Asia,” he said.

As for Asia’s deepwater prospects, which haven’t developed as well as areas like Africa or South America, Mr Takahashi wonders if that’s because of the limited infrastructure in place. “Once they find gas, it must be a huge find in order to make development feasible,” he said.

That might diminish exploration motivation for Western operators, but Asian companies will have high motivations to explore, he pointed out. JAPEX has drilled three deepwater wells in Japan since 1999, though without success. “I think we still have chances to find oil in deepwater here. The problem is contracting deepwater rigs. They’re very difficult to get, especially in this region.”


Sidebar: Teikoku Oil to abandon Iwaki field platform, enter Libyan market in 2008

Japan-based Teikoku Oil recently made a small oil discovery in Niigata on its onshore Minami Kuwayama field, said Matsuzawa Saburo, general manager of Teikoku’s drilling department. The TT-1 well measured 3,793 m (12,450 ft) and took about 135 days to complete. Several more wells are planned over the next few years to fully develop this discovery.

On Teikoku’s main domestic field, the onshore Minami Nagaoka gas field, Teikoku has been working on a 4,950-m (16,240-ft) well that should be completed by November 2007. Additionally, two underground gas storage wells are planned for the remainder of the year in Japan.

Its other main domestic field is the offshore Iwaki gas field, discovered in the early 1970s. It was on this field that Teikoku, in cooperation with Esso, constructed Japan’s largest earthquake-resistant platform at a water depth of 154 m (500 ft). According to Mr Matsuzawa, Teikoku and Esso have decided to abandon the platform; no other details were provided.

For the first time next year, Teikoku is entering the red-hot market of Libya, he said, with plans to begin an exploration program of five onshore wells. This entry to Libya highlights North Africa as one of Teikoku’s core areas, along with another Teikoku-operated project in Egypt that is already producing.

Latin America is the operator’s other core overseas area; Teikoku was among the first Japanese companies to enter the Venezuelan market in 1992. According to Mr Matsuzawa, Teikoku has decided to continue operations in that country following the oil industry reshuffling there earlier this year.

On the technology side, Mr Matsuzawa said, he’s very interested in managed pressure drilling, but has had no opportunity to try the technique. Same with rotary steerables, he said. He explained that cost keeps rotary steerables out of reach but he would consider using rotary steerables if prices became competitive with conventional MWDs and downhole motors.

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