Tight credit market could have ripple effect, but most offshore E&P regions look strong for 2009

Posted on 18 November 2008

By Jerry Greenberg, contributing editor

Most of the world’s offshore E&P regions are expected to remain strong or see increases in rig demand, particularly for deepwater and ultra-deepwater activity. ODS-Petrodata’s 2009 forecast indicates more demand than available floaters. For jackups, however, there may be more supply than demand most of the year.

ENSCO International is only one of several major offshore drilling contractors bullish on the deepwater market, and has ordered deepwater rigs along with others such as Transocean, Noble Corp and Pride International.

“We’re very bullish on deepwater, and our seven-rig ENSCO 8500 Series semisubmersible newbuild program is solid evidence of our commitment to the industry,” said Mike Roth, ENSCO director, deepwater marketing & contracts. The company ordered three new deepwater semisubmersibles, all on speculation, in addition to the prior four units that are already contracted.

“We firmly believe that the (deepwater) market is robust and we will secure contracts on those rigs in a timely basis at acceptable market rates,” Mr Roth said. “Our strategy is to continue to grow in the deepwater arena.

“A number of independent operators are moving into (deepwater), primarily in the Gulf of Mexico,” he continued, “companies such as Nexen, Noble Energy, Cobalt and others. They have the capacity and the acreage to drill in deepwater and are valuable clients using our rigs.”

Mr Roth sees a growing demand for deepwater rigs worldwide, including the US Gulf of Mexico, Mexico, Brazil and West Africa, as well as in the Mediterranean and Australia, with Indonesia and India also experiencing demand growth. “Drilling development wells on the back of the significant deepwater discoveries worldwide will be an essential component of deepwater rig demand,” he explained.

Tight credit market

The credit market crunch that began in September could play an important role in different regions and business segments. Some companies will fare better than others, depending on the types of operators in those regions. However, nearly all are expected to see some effect. The oil price has already fallen along with stock exchanges.

A report in early October by Raymond James & Associates sounded a warning. “The global financial market melt-down … should drive energy demand lower, drive energy prices lower, depress M&A activity, delay energy infrastructure build-out, and reduce oil and gas drilling activity.”

The report also said that several companies building offshore rigs on speculation tapped the previously easy credit market, but new announcements of speculative rigs will become scarce.

Additionally, in light of lower natural gas prices, many E&P companies have had difficulty maintaining their spending levels.

“I don’t think (the financial crisis) will have a significant impact with the major international oil companies,” Mr Roth said. “Certainly the industry will have to monitor the worldwide economy, which will have an impact on the demand for oil and natural gas, but we don’t necessarily see any immediate effect.”

Large offshore contract drilling companies usually finance rig newbuilds from cash flow. That’s the case with Pride, which has four drillships under construction. Transocean, Diamond Offshore, Noble and others are likely in the same situation. Noble, in fact, recently ordered a new drillship at a cost of $585 million, a bargain in today’s newbuild market.

The credit market could be a boon to the large offshore drillers, assuming some of the rigs built on speculation become distressed merchandise. “I think the impact of tight credit potentially is very serious for contractors who have ordered rigs subject to financing,” explained Kevin Robert, Pride senior vice president, marketing and business development.

“A lot of speculators who have ordered rigs and who have put minimal money down will have a large payment to make later, and they will need to have a contract in order to finance a portion of that rig.”

Pride is investigating additional newbuilds and has an option for another drillship, but there is plenty of time to exercise that option, Mr Robert said. Meantime, the company is looking at another potential avenue to expand its fleet. “We are looking at other rigs that have been ordered to understand their situation,” he said. “Maybe there is an opportunity that comes up.

“We want to invest more in the deepwater market,” he added. “How we do that, depends.”

Hercules Offshore, which grew its fleet from five rigs a few years ago to 35 jackups and three submersibles today via a series of acquisitions, continues to look for acquisition opportunities. However, “it’s not a time to stretch your balance sheet,” said Hercules CEO and president John Rynd. “Those opportunities will be there, and we will continue to look and evaluate (acquisition opportunities), but we are taking a more cautious view.”

For small independent operators who have to drill a well with financing, it might be difficult to promote that project presently. The good thing is that the prospect doesn’t disappear because financing is unavailable; it (usually) gets postponed. Some larger independents also rely on credit markets, however, they also have base programs with which they can continue.

“At the moment, it is still too soon to predict to what extent current events will affect overall activity in 2009, but we anticipate a slowing in the rate of increase of customer spending,” Schlumberger chairman and CEO Andrew Gould commented in announcing the company’s third-quarter results in mid-October. He added that he anticipates effects of the credit market crunch to be limited to North America and some emerging exploration markets overseas.

US Gulf of Mexico

Dayrates for jackups in the US Gulf rose considerably during the first nine months of the year but leveled going into the fourth quarter. Still, the shelf market appears solid. “One of the drivers has been the continued migration of jackups out of the Gulf to international markets,” Mr Rynd said.

Mr Robert agreed: “The jackup market in the Gulf of Mexico is very strong right now due to the supply side being so tight.”

One doesn’t have to look back too far when there were 150 jackups in the Gulf, Mr Robert noted. Today, the figure is closer to half that, with around 60 of those rigs being marketed. With as many as another half-dozen expected to leave in 2009, plus three jackups that were lost during Hurricane Ike, the number of marketed units could soon drop to around 50, perhaps lower. As a result, drilling contractors expect the shelf market to remain buoyant.

Dayrates for 250-ft mat-supported jackups ranged from around $58,000-$63,000 in January 2008 but increased to $75,000-$95,000 during the summer. For 300-ft independent-leg cantilever jackups, dayrates ranged from about $115,000-$120,000. These increases were due to the tighter market plus higher natural gas prices during the summer.

Natural gas prices fell during the late third quarter and early fourth quarter, which could impact jackup demand as smaller independents pull back on exploration activity. Combined with the tight credit market, a pullback of activity could adversely affect the shelf market.

There is no such worry in the deepwater market, where rigs are enjoying virtually 100% utilization along with dayrates in some cases approaching $600,000. The lack of equipment is responsible for those rates, of course, but as far as exploration and development work, there is no end in sight for deepwater rigs.

Of the 99 semisubmersibles and drillships under construction with deliveries stretching to 2011, only 29 presently are available for contract. During 2009 alone, 25 semisubmersibles and drillships are scheduled for delivery, all with contracts and many destined for the US Gulf.

Mexico

The US Gulf and the Mexican Gulf continually feed off of each other for rigs, both jackups and deepwater units. In fact, several rigs departing US waters are expected to head to Mexico. Additionally, Pemex continues to tender for jackups internationally to fulfill their requirements. Earlier this year, Pemex had rig tenders calling for three independent-leg jackups, another for three more jackups. They’re expected to issue a third tender for another three jackups by the end of the year.

The US Gulf has been a primary source for Pemex’s jackups, but the company may have to begin looking in other areas as most of the rigs they are tendering are independent-leg units. Previously, Pemex chartered a mix of independent-leg and mat-supported jackups; however, their current and future requirements specify the former due to their flexibility for the company’s drilling programs.

Switching from mat-supported rigs would previously have been of concern to drilling contractors like Pride, which has seven mat-supported rigs contracted to Pemex. However, as mentioned earlier, rigs leaving the US Gulf has only further tightened the market there. Many of Pemex’s requirements could still come from the US, and that could be good news for jackup contractors.

“If Pemex increases its demand for independent-leg jackups, they will be taking them from the US,” Mr Robert explained. “The rigs that they will take, the 250-ft independent-leg cantilevers, drill the same wells as our 250-ft mat rigs, increasing demand for mat rigs up north.”

Pride has seven mat-supported rigs and two independent-leg jackups in Mexico. The two independent-leg units are contracted to Pemex through August and September 2009, while all but one of the mat-supported units had contracts that expire during fourth quarter 2008. Hercules has two mat-supported rigs with contracts that expire in mid-2009.

As far as rigs outside the US Gulf, Pemex contracted the Noble Carl Norberg, a 250-ft independent-leg jackup, from West Africa. This will give Noble 11 jackups in Mexico. The dayrate is about $155,000 for two years, compared with about $170,000 in West Africa, although the rig did not have a term contract in Africa. However, the dayrate is tied to an index that calls for re-pricing every 90 days based on an index of jackup rates in seven international regions, according to Noble. Most of Pemex’s jackup contracts are tied to various pricing indexes.

Pemex is operating five semisubmersibles, but four of them are considered mid-water depth units rated to drill in about 1,500 ft to 3,000 ft. Only one rig, the 7,000-ft Noble Max Smith, is considered deepwater.
“Pemex would like to contract another deepwater rig in 2009,” Mr Robert noted, “but I don’t think they are going to be successful because there are no rigs available.”

The first opportunity for Pemex to bring in a deepwater rig is when SeaDragon Offshore’s Oban B is delivered in late 2009. The rig is rated for 10,000 ft of water and will work for Pemex under a five-year contract.

The next deepwater newbuild semisubmersible for Pemex won’t be delivered until the second half of 2010, Grupo R’s 7,500-ft La Muralla III, also contracted for five years. A third, PetroRig III, will begin working for Pemex in early 2010. This rig is rated for 10,000 ft of water.

Petrobras

“Petrobras has the geology like nobody else in the world,” Mr Robert emphasized, “and they can afford and have demonstrated a very long-term view of the drilling market.”

Petrobras has been recognized as one of the world’s deepwater E&P leaders for years. The company has developed numerous technologies and innovations that have become standard in nearly every deepwater basin, such as subsea technology, FPSO and floating production systems. However, for the most part, the company has drilled and developed fields in around 5,000 ft of water or less. Even today, Petrobras’ drilling activity is generally in less than 5,000 ft of water.

That’s going to change in the near future, though, aided by better seismic technology that enables Petrobras to “see” through subsalt prospects and more accurately locate wells in greater water depths. As a result of the anticipated growth in ultra-deepwater, Petrobras is working to essentially double its number of floating rigs.

Early in the fourth quarter 2008, Petrobras was contracting or operating 29 semisubmersibles and six drillships, the majority of which are rated to drill in 3,000 ft to 5,000 ft of water. However, most of them were drilling in water depths substantially below their rated capacity. Looking forward, assuming Petrobras continues to contract these rigs, it will have under contract another 17 semisubmersibles and 11 drillships by the end of 2012, essentially doubling its fleet of deepwater and ultra-deepwater rigs. Several of these rigs are rated to drill in up to 10,000 ft of water.

With the Brazilian government pushing for more local content, Petrobras has awarded contracts for about 15 newbuild semis and drillships to Brazilian drilling contractors. Several are under construction, but several more are listed as “on order” by ODS-Petrodata, including a few without a specific shipyard. “Many of those contractors are very short on infrastructure,” Mr Robert noted, “and they are affected by the high cost of newbuilds as well as the current credit crunch. A number of them signed contracts without shipyard slots subject to financing.

“I think another part of the story is how many of those rigs that Petrobras has ordered from local companies will actually be delivered.”

Additionally, some expect Petrobras to produce additional rig tenders that could include a total of perhaps two dozen more deepwater and ultra-deepwater rigs. The government wants to increase local content by having most or all of those potential newbuild rigs constructed in Brazil. The problem is the lack of local shipyard capacity.

“Petrobras understands the risk of trying to build rigs in Brazil,” Mr Robert said. “But no matter what the outcome, their increasing demand (for offshore rigs) will impact our business for the next 20 years.”

Dayrates for mid-water depth semisubmersibles in Brazil generally range from the high $200s to the mid-$300s. A couple of Noble’s semisubmersibles in Brazil are working for substantially less but have new contracts that call for significantly higher dayrates. For example, the Noble Paul Wolff, rated to drill in 9,200 ft of water, is contracted to Petrobras until November 2009 at a rate of about $164,000/day (this contract was signed in 2005). The rate will increase to $428,000 under a new five-year Petrobras contract until November 2014.

Pride’s semisubmersibles, rated for up to 5,700 ft of water, are contracted to Petrobras with dayrates ranging from the low $200s to the low $300s. The Sea Explorer, a 1,000-ft water depth semisubmersible, will begin work for OGX in Brazil in August 2009 at $335,000/day following its contract with Eni in the Congo at $255,000, which is closer to $270,000/day with a bonus, according to Mr Robert.

West Africa

The West African jackup market softened somewhat late in 2008 with several idle jackups hanging over the market. Contracts for as many as four additional jackups expire before year end 2008, with contracts for another half-dozen jackups set to expire during the first half of 2009.

Hercules operates two jackups in West Africa at dayrates of around $150,000 each. Mr Rynd believes the slack demand is due primarily to the large amounts of money being spent in deepwater, primarily offshore Angola.

“Over the last four years, jackup demand has grown by only about three rigs,” he said. “With a large continental shelf and oil prices through the roof, you think there would have been higher demand.

“Having said that, I think longer term (West Africa) is going to be a very good market.”

Mr Rynd said his company has the largest lift boat fleet in West Africa, with 18 in Nigeria, and believes its jackup presence can grow with the lift boat infrastructure. “We have a good beachhead on which to grow, and we will have a significant West African presence for a while.”

He expects the jackup market will see an uptick beginning in the fourth quarter 2009 because of lease transfers to different companies. “We are getting a market sense that people are starting to look for jackups, in Angola and Nigeria specifically,” he said. West Africa is also a possible home for Hercules 350, a 350-ft independent-leg cantilever jackup in the US Gulf.

The company’s West Africa rigs include the Hercules 185, contracted until September 2010 at about $150,000/day, and the Hercules 156, contracted to ADDAX until February 2009 at the same rate. The latter rig will undergo shipyard work at the end of 2008, including adding a leg to bring it up to its design capacity of 150 ft. ADDAX is reportedly seeking a 350-ft jackup to begin work in early 2009.

Like Mr Rynd’s outlook for the jackup market, Mr Robert believes West Africa’s floater market will grow from a demand standpoint. “The industry will put more rigs into West Africa,” he said. “The question is whether (the industry) is able to do that right now. Everything is contracted, so if I was to move another rig into West Africa, I’m not sure where to find it other than build a new rig.”

One of Pride’s newbuild drillships is contracted to Petrobras for work offshore Angola, with delivery in 2011. Another is available for contract with a delivery date in the fourth quarter 2011. “That rig could potentially go anywhere in the Atlantic Basin or the Far East,” Mr Robert explained, “but my bet would be more inclined toward the Atlantic Basin.”

Middle East

ODS-Petrodata is projecting average jackup demand in the Middle East to increase from 89 in 2008 to 112 in 2009, beginning during the second half of the year. In the meantime, it is predicting a shortfall in supply during most of 2009 beginning late in the first quarter.

“The Middle East is the world’s largest jackup market,” said Mr Rynd, “and it looks like it’s poised to continue its growth. Saudi Aramco is evaluating bids for three to five jackups.”

Mr Robert agrees: “Saudi Arabia is a very strong growth market. The net increase in demand over the next couple of years is probably close to 30 jackups.”

Mr Rynd also noted that there could be additional tenders from Saudi Aramco soon. Maersk Oil & Gas has issued tenders for jackups to work offshore Qatar as well.

Hercules has three jackups in the region, one contracted to Occidental in Qatar until July 2009 at just over $100,000/day. Two others are contracted to Saudi Aramco until September 2011 at rates from the high $120s to the high $130s. These rigs are used in Saudi Aramco’s oil plays, Mr Rynd said, but the push for the past year or longer has been to drill deep, HPHT gas wells that require larger jackups.

However, according to Mr Robert, many operators, especially in the Middle East and Southeast Asia, realized that they could play the presence of newbuild jackups in shipyards in Southeast Asia to try to keep dayrates low. Operators also are offering shorter-term contracts – two years or less – in order to have more rigs re-contracting.

“It’s still a seller’s market, but operators with work (in the Middle East) are mostly national oil companies,” Mr Robert explained, “so they can afford to wait to contract a rig if they think the rates will go down.”

Southeast Asia

The Southeast Asian jackup market is expected to rise from an average of 39 contracted jackups during 2008 to an average of 45 in 2009. Despite this demand increase, ODS-Petrodata forecasts show the Southeast Asia jackup market may have a surplus of about six jackups during the remainder of 2008 and more than double that figure during 2009.

The reason is lower demand during the second half of 2009, an average of 41-43, down from 49 in January 2009 and remaining at that level during the first half. Meantime, supply is expected to increase from around 53 jackups in January and rising steadily throughout 2009, ending the year with an expected supply of 64-66 jackups.

Despite this outlook, Mr Rynd believes the Southeast Asian jackup market is still fundamentally solid. While Hercules currently has only one jackup in the region, Hercules 208 offshore Malaysia working for Murphy, Mr Rynd said the company wants to grow in the region. Hercules 208 mobilized from Trinidad, where it was cold stacked, and was upgraded “from the drilling systems to the quarters. This opportunity with Murphy may lead us to further opportunities.”

Like most other regions with floating rig requirements, Southeast Asia is expected to experience more demand for semisubmersibles than supply. While there are a couple of standard water-depth semisubmersibles available early in the fourth quarter, ODS-Petrodata is forecasting a deficit of such equipment during most of 2009 beginning in March. The deficit could be as high as four or five rigs on average throughout 2009.

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