New oil environment, new contracting model

Critical D&C issues with Sverre Skogen, Hugh Mackay, AGR

By Jeremy Cresswell, contributing editor

AGR is one of a small but increasingly influential cadre of companies that have successfully built businesses around portfolio-based, packaged well construction management and related boutique services. Sverre Skogen is this Norwegian group’s CEO and Hugh Mackay is its business development director.

DC: AGR laid its foundations in the North Sea and is becoming increasingly active globally, but how will this model work in other offshore provinces as they mature, small/mid-cap exploration and production companies gain ground and crude prices edge inexorably northward?

Skogen: I am certain that our approach, where consortia of different small and mid-cap E&P companies are brought together to create credible back-to-back drilling programmes, will spread.

Our model came about because we saw that not only did such companies need our help to be their drilling department, they also needed help in getting a rig. With demand high and supply short, rates high and contractors demanding longer contracts, it was obvious that a new model had to be found. We have been able to build a strong business under these circumstances, and we expect to continue to do that, even with some evidence of rates softening, with evidence of that showing among new jackups scheduled to enter the marketplace during 2008.

But I see little or no easing on the semisubmersibles side, which means owners will continue to demand three-year deals and preferably longer, such as on the Norwegian Continental Shelf and deepwater in provinces such as West Africa.

DC: Does this mean you will be able to put together programmes for jackups more easily?

Mackay: More than 70 jackup rigs are reported as under construction, around 30 of which are scheduled to be delivered in 2008 and, of these, only 10 are reported as having a fixture.

This is beginning to have an impact on the jackup market in certain areas. In particular, we see some softening of the market in West Africa and Asia in terms of both rig rate and duration of contract.

We can see in West Africa, where we’re currently in the market, that suddenly we’re able to get hold of rigs on shorter fixtures, whereas before it was more difficult.

But the situation in the UK and especially Norway remains very tight, with a limited number of jackup rigs qualified to work in these areas.

DC: So what is the position with deepwater units currently on order?

Mackay: Most of the 40 or so semi-submersibles and 24 drillships on order already have fixtures, and their impact will be felt from 2009 onwards.

Most significantly, as far as the UK and Norway is concerned, is that all the newbuilds are deepwater units, and no mid-water semisubs are being built. The mid-water market is largely reliant on the existing fleet of 1970s rigs.

The lack of mid-water semis is being felt acutely in Norway, where first availability on a semisub is 2010 and fixtures of 36 months are sought. In the UK, drilling contractors continue to seek fixtures of 12 months. Rig rates continue to be high.

We see no softening of semisub and drillship availability in any part of the world. We have seen evidence of oil companies overcommitting and taking rigs on contract without having a full programme of work, and AGR has taken on a number of rigs from this secondary market.
But whether this secondary market will develop amongst the deepwater newbuild contracts remains to be seen. There is significant demand emerging in West Africa and the South Atlantic, and we are well placed to take advantage of this secondary market should it develop.

DC: OK, we’re familiar with AGR’s capabilities in the North Sea, but how confident are you that your approach really can work elsewhere?

Skogen: We’re doing it in Australia (second campaign) … there’s certainly demand in Asia-Pacific for this kind of collaborative campaign; we can definitely see it in West Africa for both jackups and deepwater units. Previously we had drilled deepwater in West Africa with Dana Petroleum, so what we’re seeing in the UK and Norway is being replicated elsewhere.
Whether it’s in Russia or Kazakhstan or Indonesia, there are small, entrepreneurial oil companies emerging. It’s not simply a European phenomenon.

DC: It seems that more and more reliance is being placed on small and mid-cap E&P companies to do the real exploration globally, generally in some sort of partnership with NOCs. They’re emerging as the risk takers, not the majors. What’s your view?

Skogen: I’m sure that mid-cap E&P player will become increasingly important over the next few years … tough for the majors perhaps, but unsurprising. I see such companies complementing the NOCs.

In just the one campaign we had in Norway so far (2007), probably in the order of half of all exploration wells drilled on the Norwegian Continental Shelf were drilled that way. Had it not been for that campaign, the whole business model of letting the small oil companies even get licenses in Norway would have been questioned. You’ll increasingly see this happen elsewhere.
To be frank, we see NOCs as a tremendous untapped market for us because I believe that’s exactly what they’re (the NOCs) looking for, and the few discussions we’ve had with them just confirms that.

DC: Has the market changed that much in such a short time?

Mackay: Since 2000, when there were just eight companies on London’s Alternative Investment Market (AIM) and oil was at $12, the stage has been completely transformed. We now have $100 oil and 100 companies on AIM, and the seven sisters are now all NOCs.
The one thing we can be certain of is that this situation will change: The price of oil will change, market sentiment will change, supply and demand will change, some countries will open up while others will close, new basins will be found and others will decline, the customer base will change.

We believe that the market for drilling contractors and the service sector in general will continue to evolve and change. It would be foolish to rely on whatever works today to still work tomorrow. A key to success for anyone working in this environment is to remain very responsive to the evolving needs of the oil companies and NOCs and to keep evolving the service offering.