Glut of newbuild deliveries, falling oil prices cast shadows on otherwise positive Asia Pacific outlook
By Astrid Wynne, Contributing Editor
The Asia Pacific is as vast as it is diverse. With huge gas projects in Australia, a focus on maximizing domestic resources in Indonesia and Malaysia, and new bidding rounds announced in Myanmar, Thailand and the Philippines, the region’s long-term outlook is strong. Still, current uncertainty around the oil price is casting doubt over how many projects will go ahead in 2015, as well as how dayrates and contract lengths will be affected. And as in other drilling markets around the world, companies in the Asia Pacific are looking to technological solutions to mitigate costs for both brownfields and deeper water. In this article, representatives from UMW Oil & Gas, PetroVietnam Drilling, PETRONAS, IHS and Myanmar-based Parami Energy share their insights on what the coming year holds.
The elephant in the corner
Oil price uncertainty is undoubtedly impacting the Asian drillingIHS data on the Asia Pacific region suggests there are a total of 140 floater and 120 jackup projects that could potentially start in 2015. However, it is probable that many of these will be postponed and some will no longer be commercially viable at today’s oil prices. market. According to Tom Kellock, Rig Consultant for IHS, declining oil prices will also affect LNG prices in the region, reducing most operators’ cash flows from 2013/2014 levels. In the region as a whole, Mr Kellock said he sees a potential for $8-9 billion in drilling spend for 2015, with India, Australia and Malaysia as regional leaders, followed by Indonesia and Vietnam.
However, actual drilling spend still depends on how the oil price fares. “How much this will affect their drilling plans is still unknown, but it is possible we will see an increase in attempts to sublet rigs, as well as reduced numbers of new fixtures,” he said. “It’s very difficult to say how many drilling contracts we expect in 2015 because of uncertainty about timing. In the entire Asia Pacific region, we have identified around 120 projects for jackups that could potentially start in 2015 and another 105 that would require semisubmersibles. For drillships, the number is about 35.
However, we don’t expect that all of these will result in contracts during 2015.” He added: “We are not expecting any great upward changes in rig demand, but Malaysia is most likely to see an increase in rig count.” According to IHS data, the average jackup dayrate for Indonesia, Malaysia, Brunei, Thailand, Vietnam and Myanmar was approximately $147,000 at the end of 2014. That’s down from approximately $161,000 at the beginning of the year. Average floater fixtures in Southeast Asia followed a similar downward trend in 2014, from $400,000 in Q1 to $250,000 in Q3. Only in Australia were floater rates more buoyant, averaging $430,000 over the past three years. Contract lengths for jackups appear more positive, which has been increasing slightly over the past three years. “This does appear to reflect an increased emphasis on development drilling. For tenders, the numbers have fluctuated, which is not surprising given the relatively low numbers of new contracts each year. It is hard to identify any underlying trend,” Mr Kellock said.
Rohaizad Darus, President of Malaysia-based UMW Oil and Gas, highlighted what he called a paradigm shift on the part of local NOCs in terms of drilling spend. “The national oil companies, while they are still concerned about profit, are looking more toward security of supply,” he said. “In the event of the price of oil spiking again like in 2008, at least that would help to reduce the cash they have to issue out to buy or import foreign oil.
It is more and more prevalent in the countries in the region – especially Indonesia, Vietnam and Thailand – to have more reliance on oil and gas products to sustain the economy. There is a social obligation on a number of these countries, especially Malaysia and Indonesia, to subsidize oil, kerosene and things like sugar and food. I think a lot of these subsidy funds come from oil and gas production. ” In terms of rig rates, Mr Darus said jackups had been going for as high as $170,000/day but are now starting to consolidate toward a regional standard ranging between $145,000-$160,000/day.
The exception is Malaysia, where the rate is slightly lower because PETRONAS is able to offer longer contract lengths of one year up to three years. Smaller oil companies in the region typically offer two- or three-well contracts. “There are not many local companies big enough to award a three-year contract,” he explained. UMW Drilling, a subsidiary of UMW Oil and Gas, currently has three jackups in Vietnamese waters. Naga 2 and Naga 3 are with Hoang Long Joint Operating Co (JOC), and Naga 6 is with PetroVietnam. In addition, the UMW Naga 5 jackup is drilling in Myanmar for PTTEP, and the UMW Naga 4 is working in Malaysia for PETRONAS. Naga 7, delivered in Q4 last year by China Merchants Heavy Industries (CMHI) in Shenzhen, China, is due to begin a contract for Philippines-based Frontier Oil Corp in Q1 this year.
Mr Darus noted that, overall, rig utilization in the region remains strong for now. “It’s very tight. In fact, we have had to rush from one contract to another contract for the past two or three years. If the tenders that are being issued now maintain the same trend, I believe this will continue. Whatever we are seeing right now may be just a hiccup and may last three to six months. There is a knee-jerk reaction on behalf of oil companies as they start to slow down on exploration activities, but I don’t believe it will be long term.”Several countries in the region have issued new bidding rounds in 2014. The Philippines announced the launch of the 5th Philippine Energy Contracting Round in May 2014, with 11 new areas on offer in Luzon, Palawan, Masbate, Iloilo and Recto Bank. Myanmar awarded 20 offshore and 16 onshore blocks in Q1 2014 in its first open bidding round, and Thailand announced a bidding round for 29 new blocks for the first time in seven years in October 2014.
Chinese yards step up
In line with the expected increase in drilling demand, UMW is expanding its fleet. Although established shipyards in Singapore remain popular, more companies are also looking to China. Within the past year, UMW has taken delivery of two identical-design jackups from CMHI in China. Both are GustoMSC CJ46-X100-D jackups built for operations in up to 375 ft of water and drilling to 30,000 ft. “You need to have a number of suppliers from a number of countries to ensure you get the right pricing.
At the same time, we are trying to get more than one kind of rig,” Mr Darus said. “Chinese yards have come a long way from where they were before. I have no experience with the other yards, but the yard we have been working with is giving very good quality and timely delivery.” Other Chinese newbuilds in the region include two Friede & Goldman F&G JU2000E jackups under construction at China Shipbuilding Industry Corp. One is due in 2015 for Apexindo, and a second is set for 2016 delivery for Seadrill. According to IHS, 98 new offshore rigs are scheduled for delivery this year – 67 jackups, 11 semis and 20 drillships. The Chinese share is 39 jackups, three semis and three drillships.
A well-supplied market
According to IHS data, total rig utilization in Southeast Asia averaged around 92% for 2014, compared with approximately 91% in the rest of the world. For jackups specifically, utilization averaged almost 99% during the year compared with almost 92% in the rest of the world. The higher utilization rate for jackups is a trend that has continued since 2012. Still, some regional drilling contractors are growing concerned with the number of newbuilds scheduled to be delivered in 2015-16 and the possible effect on the market. Pham Tien Dung, CEO of PetroVietnam Drilling (PV Drilling), says he believes the flood of new jackups will make things more difficult for drilling contractors in Southeast Asia. “There are still a lot of secondhand rigs or rigs that are more than 10 years old,” Mr Pham said. “In the Gulf of Mexico, the US government set up a higher level of regulatory requirements so they only accept higher-spec rigs. The Middle East also prefers premium jackups.In Africa, most of the areas are deepwater drilling… Southeast Asia is a very good target for those older rigs.” Other than this concern of oversupply, Mr Pham said he has a relatively positive outlook for 2015 in PV Drilling’s home market of Vietnam, as well as in other Southeast Asian countries.
In fact, the company is looking to enlarge its offshore fleet of three jackups and one tender – perhaps even adding floaters. “In Vietnam, the market looks to be stable. We foresee a demand for 14-16 premium jackups annually for the range of shallow and mid-water depths. PV Drilling at the moment can only cater to approximately 30% of the rig demand in this market. The rest is supplied by foreign contractors,” he said.
“Due to the nature of budget planning, the contracts in Vietnam tend to be short – no longer than one year or even a few months only.” Mr Pham explained that PV Drilling works with its majority shareholder, PetroVietnam, and other operators to create drilling schedules that ensure longer periods of continuous work for their own rigs as well as rigs from foreign companies. “PV Drilling plays the role of connecting those individual short programs from several different operators into longer-term contracts.” Looking at the medium term, Mr Pham sees a move toward deeper water in Vietnam.
In October, Eni signed an exploration contract on the 6,000-sq-km Block 124 in the Phu Khanh Basin, where waters can run as deep as 2,600 m (8,530 ft). Promoting deepwater exploration is also a stated aim of PetroVietnam, and the NOC has asked PV Drilling to look into acquiring a semisub.“It would be a long project if we build a new rig,” he continued, noting that the company is seeking partners for a possible joint venture to purchase an existing semi. PV Drilling’s four offshore rigs are currently working in Vietnamese waters. The jackups – PV Drilling I, II and III – are working for Cuu Long JOC, Lam Son JOC and VietSovPetro, respectively.
The PV Drilling V tender rig is under contract to Bien Dong Petroleum Operating Co. PV Drilling also has one land rig, PV Drilling 11, working in Algeria for GBRS. An additional jackup, the PV Drilling VI, is scheduled for delivery from Keppel FELS in February.
Mr Pham said that market requirements for premium rigs are driving PV Drilling’s focus on new assets. “Even in Brunei, for example, they require rigs with 2 million-lb hookloads. It’s not only HPHT or extended-reach wells that need big rigs now,” he said.
New technologies for new challenges
From the operator perspective, resource replenishment continues to be a significant challenge. According to PETRONAS, crude oil output from Malaysia’s hydrocarbon basins is on the decline. The country’s currently producing domestic resources are expected to last only 20 years unless the company intervenes to prolong the life of mature fields and to make new discoveries, PETRONAS stated.“The drilling focus for 2015 is on initiatives that include advanced preparations in terms of pre-drill and rigless activities, as well as initiating lower-cost wells and using multipurpose rigs,” said Datuk George Ling Kien Seng, who heads up the drilling division of PETRONAS’ upstream business.
“For completion technology, the biggest challenge is to reduce completion cost. Due to complex reservoir environments in HPHT and deepwater, the requirement for reservoir surveillance and well completion operations are taking up longer rig time, which translates into higher cost. To mitigate this challenge, a focus on operations optimization and fit-for-purpose technology to reduce cost has been set up. ” Relevant technologies include single-trip multizone gravel packs, ceramic sand screens to replace conventional gravel packs, rigless coiled-tubing completions and the use of offshore service rigs for completion operations.
Offshore service rigs, he said, are similar to service rigs for land operations and can reduce completion costs by approximately 20%. Low-cost concepts for deepwater development are also being analyzed, as deepwater resources account for the bulk of estimated undiscovered resources in Malaysia. PETRONAS has a deepwater exploration presence in West Africa, as well as in countries such as Mozambique, Cuba, Egypt, Mauritania and Brunei. Potentialplays at home in Malaysia include the under-explored onshore prospects of Sabah and Sarawak in East Malaysia, as well as ultra-deepwater basins off the coasts of the same states. Notable recent developments include the Kikeh and Gumusut-Kakap fields.
PETRONAS expects those two projects, along with other deepwater developments in Malaysia, to account for more than 20% of its total oil production over the next five years. While these projects carry larger resource potential, they also average around 22% higher in cost than in shallow water in Southeast Asia, the company said.
Datuk Ling outlined possible ways to mitigate the cost implications: “Our deepwater completion design philosophy will be interventionless, whereas HPHT development will focus on fit-for-purpose materials for appropriate field lifetime.Fields that contain high H2S or CO2 will require fit-for-purpose chrome materials, such as 17 chrome, to replace the common 22 chrome,” Datuk Ling said, referring to steel coating materials. Other cost mitigation measures will also be implemented, such as single trips for wellbore cleanup and single-trip upper and lower completion installation, he added.
PETRONAS currently has five jackups drilling in Malaysian waters, being managed by Aban Offshore, Hercules Offshore, Maersk Drilling, UMW Drilling and Vantage Drilling. In addition, it has one semisub managed by Japan Drilling Co and three tenders managed by SapuraKencana Drilling. The Malaysian NOC also has two jackup operations each in Indonesia (Rowan Companies and Vantage Drilling) and Turkmenistan (Eurasia Drilling Co and Ezion Holdings).
Opening market in Myanmar
Myanmar has a history of drilling that extends back to the 19th century, but the country has only recently begun to open to expanded foreign investment. A total of 30 offshore blocks were offered in a 2013 bidding round. On 26 March 2014, the Ministry of Energy announced the winning bids for 20 of those blocks, 10 of which are classed as deepwater and 10 as shallow-water. PSCs are being signed with the likes of Shell, BG, TOTAL, Chevron, Eni and Woodside. According to a presentation given by China’s North Petro-Chem Corp at OSEA 2014, held 2-5 December in Singapore, there is potential for another bidding round as soon as late 2015. Sixteen new onshore blocks also were awarded during the most recent bidding round.
One indigenous operator, Parami Energy, has interests in one offshore and two onshore blocks from the recent bidding rounds. The company also has investments in the Ophir Energy-operated offshore block AD3, for which a PSC was signed on 4 December, and in onshore blocks PSC-O and PSC-J, both operated by Pakistan’s Petroleum Exploration. Parami recently took on operator status on existing block PSC I, an area of approximately 3,600 sq km located 125 km northwest of Yangon in the Ayeyarwady region.
The company is currently carrying out seismic analysis on PSC I, and drilling is expected to begin mid-2016 with a minimum of two wells. Looking at the wider market in Myanmar, U Zaw Win, Head of the Drilling Business Unit at Parami, said that at least 20 wells are expected to be drilled under new PSCs in the next two years, as well as significant work on the M9 shallow-water block operated by Thailand’s PTTEP. “For M9, they have to drill perhaps 40-50 development wells over the next two to three years. According to their plan, they have to use jackup rigs, so jackup activity will be 40-50 wells at least,” Mr Win said.
“Onshore first drilling will come at least in the first one and a half years.” He said he sees growing potential for more development drilling in the near term, noting that ONGC is working on discoveries on onshore blocks PSC-B2 and EP-3. In the 10 deepwater concessions just awarded in 2013, Mr Win said he sees a need for two to three appraisal wells per block using floaters, likely to begin in the second half of 2017.
He explained that, in this market at least, the falling price of oil is unlikely to stop drilling plans. “The PSCs will state they have to drill within a timely manner for the contract. If they have some reason for waiting or delay, they need to explain. If the reason is not sound, they have to drill – they must drill.”