Oil and gas Industry appetite for top-of-the-line new rigs not yet slaked

Here’s a brief capsule of the US oil market in recent months, as what used to be a fairly predictable industry has become a suspenseful rocket ride along a trajectory of activity that has soared to levels not seen in decades:

Volatile crude prices.  Price differential blowouts between West Texas Intermediate and waterborne crudes.  A horde of new oil production from shale plays and a frenzy of midstream projects to capture, process and transport it.  And a refining sector that’s enjoying lucrative product exports and high margins from buying advantaged crude at low prices.

But a little-remarked part of the picture is the drilling industry, where the appetite for new rigs appears nearly insatiable, even after two major rig-building booms in the last seven years.

After a wave of construction that began in 2005 that saw orders for just over 200 rigs — split about evenly between deepwater floaters and the rest shallow water jackups — a renewed rampup began in late 2010 that resulted in plans launched for another nearly 150 more rigs of both classes.  Most of those ordered in the last couple of years are still being built in shipyards around the world.   The rig figures are courtesy of offshore consultants IHS Petrodata.

After an avalanche of newbuild announcements that continued into early 2011, things got quiet for awhile.  And now, it seems to be stirring again, not in terms of actual announcements, although there have been some.  But drillers say they are willing to build still more rigs based on a widely-held view that demand for additional equipment will persist for years to come.

One reason for this is that despite the building beehive of recent years, premium rigs — especially equipped for ultradeep waters  that can navigate waters 7,000 feet and greater — remain in tight supply.  Sources say availability is sold out for this year and to a large extent for 2013 also; discussions now center around 2014 availability.

Investment bank Tudor Pickering Holt, in a recent daily industry report, called the ultra-deepwater market “red-hot,” adding 2013 capacity is ”vanishing” with 89% of days already booked.  For 2014, 22 of 25 deliveries targeted to debut that year are not contracted, TPH said.

Demand for rigs has risen on a variety of factors: a cascade of exploration and development in both known and emerging offshore provinces, growing global demand for hydrocarbons, and strong oil prices.  And to probe some of those areas which are increasingly remote, complex and often difficult, a lot of bells and whistles are needed–the high-pitched kind that newer rigs possess.  

Not only is the appetite for rigs high, but so are dayrates, the sums oil companies pay to lease rigs.

Drillers have said during recent presentations and conference calls that new drillships are fetching around $600,000/day, although some contracts have exceeded that.  For instance, jackup driller Rowan Companies, which jumped into the deepwater rig business last year with announcements to build three drillships, last week signed its first customer (Spain’s Repsol), which agreed to pay $625,000/d for three years to use the rig in West Africa.

Moreover, a perceived and persistent scarcity for deepwater drilling units appears to have recently prompted E&P operators to want to lock in contracts even before rigs are built, say drillers.  In times of scarcity, this arrangement appeals to operators, who can get exactly what they want now at an agreed-upon price and will have a rig handy when they need one.  Drillers, however, face a different dilemma:  a pre-construction contract provides guarantees that make revenue visibility clearer and credit terms easier, but their hands are tied if dayrates happen to rise by the time the rig debuts a few years later.    

In any case, offshore exploration in waters of 4,000 feet or greater has blossomed in recent years after the global recession of 2009 and the Macondo oil spill in the Gulf of Mexico the following year, David Williams, CEO of driller Noble Corporation, said.

Williams, in an early September presentation to the Barclays annual energy conference, said that in 2011, 12 countries reported discoveries in those water depths, versus five countries in 2008. He said three of the five discoveries in 2008 were sited in the so-called “Golden Triangle” of the Gulf of Mexico, Brazil and Angola.

In contrast, from January through July 2012, operators announced 22 discoveries in 10 different countries, said Williams. These were located not only in the Golden Triangle but also in Mozambique, Mexico, Ivory Coast, Tanzania, the Falkland Islands and Sierra Leone. 

Williams also said operators are signing up for longer term contracts in deep waters. For the last six months of 2011, the average length of a deepwater contract was two years, while in the first eight months of this year it’s been 3.5 years. Moreover, contracts of five to seven years are not uncommon, and Noble has three 10-year contracts on ultra-deepwater rigs, and Williams claims he heard of another operator considering a 10-year deal.

Ten-year commitments.   Now that’s confidence.

 

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