Rig contractors are flying high, right now, but some storm clouds are gathering that could limit their altitude. Demand, sprinkled with geopolitics, security of supply and a fear premium has driven oil prices to present levels, said Lee Ahlstrom, vice president of investor relations and planning with Noble Corp. at the International Association of Drilling Contractors (IADC) annual meeting recently.

Pure speculator activity joined the mix as prices went up, and they are bailing out as prices decline, he said. Mixing the different elements, “I’m hard pressed to see us go back to a US $35 oil price. China and India continue to generate demand. A breakout of world peace is unlikely. With a 1-year delay in production from Thunder Horse, OPEC won’t have to defend the oil price by cutting production.

Some national oil companies (NOCs) are going too far. Petrobras is awarding contracts to indigenous companies, and those companies go into the market and get partnerships. In one of those partnership deals, the indigenous company wanted Noble to assume all the risk for 70% of the contract. The company ran the numbers and found they wouldn’t work at the day rates Petrobras set. “They need a day rate closer to the market,” Ahlstrom said. “I understand two contracts were turned down because companies couldn’t get access to shipyards or shipyard costs were too high.” He added, “Drilling contractors will continue to serve NOCs, but they must choose how they will serve them.” Noble does 40% of its work for NOCs.

Working the Gulf of Mexico, the company has seen permitting activity drop 3.5% in the past 3 years. That’s one reason Noble is moving jackups out of the area. The margins are the lowest in the world, Ahlstrom said.

Even the newbuild market shows some clouds. For example 55 of the 102 new deepwater rigs in the works are being built by 31 startup companies. “I question how expectations will match reality,” he added. Those rigs don’t have crews and the companies will have a tough time finding trained people. That raises questions about performance and safety.

“The big issue is staff. Where do you find [staff for] one Transocean or two Nobles?” he asked. That chokepoint could offer opportunities for existing drilling companies to pick up new rigs at good prices.

“A peculiar anomaly has surfaced. The recent drop in oil prices hasn’t affected operating company plans for floaters. Most of them made their plans with an oil price between $30 and $40/bbl. But Wall Street is acting like the cycle is over. It has driven price-earnings multiples down to levels reached when oil was selling for $10/bbl,” he said.

Claus Chur, 2006 IADC chairman and director of Europe, Middle East and Asia for KCA Deutag, said operators plan to invest $200 billion a year in the oil business. He predicted the world rig count would grow by more than 300 units this year and 250 more in 2007. At current prices a new 2,000-hp rig with a drill string and all equipment will run about $40 million, and payout in 7 years requires a day rate between $25,000 and $30,000. Land rig prices above $40,000 a day are not uncommon.

The biggest challenge, with 500 new rigs anticipated in the next couple of years, he said, will be people. That number of rigs requires the hiring and training of 30,000 new people during a period of high turnover as companies raid each other for key people. At the same time, approximately half the people in the business will retire in the next 10 years.

John Lindsay, vice president, US and international operations for Helmerich & Payne, believes gas and oil prices will stay down as storage tops the 5-year average, but US operators continue to expand as the climb from $50 billion in spending last year to a planned $55 billion this year in a beginning-of-the-year survey. A midyear survey put spending plans at $64 billion.

Directional and horizontal wells have doubled between May 2002 and May 2006 with 40% of his company’s rigs working on those more difficult wells. Resource plays are getting a lot of rigs. The count in Colorado drilling unconventional reserves rose from one rig in 2002 to 63 now. The numbers for the Barnett Shale are similar.

Looking offshore, 60 jackups, 43 semisubmersibles and 13 drillships are currently under construction, according to Jefferies and Company. Of the semis and drillships, 38 are rated to water depths of 7,500 ft (2,286 m) or greater, and six are rated up to 12,000 ft (3,658 m).
As rigs go deeper, dayrates head higher. According to Jefferies, dayrates are likely to head higher in the Gulf of Mexico jackup market. Dayrates in the ultradeepwater market reflect its tightness, with dayrates north of $500,000 in some cases.

In all, it’s a lot of activity, a lot of money and a fair amount of uncertainty. Let’s just hope the industry can find a lot of people (or at least enough or them) to use these assets safely and efficiently.

Comments