Before analyzing the fluctuating rigs market in the shadow of the current price drops, a full picture of the market conditions over the last two years should be presented in order to make an evaluation of the present situation. As a matter of fact, the year of 2007 is considered as a base-year for upsurge of commitments and construction of rigs, and the first six months of 2008
Comments From PPL Officials
Many officials in Singapore stated that the construction cost of jack ups rose about 30 percent over two years (2005 and 2006) to average $180-190million per rig. These prices were expected to even exceed $200 million in 2008 due to the strong demand for new units.
The prices of jack ups designed for 375 feet water depth capable of drilling high-pressure and high temperature wells were in the average of $180 and $ 190 million (T.K. Ong Managing Director of PPL shipyard). A 300-350 feet water depth rig, with similar design, would cost $180million according to an official at KEPPEL FELS. The reason behind cost increases was mostly due to tighter supply of equipment and steel in addition to an issue of limited yard space. The yards were moving toward option contracts that give the rig owners a margin to renegotiate a price. The advantage of the option contract is that it provides potential savings to rig owners and gives the yards a firm order. PPL scheduled to deliver four jack ups in 2007, five in 2008 and two in 2009.
Why Ensco Expects Cost Reduction
The average day rate for Ensco’s 43 rig jack up fleet for the 1st Q of 2009 increased by 18 percent, totaling $168200, compared to $142800 in the same Q, year ago. But, the utilization of its jack up fleet was 80 percent in the 1st Q of 2009 compared to 95 percent in the 1st Q of 2008. The Chairman of Ensco stated that some of their jack up rigs would be without contracts for some portion of the year and expect cost reduction initiatives to offset some of the negative financial impact from the softening jack up market. This lower rate of jack up utilization caused by a reduction of activity in the Asia Pacific and North, South America regions. That is why the company is expanding its deepwater fleet in order to get an efficient cost structure and strong balance sheet, which make Ensco “well positioned” despite the current market conditions. The company also added two 8500 series deepwater rigs, which were added into operation line in 2007.
Deepwater semisubmersible Ensco 7500 recently commenced its contract in Australia for Chevron at rate of $550 thousand per day; the effective day rate to be recognized for Ensco is $687 thousand inclusive of deferred day rate mobilization revenue that will be amortized over the expected 17-month contract period. The first of the company’s seven new Ensco 8500 ultra deepwater semisubmersibles were scheduled to start operations in the Gulf of Mexico for Eni and Anadarko in June 2009 after final testing.
Ensco recently celebrated the second 8501 rig, which is presently undergoing acceptance testing in Singapore prior to commencement of a term drilling contract for Nexen & Noble Energy in the Gulf of Mexico in the third Q of 2009, the remaining five 8500 series rigs are expected to be delivered over the next three and a half years.
Expand Rig Construction Program
Rowan Companies Inc has entered into contracts with KEPPLE AmFELS Inc for constructing four rigs Super 116 E class jack ups. The delivery schedule will be four-month intervals beginning in the second Q of 2010, with total cost of each rig round $175 million, more than one-third of that amount attributable to the cost value of: the design, kit components and drilling equipment. It will build two additional 240C class jack ups for delivery in the 3rd Q of 2010 and 2011with total cost of $400 million, while the first two 240 C class rigs were currently under construction with delivery expected in the 3rd Q of 2008 and 2009.
From the above discussion, it appears that the year 2007 was congested with rig constructions, at the same time crude oil prices were soaring. For instance, the count of global offshore rigs in January 2007 was 364 rigs, and average oil price was $51/ bpd, while the count at the end of the same year was 355 rigs, and average oil price was $90/bpd. The peak number was achieved in June 2008 reaching 388 rigs, oil price also hiked to $132/bpd. By the beginning of July 2008, oil prices rose to a record of $147,27/bpd, however, impact of economic crisis caused oil prices decline by more than $20 over the following two weeks of July, selling price was around $125/bpd, then followed a dramatic collapse of prices leading to a decline of demand and looming glimpses of recession that drew gloomy image.
Situation of Rig Builders
Kepple Corp, one of the world’s biggest builder of offshore oilrigs, had two contracts under review were cancelled, while the third deal had been negotiated. Company officials agreed with Bermuda-based oil rigs operator Scorpion Offshore to terminate $405 million oil rig contract on mutually acceptable terms. Also, Kepple agreed with Seadrill jack ups ltd to continue building two jack-ups rigs worth $420million on revised terms.
Moreover, Sembcorp Marine (Singapore-based rig maker, its subsidiary yards: PPL Shipyard, Jurong shipyard, Sembawang shipyard) had agreed with Seadrill jack ups Ltd to revise terms on two jack up rigs ordered in June 2008 to be built at PPL yard. The contract value of the two rigs is worth $430 million.
In a research conducted by the Australian Macquarie University, it indicated that oil drilling companies are deferring fresh orders in anticipation that prices of oil rigs would fall due to a sharp drop in raw materials used in making the structure where steel can account for approximately 25-30 percent of the total cost of a deepwater project. Therefore, they wait until prices drop, which may prolong from six to ten months.
Rig Market Flexibility
In fact the downturn in the global financial markets is having an effect on every aspect of business around the world. Being interested in the oil industry, when oil price was over $100/ barrel, oil companies rushed to increase exploration and production budgets and to drill more wells, at the same time increased expenditure thrilled demand for rigs. Drilling contractors seized the opportunity to charge higher rates and to build a number of rigs on speculation. When oil price plummeted below $ 40/barrel, operators and contractors were forced to re-evaluate their plans. According to ODS-Petrodata, 86 rigs out of nearly 180 rigs under construction in the world do not have contracts. Jack ups are facing challenges as 54 of the 76 units under construction are without contracts, while deepwater attract more jobs for floating rigs. Only 12 of the 55 semisubmersibles under construction are without contracts. According to current oil price, the demand for all types of offshore rigs will remain flat, according to ODS-Petrodata’s latest research. Currently, worldwide offshore rig utilization stands at 87,6 percent.
Prevailing Day Rates
It is noticeable that day rates differ from one region to another. Jack ups are now earning between $120-$220 thousand a day, while semisubmersibles capable of operating in 5000 ft to 7500 ft are in the average of $540-$605 thousand a day. In Latin America, day rates for jack ups around $200 thousand a day, while semisubmersibles around $400 thousand a day. In North Sea, jack ups cost $405 thousand a day, while semisubmersibles between $410-$530,820 thousand a day. In West Africa, jack ups cost averages between $148-$244 thousand a day, and due to remarkable increase in exploration activity in West Africa, day rates for semisubmersibles (5000 ft) are earning from $365-$495 thousand a day. In the Middle East, excluding Egypt, 96 of 104 mobile offshore rigs under contract. The region’s offshore rig fleet utilization rate is 92 percent. Due to the shallow waters throughout the Middle East, all the 104 rigs are jack ups; the highest jack up day rate is around $161 thousand a day. The day rate differs from one region to another based on depth of water, exploration activities and how far the oil producing countries can mainly depend on oil as a source of cash inflows.
The fluctuation of oil price from a month to another is due to some key factors that affect determining the crude oil price. For instance, oil price rose sharply to above $70/barrel on June 25, on renewed rebel attacks against oil facilities in Nigeria, also the statements of oil experts and their optimistic image indirectly affect oil price market. In addition, the dollar decrease has its own effect on purchasing power and also increasing demand of crude oil. By the beginning of last month, oil price was puzzling and tend to fall, this may continue to slide through December with waning seasonal demand. The picture is not clear, if the dollar continues to increase till end of December, or rush increase of production by oil producing countries specially, Latin America and West Africa.
Offshore rigs wait for bright future
Currently, the number of floating rigs available in the market does not cope with demand. But that trend expected to improve as the goes on and come into next summer. According to data compiled for ODS-Petrodata’s World Rig forecast-short term trends, demand will continue to be close to supply in the coming months, and it is not expected to surpass it until late next year, if ever. At its worst, the surplus will climb over 30 rigs, but will be reduced to less than 10 rigs by next year. Increasing exploration and production and floating rig utilization will soar again and less capable rigs would find difficulty to operate.
In conclusion, the prediction of oil price and its effect on relevant service activity could not be accurate, but specialists and experts trying to analyze and deduce the available information presented to them just to relieve the shock of frustration to both readers and involved persons in oil industry. In fact, such information sometimes become misleading since current events affect them severely, anyhow we have to watch and wait what is going to happen.
By Mostafa Mabrouk
Economic Specialist, Ganope