The current economic crisis cast its shadow on all producing activities including oil industry, which used to generate trillions of dollars, but now, many oil producers and relevant services companies sustain loss of billion dollars. Undoubtedly, the economic crisis made biggest companies to shrink their activities in exploration and exploitation, excluding the developing countries, which are compelled to produce under any circumstances and whatever the prices are, to fulfill government budget cash inflows
Ups and downs of rig rates
The credit crisis and the 60-percent fall in crude oil prices have resulted in oil companies drilling fewer wells in offshore areas. This has increased the availability of rigs across the world and helped bring down rig rentals by up to 10 percent. Daily rentals of jack up rigs used for drilling in shallow waters have decreased from around $200 thousand to $180 thousands, yet rates are still over three times higher than they were two years ago. Analysts said, “Rigs rates have corrected with oil prices coming down. Exploration companies, which are due to renew their contracts or firm up new contracts in the coming months, stand to gain from the current slide”.
Bloomberg reports show expectations that rental rates for deepwater drilling rigs will continue to surge as a worldwide shortage of vessels used to search the oceans for oil outweighs the biggest drop in crude prices. For instance, Transocean Inc, the world’s largest offshore oil driller, agreed to lease its C. Kirk Rhein Jr. rig to Burgundy Global Exploration Corp. for $550 thousand a day; a 52-percent increase from the previous rate (capable of operating in water depth up to 3300ft and max. drill depth 20000 ft, 10000psi bop). The lack of financing is preventing small rivals from implementing plans to build new vessels. At least, one fifth of the new deepwater rigs on order in shipyards from South Korea to Norway will be cancelled or delayed because of capital constraints. Demand for vessels that can explore more than 10 kilometers below the sea surface and hundreds of miles from shore has risen faster than the world’s supply of the most drill ships, pushing day rates to a record.
Do oil prices affect rig contracts?
The price of oil is starting to slowly recover from its recent turndown; economic analysts believe that industry will recover to appropriate price per barrel over 2009 and onward. The New York Mercantile Exchange (NYMEX) made a graph compares crude to day rates for all floating rigs worldwide from 1st Q 2004 through 1st Q 2009, the day rates included in this analysis are an average of day rates for new contracts signed each month. The following can be derived:
-When price of crude was under $40 at 1st Q 2004, day rates were around $120,000
-When price of crude was over $60 at 3rd Q 2005, day rates were around $265,000
-When price of crude was $70 at 2nd Q2006, day rates were around $350,000 due to tensions in Middle East
-The trend of day rates went up to six months till 1st Q, 2007 and reached $410,000
-After a slight dip, oil prices start to rise again to a new high in the 2nd Q2008 to more than $130/barrel, then prices came down over the next several months, while financial commitments of drill ships and semisubmersible rigs hit $ 470,000 per day in 4th Q2008, just four months after imaginative increase in oil prices that reached to $147.
Due to the already signed contracts, the present day rates are not reflecting the current oil price. The increase in oil prices throughout this span of time helped to open up new areas of exploration and development, making previously under-explored deepwater regions economically feasible. This increased demand for the limited number of floating rigs worldwide drove operators to sign longer contracts to ensure that operators had available rig time when they were ready to begin deepwater project. Also, there are currently 88 new build floating rigs, expected to be delivered this year. However, the combination of today’s lower oil price and a larger fleet of floating rigs are expected to contribute to an increase of day rates, or possibly a decline.
Market support for rig construction faltering
The year 2008 started with the strongest offshore rig fleet utilization seen in years and the highest oil prices exceeding the $100/barrel, giving drilling contractors ample excuse to continue the surge in rig construction. However, by mid 2008, the global economic credit crunch has made project financing more difficult. As a result, drilling contractors have already been scrapping plans to construct new rigs or altering existing agreements as operators revise their spending budgets and explorations efforts going forward. In 2009, drilling contractors planned to construct new rigs, but last February, Rowan Cos. cancelled the construction of a fourth 240C jack up, suspended construction of jack up Joe Douglas and requested that construction be suspended on jack up Rowan EXL no. 4, Scorpion offshore Subsidiary Scorpion deepwater also it had terminated its $405 million contract for the construction and delivery of DSS-38 Semisubmersible rig with Keppel Fels in Singapore. All of these rigs have become causalities of current economic conditions.
Atwood Oceanics Inc. reported also that it will not exercise its existing option to have Jurong Shipyard Ple. Ltd construct another deepwater semisubmersible for the company at Jurong’s Shipyard. The Singapore-based yard is currently building two rigs for Atwood (6000ft and 1000ft). Both units will be delivered early 2011 and mid 2012. Moreover, Seadrill announced earlier this year that it would amend construction agreements entered into 2008 with PPL Shipyard and Keppel Fels for four new build jack ups. The company originally ordered two jack ups from PPL and two from Keppel for delivery in 2010. The two yards agreed to postpone all remaining milestone payments for the second units to be built at both yards until delivery, and revised the milestone payment schedule for the first two units. Construction of all four will continue under the supervision of the current project teams sponsored by Seadrill.
During 2009, 72 new build drilling rigs are scheduled for delivery, including 37 jack ups, 24 semisubmersible, seven drill ships and four tender rigs. ODS-Petrodata reported that a significant number of these rigs are under construction in Shipyards in Southeast Asia and the Far East. The number of new build rigs set for delivery in 2009 represents an investment of over $22 billion.
Global offshore rig fleet expands
The worldwide offshore rig fleet continues to grow with new rig deliveries even as the contracted offshore rig count continues to decline. The worldwide contracted rig count fell by 14,3 percent where 611 rigs under contract out of 713 available.
The following table illustrates the movement of rigs compared to last year.
The rig count tables above include all MODU types except tenders. It appears from data above the following:
-Rigs under contract reduced by 5,5 percent compared with last year dated 15/5/08 and one percent with last month, due to the postponement or cancellation of most projects by major companies as per budget cuts.
-The w/o contract has increased by 200 percent compared with previous year since contractors focused on w/o operations and avoid heavy cost of drilling new wells for purpose of budget cuts.
-In general, number of total rigs in drilling fleet has increased by five percent compared to last year
Offshore Rig Day Rates
The day rates provided below are the current day rates for each rig type drawn from the RigLogix database. These numbers, which include both competitive and non-competitive rigs, are updated on a daily basis.
he number of offshore rigs working in Egypt round 31 rigs distributed between Gulf of Suez and Mediterranean Sea, including three submersible rigs rented.
By Mostafa Mabrouk
Economic Specialist, Ganope