Reviewing the offshore rig market

The offshore rig market continues to suffer worldwide from an oversupply of new rigs that outstrips demand. As the newly delivered rigs have been built at advanced specifications, older rigs have more trouble securing contracts

The number of mobile offshore drilling units under contract is currently 572 worldwide; almost identical to the number of rigs under contract at this time last year. However, there are now 790 rigs in the drilling fleet, compared to the 749 in January 2010. With the increase in fleet size, worldwide offshore rig utilization stands now at 72.4%, down from 76.5% a year ago.

According to ODS-Petrodata’s Rig Base market intelligence tool, 104 mobile offshore drilling rigs are under construction or on order around the world, with 57 of these rigs scheduled for delivery this year. Only 30 of the rigs set for delivery this year have contracts lined up.

Gulf of Mexico
Currently, the offshore rig fleet utilization in the U.S. Gulf is 47.6%, down from 55.9% utilization rate in January 2010. Of the 126 rigs in the region, 60 are under contract. Jackup utilization is only 37.3%, while semisubmersible utilization languishes at 69.2%, down from 100% a year ago. Drillship utilization has remained 100%, and, although only three rigs are actually working, all of the 11 units that remain in the area still have contracts and/or contract commitments. Despite the grim situation, drilling in the U.S. Gulf is expected to resume in some fashion over the next 12 months, and demand is expected to rise for some rigs, according to ODS-Petrodata’s World Rig Forecast Short Term Trends. Jackup demand went up by nine units in last May. If the speed of the deepwater permitting process is rapid, drillship demand in the U.S. Gulf of Mexico could grow by around six rigs by the end of 2011. However, semisubmersible demand is expected to decline somewhat over the next year by one or two units.

Latin America
Looking further south towards Latin America, Brazil, Mexico and Venezuela continue to be the major hubs for offshore drilling in the region.
Current offshore rig fleet utilization in Mexico, Central, and South America combined is at 76.43%. Of the 31 offshore rigs in Mexican waters, 22 are under contract to state oil company Petroleos Mexicanos (PEMEX). The Mexican rig market has declined significantly since last January, when 33 out of 36 rigs were under contract. Demand for jackups in Mexico is expected to rise in 2011, assuming PEMEX can deal with certain budget and political unrest. An increase in demand for semisubmersibles is also possible, with the number of semisubmersibles under contract to PEMEX potentially increasing by as many as three by mid-year. In South America, 97 out of 123 mobile offshore rigs are under contract for a fleet utilization rate of 78.86%, up from around 76.3% a year ago. Brazil accounts for the vast majority of this activity, boasting a total of 67 rigs under contract to companies such as state giant Petrobras, domestic oil company OGX Petroleo, and international operators like Anadarko, Chevron, ExxonMobil and Repsol YPF. In Venezuela, PDVSA has 24 rigs, most of them Lake Maracaibo barges, either under contract or owner-operated, while one jackup is working in the country for Repsol YPF. Based on currently known drilling plans put forth by operators, demand for semisubmersibles and drillships should rise in South America throughout the next year, due for the most part to work offshore Brazil. For jackups in South America, the story is different, with little change expected in the number of rigs under contract over the course of the coming year.

Europe, Mediterranean and Black Sea
The European rig fleet has increased since January 2010, going from 104 units to a current level of 116. The contracted rig count also increased, from 90 to 93, but utilization dropped from 86.5% to 80.2%. Even with this decline, Europe still has the highest fleet utilization of any major rig market. An increase in semisubmersible demand is expected in Northwest Europe over the next year. However, demand will slacken somewhat in the latter half of 2011. This will be coupled with little change in the small European drillship market, so overall the number of floating rigs working in European waters will rise only modestly in 2011. However, number of jackups under contract in the area could rise by 10% or more by the end of the year.

West Africa
The West African mobile offshore rig fleet has undergone only a small amount of change over the past year. Compared to January 2010, the number of rigs in the region has gone up by a net two to 64, while the number of contracted rigs is the same 48. Fleet utilization is now 71.9%. When broken down by rig type, 11 of 13 drill ships, 15 out of 19 semisubmersibles and 20 out of 30 jackups are under contract. Demand for all three-rig types is predicted to rise modestly in West Africa this year. New drilling programs offshore Nigeria, Ghana, Angola, and Cote d’Ivoire will drive the majority of the increases.

Middle East
The Middle East is a jackup market, and the region’s mobile offshore rig fleet is essentially unchanged from a year ago. Now, 90 out of 119 mobile offshore drilling units are under contract for a fleet utilization rate of 75.6% versus year-ago numbers of 90 out of 118 rigs under contract and a fleet utilization rate of 76.3%. Boosted by Saudi Aramco’s activities offshore Saudi Arabai and the Iranian Offshore Oil Co. in Iran, Middle Eastern jackup demand is likely to rise during 2011.

Offshore Middle East developments move forward
Offshore capex across the Middle East and Caspian Sea is set to rise by one-third over the next five years, according to a recent report from Infield Systems Ltd. Much of the growth will come from the Persian Gulf and new projects off Saudia Arabia; but Israel should also become increasingly influential, with its gas field programs in the eastern Mediterranean incurring expenditure of over $2 billion between now and 2015.

Whether these developments, led by the Noble Energy-operated Tamar, go forward as planned will depend on political as well as commercial considerations. Israel’s parliament (Knesset) has been considering a bill to implement the Sheshinksi Committee’s recommendations on raising taxes on oil and gas production. If ratified in full, it could impact the economics of Tamar and other gas discoveries in the Tamar basin, such as Noble’s Leviathan. Here, though, drilling of the Leviathan 1 well was recently suspended due to the need to procure equipment from outside Israel to deepen the well. The Sedco Express has since transferred to the Tamar field for development drilling.

Other companies are moving into the region, among them ATP Oil & Gas, which was recently awarded five deep-water licenses. Toronto-based Adira Energy commissioned two seismic surveys (both acquired by WesternGeco) earlier this year over its Gabriella and Yitzchak offshore permits.

Noble’s drilling success has sparked interest among Israel’s neighbors, with Greek-controlled southern Cyprus considering staging a second offshore licensing round later this year, comprising 12 deep-water blocks, although this might draw objections from the Turkish-controlled north. Noble is reportedly looking to drill southeastern offshore block 12, which is thought to hold 10 TCF of gas.

Syria’s Petroleum and Mineral Resources Ministry recently launched an international offshore bid round, with CGG Veritas providing technical support. And Lebanon’s Ministry of Energy & Water may open the country’s first offshore licensing round in November, which could be promoted by PGS. Lebanon has also voiced concerns that development of Tamar may infringe its rights, if it is proven that the field extends into Israeli waters.

More surprisingly, according to press reports in Israel, Prime Minister Benjamin Netanyahu has approached the Palestinian Authority for talks on a potential $800 million-plus development of two gas fields offshore Gaza discovered a decade back by BG Group. Gaza Marine 1 and Gaza Marine 2 are thought to hold combined reserves of 1.4 TCF. If the project went ahead, it could alleviate current power generation costs in Gaza.

Offshore Saudi Arabia, development continues in Saudia Aramco’s giant Manifa field in shallow water, 200 km northwest of Dhahran. The company’s drilling team recently set a new record for a long-reach well, using a Precision Drilling rig. Earlier this year, Aramco awarded Saipem a $2.2 billion-plus EPC contract for offshore development of the Arabiyah and Hasbah fields, 150 km northeast of Jubail Industrial City. The program involves building and installing 12 wellhead platforms; one injection and two tie-in platforms; a network of infield flow lines and subsea electric/control cables, and a 260-km export pipeline.

Farther southeast along the Arabian Peninsula, RasGas, the joint venture between Qatar Petroleum and ExxonMobil, awarded Hyundai Heavy Industries a $900-million contract for the Barzan gas project, 80 km northeast of Ras Laffan Industrial City. The offshore facilities will include three wellhead platforms and 200 km of subsea pipelines, designed to deliver 1.9 mmcf/d of gas.

Dubai Petroleum Establishment has commissioned an unmanned wellhead platform and associated pipelines from Global Industries for the Al Jalilah project. The newly built Global 1200 vessel was due to participate in the installations. Offshore Oman, the Ras Al Khaimah gas Commission approved RAK Petroleum’s application to re-develop the long shut-in Saleh gas condensate field. The initial program involves deepening an existing well to the Thamam reservoir and rehabilitation of four platforms.

In the Persian Gulf, Pars Oil and Gas Company aims to start production next March from the South Pars Phase 12 development. This is designed to produce 75 mmcm/d of gas and 120,000 bbl/d of condensate. According to Iran’s Petroleum Minister Seyyed Masoud Mirkazemi, all remaining 19 South Pars phases should come onstream by 2015. Iran is also looking at ways to lift oil production from various offshore fields close to Bushehr province, of which Norouz and Soroush are the main producers.

In the Kazakh sector of the Caspian Sea, progress on the ultra-shallow water Kashagan project remains slow. The government is now thought to be pushing for a simplified design to cut costs of the full field development. Korea National Oil Corp has commissioned DSME to construct a drillship for exploration on Kahazakstan’s Zhambyl oil field, using local shipyards on the Caspian Sea coast and the Mangalia shipyard in Romania

In this region, offshore rig fleet utilization is at 76.1%, with 108 out of 142 mobile offshore rigs under contract. Jackup utilization is at 77.4%, semisubmersible utilization is 72.2%, and drillship utilization is 75.0%. In the Indian Ocean, jackup and semisubmersible demand will increase slightly this year, while drillship demand will be essentially flat. In Southeast Asia, slight increases in semisubmersible and drillship demand will be countered by a drop in demand for jackups. In the Far East, major changes in offshore rig activity are not expected this year. In Australia and New Zealand, jackup demand is expected to go up by one or two rigs this year, and the floating rig market could see a similar net increase in the number of rigs under contract.

Offshore rigs daily rates
Over time, in normal rig market conditions, daily rates tend to move with utilization, although rates generally will drop faster and rise more slowly than utilization. On a worldwide basis, average offshore rig day rates increased slightly over the course of 2010. Rates for 250 ft. to 300 ft. jackups in the U.S. remained flat, while jackup rates in Northwest Europe fell slightly. Globally, rates for mid-water depth semisubmersibles increased during the second half, but fell back in December, while rates for deep water rigs rose in the second quarter and then leveled off. ODS-Petrodata’s latest offshore rig demand forecast predicts improved global fleet utilization among all three major rig types, jackups, semis and drill ships. However, the gains are expected to be fairly modest for all three, and that foreshadows a similar situation for day rates over the course of the year.

Prepared by Mostafa Mabrouk, Vice Chairman Assistant For Economic Affairs, Ganope


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