Day rates for high-specification rigs capable of drilling in 10,000 feet of water have rocketed more than 40 percent since the first of the year and likely will go higher as the supply of “ultra-deepwater” rigs begins to dry up next year.
In fact, the world’s largest offshore driller, Transocean, is now expecting a global shortage of so-called fifth-generation units, or technologically advanced deepwater rigs constructed since the late 1990s.
The demand for high-spec rigs appears to be driven by unusually high levels of exploration and development drilling activity occurring at the same time, undoubtedly supported by the strong commodity price environment.
“A lot of wells will be drilled in places like Angola, Nigeria and in deepwater Gulf of Mexico to bring some of this oil to the market,” Jeff Chastain, Transocean’s head of investor relations, said Dec. 1 at the Friedman Billings Ramsey annual investor conference in New York.
Just 24 fifth-generation rigsThere are just 24 fifth-generation rigs in the word today, with two new builds due out of the yard in mid-2005. Operators’ preference for these rigs “is why we believe there will be a shortage” in 2005, Chastain said.
“You see operators today that are talking to us well in advance of these rigs being available, as much as eight months to a year before they are available,” he added. “They’re already discussing the time they want the rig when it does become available.”
Two years ago long-term contracts for high-spec rigs were far and few between, Chastain said.
“Operators knew the rigs were there and they knew they could get them when they wanted them,” he said. “There was no sense in tying them up for 12 months or longer.”
Long-term contracts now the normBut times have changed. Fifth-generation rigs that pulled $130,000 to $160,000 per day on the spot market at the beginning of 2004 are now going on long-term contracts for $200,000 or more, he said.
“In fact, we’ve seen signings that have been anywhere from $200,000 up to as high as $240,000 a day,” he said.
He said operators generally want long-term contracts of a year or more. In the U.S. Gulf, for example, BP has a three-year rig contract for field development at its huge Thunder Horse discovery in Mississippi Canyon. Last April BP got the rig for a bargain $183,000 per day.
“If that rig were signed in today’s market … it probably would be somewhere in the $240,000 range,” Chastain said. “Timing is everything. And in the case of BP, their timing was very good.”
Contracts on about seven of Transocean’s fifth-generation rigs are set to expire in 2005, paving the way for another round of rate hikes.
“I think those are potentially the units that set the next level of day rates for this class of rig,” Chastain said. “We are now focused on getting the appropriate day rate for these rigs, given the supply and demand dynamics that we see building here in 2005.”
He said fifth-generation rigs also are coveted by industry operating in waters of 7,000 feet or less because of “efficiencies” that reduce drilling time and therefore expenses related to drilling, such as supply boats and helicopters that ferry workers to and from rigs.
“You look at all that and add it up and they can save a lot of money on their drilling programs when they start looking at these fifth-generation rigs,” Chastain said.
Study shows fifth-generation rigs fasterHe said Transocean conducted an internal study showing that based on 5,000 feet of water and a target depth of 21,000 feet, the most advanced fifth-generation rig could finish a well in 38 days vs. 58 days for a fourth-generation rig and 63 days for a third-generation rig. Even a less advanced fifth-generation rig could do the job in 45 days, he noted.
Meanwhile, Gulf of Mexico day rates for lower end deepwater rigs capable of drilling in 4,500 to 7,000 feet of water have increased to around $150,000 per day from $80,000 to $90,000 per day at the start of this year, Chastain said.
“The reason is partly because that 7,000 foot and greater rig is really so tight now that a lot of these operators who had preferences have decided they can’t get them, or they are not willing to pay the kind of number that would be required to get them,” he said. “So they are beginning to focus on the next level down.”
The U.S. Minerals Management Service expects deepwater drilling activity to continue strongly in the U.S. Gulf, based on its own calculations that 56 billion barrels of an estimated 71 billion barrels of total oil equivalent reserves remain to be found in the region. Exploration drilling in 2002 and 2003 alone turned up more than 2 billion barrels of oil equivalent with a dozen fields coming on stream in 2003 and another 13 planned in 2004.
“What can mitigate the tightness, or at least the rig shortage, is if an operator decides to postpone a project, which they may very well do, although that is a costly decision,” Chastain said.