Day rates for lower specification, second-generation offshore drilling rigs in the U.S. Gulf of Mexico appear to have reached their highest levels since the last drilling boom, another strong indication the drilling industry is on the road to full recovery and prosperity.
Rates for higher specification rigs, in particular fifth-generation drillships and semi-submersibles capable of drilling in water up to 10,000 feet, have been on the increase for some time and are in short supply. Fifth-generation units that pulled $130,000 to $160,000 per day on the spot market at the beginning of 2004 reportedly were going on long-term contracts for $200,000 and more by year-end 2005.
As the supply of high-end deepwater rigs dries up on strong demand for both exploration and development activities, explorers are being forced into available lower end “mid-water” rigs.
Larry Dickerson, president and chief operating officer for Diamond Offshore, said one of its second-generation rigs recently leased for $110,000 a day in the Gulf of Mexico.
“The significant thing about that $110,000 rate is that it pretty much is what the peak rate was during the drilling upsurge that took place starting in 1995 and went to 1997 and 1998,” Dickerson told industry analysts in a Feb. 9 conference call to discuss 2004 fourth-quarter earnings.
Profits surge
Diamond said its profit surged to $11.3 million or 9 cents per share in the 2004 fourth quarter from $1.3 million or 1 cent per share in the 2003 fourth quarter. Revenues were $237.3 million versus $187.7 million in the year-ago period. Though day rates are on the rise and deepwater rig markets tightening, Dickerson is not expecting a corresponding boom anytime soon in new construction and rig upgrades to meet expected future demand.
For one thing, construction costs are much higher today than they were during the 1990s boom, he said, adding that “drillers got sharp lessons last time” regarding high drilling costs of the time.
He said that except for the shallower water jack-up rig market, “we’re not seeing a huge rush in construction. (And) I don’t think there are many opportunities for upgrades. We’re not at that stage yet.”
Backlog of development projects
Nonetheless, exploration around the world is producing discoveries and a backlog of development projects in need of deepwater rigs, Dickerson said.
“I think demand … is very high in the fourth and fifth generation (and) we’re seeing the same thing now in second generation,” he added. “We’ve seen it for a while, but I think posting this kind of rate ($110,000 per day) will convince the market.”
Dickerson said day rates in the U.S. Gulf would continue to set the pace and have a substantial impact on second and third generation fleets around the world, “not only for us but our competitors.”
“We get calls all the time from multiple companies … having a number of prospects they want to drill in deepwater and ultra-deepwater,” he added. “Right now our and our competitors’ rigs are pretty much booked well into 2005, and there is just not enough equipment we believe to service that. So again, we think we are in a very strong rate environment.”
Two letters of intent signed
Meanwhile, Diamond announced Feb. 8 that it signed letters of intent for term contracts using the Ocean Baroness and Ocean Rover, two fifth-generation semi-submersibles currently operating in South East Asia. The contracts are expected to generate about $243 million, the company said.
Under the Ocean Baroness deal, the rig is expected to relocate to the U.S. Gulf for a one-year contract with Amerada Hess, following completion of its current work in Indonesia in May. The Baroness is projected to require between 90 and 120 days mobilizing to U.S. waters. The Ocean Rover deal would provide for an approximately 950-day extension of the rig’s current work with Murphy Oil, Diamond said, adding that the contract is expected to include the drilling portion of Murphy’s Kikeh development offshore Malaysia.
