It now appears unlikely that construction of new offshore jack-up rigs over the next decade can keep pace with the expected worldwide demand for shallow-water drilling, a situation that does not bode well for the Gulf of Mexico’s continental shelf, a major source of natural gas for the United States.
“I guess our question is where will the rigs necessary to fulfill this requirement come from?” said Danny McNease, chief executive officer of big contract drilling company Rowan, a leading provider of jack-up rigs.
About one-quarter of the U.S. domestic natural gas supply comes from the U.S. Gulf’s continental shelf, and the demand for natural gas and the rigs needed to find it has never been hotter.
“This appears to be the best market we have seen during our 18-year history,” Carl Thorne, chief executive officer of drilling contractor Ensco International, said of global rig markets. “It further appears to have the legs of sustainability. The Gulf of Mexico is one of the strongest markets in the world.”
Rowan is among several drilling contractors that expect a rig shortfall down the road based on the average number of new rigs delivered into the market each year vs. the attrition rate of older rigs, plus the relatively small number of shipyards around the world willing to build new jack-ups.
40-rig deficit
“Going forward you’re really at a 40-rig deficit at the end of the 10 years,” McNease said. “That’s the reason why we believe the market is going to be so strong in drilling products and new construction.”
McNease said that by 2010 more than 93 percent of today’s world-wide jack-up fleet will be over 20 years old. However, he also said Rowan “is confident” that available shipyards can build no more than 10 rigs a year to both replace the aging fleet and to meet the demand for additional new rigs.
“It would surprise me that 10 years out that we would have any increase in jack-ups,” he said. “I think we actually will have a decrease.”
Ensco’s Thorne said the total number of jack-ups in the world today, including existing rigs and some 30 recently announced new builds, is actually less than it was back in 1990.
“The fleet is 10 or 11 rigs short of what it was in 1990 because of attrition,” Thorne told industry analysts in an April 26 conference call on the company’s 2005 first-quarter earnings. “So the fleet has actually shrunk in size.”
Industry unlikely to overbuild
However, Rowan’s McNease assured analysts who participated in an April 22 conference call on Rowan’s 2005 first-quarter earnings that industry this time around is unlikely to overbuild, as it did in the early 1980s when some 140 new drilling rigs were dumped on the market in a single year.
“We’re in a whole different environment than we were in the 1980s,” he said, noting that in addition to fewer shipyards willing to take on new rig builds, government regulations related to construction materials and safety are much stiffer than they were in the 1980s. “So it takes longer to build them.”
Ensco’s Thorne said he also does not expect the current drilling cycle will lead to overbuilding. “We’re not overly concerned,” he said, adding that Ensco would not “rule out” buying a new build if the price and timing were right.
Though natural gas production on the continental shelf has been on the decline for years, industry has high hopes for yet undiscovered deep reserves below 15,000 feet and particularly below 25,000 feet in the so-called “ultra-deep” zones of the shelf.
In addition to strong commodity prices, a main exploration driver over the next three years on the continental shelf will be the some 1,200 federal leases scheduled to expire, according to Rowan’s McNease. “People are going to have to pay the (high) day rates in order to get access to the equipment,” McNease said.
The U.S. Minerals Management Service estimates that undiscovered natural gas resources of up to 55 trillion cubic feet may exist in this deep frontier area. Meanwhile, the Energy Information Administration forecasts the demand for natural gas will increase by 42 percent in the United States over the next 20 years.
Utilization, day rates both up
The growing demand for jack-ups has led to both higher utilization and day rates worldwide for the drilling industry, including Rowan and Ensco.
In the U.S. Gulf alone, Rowan’s offshore fleet was 98 percent utilized during the first quarter of 2005, up from 82 percent in the 2004 first quarter. Rowan’s average day rate was $58,000 during the 2005 first quarter, up by $18,300 or 46 percent from the same period last year.
“The company’s drilling fleet has been almost fully utilized over the past 11 months and our average day rate continues to improve with each new assignment,” McNease said. “We have commitments in hand for rates never before achieved in our long history of drilling in the Gulf of Mexico.”
He said that barring any collapse in oil and gas prices, the current drilling momentum should continue through at least 2005.
On the earnings front, the much-improved drilling climate also helped Rowan dig itself out of a hole in the 2005 first quarter. For the first three months of this year, the company generated a profit of $43.4 million or 40 cents per share, compared to a loss of $11.3 million or 11 cents per share for the year-ago period. Total revenues were $231.8 million versus $149.4 million a year earlier.
Ensco reported 2005 first-quarter net income of $41.8 million or 28 cents per share on revenues of $217 million, compared to net income of just $21 million or 14 cents per share on revenues of $186.5 million for the same period last year.
Excluding rigs in a shipyard for contract preparation, regulatory inspection, and repair and enhancement, Ensco’s jack-up utilization worldwide was 93 percent in the 2005 first quarter, compared to 91 percent a year earlier.
