Drilling activity on the Gulf of Mexico’s continental shelf, already buoyed by strong demand for natural gas and high commodity prices, is expected to further increase over the next three years because of an unusually large number of oil and gas leases set to expire on the shelf.
Faced with the loss of an estimated 1,280 federal leases, exploration and production companies will be looking for long-term contracts to drill as many prospects as they can before their leases expire, indicated Danny McNease, chief executive officer for contract drilling company Rowan.
“We think this is going to continue to drive people going out and picking up rigs for the longer term, to try and ensure they’ve got the capability of drilling these leases,” he added.
McNease also told industry analysts in a Jan. 19 conference call that while Rowan expects another three-to six jack-up rigs to depart the Gulf of Mexico for international waters, rig utilization and day rates are rising to the point where drilling companies will elect to keep their rigs working in the U.S. Gulf. He said the contracted demand for jack-ups in the Gulf currently stands at 92 rigs.
“This combined with the 47 jack-ups that have migrated out of the U.S. Gulf of Mexico since 2001 is once again bringing the U.S. Gulf market back into balance,” McNease said.
Rowan, first of the major contract drillers to weigh in with 2004 fourth-quarter earnings, reported that 99 percent of the company’s 25 offshore rigs were in use during the fourth quarter of 2004, compared to 92 percent during the same period in 2003.
Rowan’s rig rates in the Gulf of Mexico during the 2004 fourth quarter also improved, increasing 19 percent on average from the year-ago quarter to $50,600 per day, while the company’s land rig rates covering the same period increased an average 24 percent to $13,800 per day. By Jan. 19, however, Rowan’s average day rate in the U.S. Gulf already had increased to $53,200, while land rates had increased to an average $15,200 per day, the company said.
McNease said industry studies indicate that exploration and production companies plan to boost their capital budgets by 10 to 20 percent in 2005 over 2004 and that oil and gas prices are forecasted to remain strong through at least 2005.
“The consumption forecast for both oil and gas will continue to remain high throughout this decade,” he said
Moreover, oil and natural gas production in the United States is expected to decline over the next 10 years, he said, adding that field depletion rates in the United States remain high and are forecasted to continue that trend.
“We believe the fundamentals are in place for 2005 to be a prosperous year for the contract drilling business, for both land and offshore,” McNease said, noting that Rowan’s 15 actively marketed land rigs were 100 percent utilized in the 2004 fourth quarter versus 96 percent in the 2003 fourth quarter. McNease said 85 percent of the worldwide jack-up fleet will be more than 20 years old in 2007 and that currently only 15 jack-ups and three semi-submersible rigs are under construction to help meet future drilling demand.
“The question we keep asking is where the rigs will come from to do the work,” McNease said.
Rowan reported strong financial results for the 2004 fourth quarter. The company’s drilling revenues reached an all-time quarterly high, while Rowan’s average Gulf of Mexico day rate in December was the highest in more than four years.
Rowan’s net income climbed to $12 million or 11 cents per share on revenues of $210.2 million, compared to net income of $4.4 million or 5 cents per share on revenues of $170.3 million in the fourth quarter of 2003.
“We believe that this momentum will continue in 2005, assuming that oil and natural gas prices remain firm,” McNease said.
