Jack-up day rates explode

Costs up in wake of hurricanes that destroyed or heavily damaged nine rigs

Ray Tyson

Petroleum News Contributing Writer

Hurricanes destroyed or severely damaged nine jack-up rigs this year on the Gulf of Mexico’s continental shelf, causing day rates on new contracts for healthy rigs to soar more than 50 percent on average in the storms’ aftermath, according to offshore drilling contractors.

The double whammy of Katrina and Rita added gasoline to an already intense fire, coming at a time of exceptionally high rig demand worldwide and escalating offshore day rates. But contractors are not sobbing over their losses in the Gulf.

Gulf rates for jack-ups have climbed from $70,000-$80,000 per day pre-storms to $105,000 per day and on up to $120,000 per day for a 300-foot jack-up. Premium jack-ups are said to be fetching $130,000 a day and more on new contracts.

“On the jack-up side, the loss of rigs due to hurricanes has strengthened an already very good market,” Robert Long, chief executive officer of big offshore drilling company Transocean, told analysts in a November conference call.

Rowan hardest hit

Deep-shelf driller Rowan, among the hardest hit with four jack-ups destroyed and another heavily damaged, expects to quickly recover its $290,000 per day in hurricane losses through insurance and the higher rates on new contracts.

With contracts on 11 of Rowan’s healthy jack-ups rolling over before year-end, the company thus far has moved rates to a combined $500,000 a day, helping to offset losses due to hurricanes. Moreover, new Rowan land rigs scheduled to come into service next June should bring another $225,000 in daily revenue, further helping to cover losses.

“We lost a total of five rigs to the hurricanes and everyone got real upset about that fact,” Rowan chief executive Danny McNease recalled. “But I can tell you one thing: we came together as a team and figured out how we were going to get out of this deal. The way the market tightened up made it very easy to work our way through this.”

Jack-ups leaving Gulf

In fact, the worldwide supply of jack-up rigs is so tight that Rowan and others are urging exploration and production companies to secure longer term drilling contracts in the Gulf, or face the possibility of more jack-ups leaving the shelf on more lengthy and lucrative deals abroad.

More than 23 jack-ups departed the Gulf for other markets pre-storms, leaving a scant fleet of around 77 working rigs when subtracting cold stacks and the nine jack-ups destroyed or damaged in the hurricanes.

“We believe operators in the Gulf of Mexico are waking up to the fact that this is a serious situation,” Rowan’s McNease said. “But the scary thing is what people are going to do in the Gulf for equipment to do their work.”

With an extraordinarily high 1,130 shelf leases expiring over the next three years, Rowan also is urging smaller E&P independents to share rigs on long-term contracts of a year or more, just like they have been doing in the North Sea. Not only would sharing rigs provide independents with the equipment to drill their own prospects, Rowan believes, but it would give them access to expiring leases on the shelf owned by companies without rig contracts.

“They can leverage themselves into deals, just like they did back in the ‘70s,” McNease said. “The drilling rig will not only become an asset to a contractor, but become an asset to an operator.”

Interest in building new deepwater rigs

Global competition for jack-ups is so intense that in the North Sea alone, as many as 250 rig months of “unsatisfied demand” in 2006 will have to be moved to 2007, said Roger Hunt, GlobleSantaFe’s senior vice president of marketing.

“Given the strong outlook for 2007, we expect (daily) prices for standard jack-ups to be in excess of $150,000,” he said.

Meanwhile, an already warming deepwater rig market has turned red hot, with premium floaters in the Gulf commanding day rates of around $475,000 with no rate cap in sight. Drillers also are reporting significant interest from clients wanting to extend deepwater drilling contracts out to 2010 and beyond.

More surprising, customers are beginning to express interest in building new deepwater rigs. “This is a relatively new development in the market,” Transocean’s Long noted.

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S U B S C R I B E

Gulf hurricanes raise government worry over failed offshore mooring systems

Industry is coming under increasing pressure from the federal government to improve offshore mooring systems that failed during major hurricanes, sinking platforms and drilling rigs and setting others adrift in the Gulf of Mexico.

General concern about inadequate mooring systems, which actually dates to last year’s Hurricane Ivan, has evolved into a major safety issue since monster storms Katrina and Rita ripped through the Gulf this year, causing unprecedented damage to offshore facilities in the relatively shallow waters of the continental shelf, as well as in deepwater Gulf.

“The issue of mooring system design is getting a lot of attention both from industry and the government,” said Robert Long, chief executive officer of Transocean, the world’s largest offshore drilling contractor. “At this time there is no simple answer regarding the right way forward.”

Two Transocean rigs broke moorings

Transocean deepwater rigs Nautilus and Marianas broke from their anchor moorings during this year’s storms, drifted and eventually ran aground. Nautilus is back working, while Marianas is undergoing repairs at a shipyard in Brownsville, Texas.

Long said a number of mooring options that might fix the problem are under consideration, ranging from “new bigger systems” to upgrading Transocean’s current eight-anchor system to one that employs 12 or even 16 anchors, with stronger cable and a new anchor design.

“The answer could be different for each rig, so it’s not clear where we’re going to come out on this at this point,” he added.

Transocean is only one of several major offshore drilling contractors whose rig moorings failed during this year’s hurricane season.

Two Diamond rigs were aground

Diamond Offshore’s Ocean Saratoga and Ocean Star broke free from their moorings as Rita passed. Both rigs went aground and were eventually found, tracked by onboard locator beacons.

“Since Katrina and Rita, this (mooring systems) has become even more important, and we’re getting more pressure from the government,” said Larry Dickerson, Diamond’s president and chief operating officer.

Diamond is focusing on a 12-point anchor “enhancement” system, which the company could employ quickly and believes would significantly increase the holding capacity of deepwater rigs, Dickerson said.

“I would point out that our efforts are enhanced by the fact that we’ve got lots of data now on the behavior of our rigs in a storm,” he said.

In addition to looking for better deepwater mooring systems, an industry study group is exploring ways to improve the holding capacity of bottom-founded platforms and drilling rigs, which took a severe beating from Katrina and Rita. Deep-shelf driller Rowan alone lost four jack-ups rigs with a fifth suffering major damage.

“Efforts that might be put in place on jack-ups rigs to increase their strength and holding so that we don’t suffer the loss of those particular units is still something too early for us to be able to comment on,” Diamond’s Dickerson said.

Three-quarters of the approximately 4,000 manned production platforms in the Gulf were in the direct paths of hurricanes Katrina and Rita, which destroyed 108 older platforms and causing significant damage to 53 others.

—Ray Tyson