Cook Inlet jack-up rig talks continue

Jack-up rig market tight worldwide, utilization high, day rates climbing with no end in sight, say offshore drilling companies

Steve Sutherlin

Petroleum News Associate Editor

In Alaska’s Cook Inlet would-be offshore explorers are hopeful a proposed multi-million dollar assistance package from the state will bring a jack-up rig they need to drill oil and gas prospects. Talks are quietly proceeding, but only one thing is certain at this point — a jack-up rig is the number one item on the wish list of companies wanting to get busy on offshore exploration programs.

Before a jack-up rig goes to work in the inlet, however, somebody will have to front the money to deploy the rig from somewhere else in the far-flung offshore oil exploration world. The cost of mobilization to Alaska waters, depending on the estimate of the moment, is $12 million — or more — with high estimates of $20 million. In a Jan. 12 state of the state address to the 24th Alaska State Legislature, Gov. Frank Murkowski suggested the state could help, working with industry to bring a jack-up rig to Alaska.

“The energy situation on the Kenai Peninsula is critical. There is a need to increase onshore and offshore exploration in Cook Inlet,” Murkowski said. “Again, I would ask the Legislature to evaluate whether the state should pay a portion of the mobilization and demobilization costs to bring a jack-up drilling rig to Cook Inlet to get exploration moving again. I challenge industry to match the state’s mobilization/demobilization contribution and also put up the risk capital necessary to find more gas in Cook Inlet.”

The Alaska Legislature has shown strong early signs that it will support the governor’s request for funding to stimulate action on mobilization of a jack-up rig to Alaska. The House Finance Committee is considering a $6 million addition to the state budget, in hopes of meeting the industry halfway on mobilization costs. State sources have also confirmed that a tax incentive package is in the works, to encourage companies to use the rig.

Jack-ups in demand

Cost calculation for Cook Inlet is rendered uncertain by fluctuating rig rates in a red-hot worldwide market. As if prospective Cook Inlet operators needed another hill to climb, offshore rig rates have been on a steady upward climb lately.

Houston-based Diamond Offshore Drilling Inc. owns and operates 14 jack-ups, and has experience in the Gulf of Alaska, the North Sea, the Straits of Magellan, the south China Sea and Australia’s Bass Strait.

The company has 12 domestic jack-up rigs currently working, according to the company’s March 29 rig status report. Eight rigs are coming to estimated contract end dates in April and May, and are listed as “available; actively marketing.”

“The overall market for the company’s drilling rigs continued to improve in the fourth quarter of 2004 and early in 2005,” the company said in a recent statement. “Particular strength was evident in the Gulf of Mexico and the Southeast Asia floater markets, where effective industry utilization is near 100 percent.”

The company said jack-up rig rates in the Gulf of Mexico are rising, with day rates for rigs capable of operating in water depths of 300 feet in the high $40,000 range, to the low $50,000 range.

Ensco International Inc. has 44 jack-up rigs. At year-end 2004, the average day rate for its jack-up rig fleet was $57,500 for the fourth quarter of 2004, compared to $49,400 in the prior year quarter, the company said. Utilization for the company’s jack-up fleet increased slightly to 84 percent in fourth quarter 2004, up from 83 percent in fourth quarter 2003. Excluding rigs in a shipyard for contract preparation, regulatory inspection, repair and enhancement, Ensco’s jack-up utilization was 94 percent in fourth quarter 2004, compared to 90 percent in fourth quarter 2003.

“As we begin 2005, we see continuing strength in the offshore drilling market; we are experiencing improvement in rate structure, and increased contract backlog on a global basis,” said Carl Thorne, Ensco chairman and CEO. “Our Asia and Pacific Rim market is showing particular strength. Two of our jack-up rigs recently secured long-term commitments in Saudi Arabia, at rates significantly improved over prior commitments.”

Rowan Companies Inc. said its offshore rig utilization for the month ended Feb. 28 is at or near 100 percent. Its fleet of seven “gorilla” jack-ups was at 100 percent utilization for the period, and its more conventional jack-up fleet of 17 units was at 99 percent utilization for the period.

Offshore drilling contractor Transocean predicts the market will remain tight for offshore rigs through 2006 and probably longer.

“We believe that based on current levels of bidding activity, 2006 will be a strong year,” Rob Saltiel, Transocean’s vice president of marketing and planning, said in its quarterly conference call Feb. 15.

Rig supply not likely to increase

While day rates for virtually every class of offshore drilling rig in the world are on the rise, they are not yet high enough to generate or justify a new round of deepwater rig construction, said Robert Long, Transocean’s president and chief executive officer.

Meanwhile, Transocean’s shallow water, international jack-up fleet continues “to experience sold out levels” due to both rig utilization and day rates trending higher, Saltiel said.

The company said that day rates for two of its rigs signed during late 2004 were above $70,000, an improvement of $55,000 to $60,000 seen earlier in the year.

“All the rigs we moved in the last six months are on the payroll and working into new locations,” Saltiel said. “We continue to take day rates a step higher for jack-ups as the markets where we operate continue to be tight.”

The flip side of higher rig rates is that they occur in large part because of higher oil and gas prices. In Cook Inlet, the outlook — particularly for higher natural gas prices — has put a rosy sheen on the return side of the ledger. Most Cook Inlet plays are highly prospective for gas.

In spite of the uncertainty, there are a number of companies marking targets on Cook Inlet maps.