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Orders for offshore drilling rigs climb E&P companies scrambling for dwindling supply of available rigs; 65-70 jack-ups, 25-30 deepwater rigs believed on order Ray Tyson For Petroleum News
Construction orders for new offshore drilling rigs are pouring into shipyards around the world as exploration and production companies scramble for what’s left of a rapidly dwindling supply of rigs.
Industry analysts believe there could be 65 to 70 orders in for new jack-ups and around 25 to 30 orders for deepwater rigs, but the actual new-build total is difficult to pin down and therefore largely a matter of speculation.
“Someone told me today that another deepwater floater was ordered. If that continues then at some point we’re going to overbuild this cycle,” Robert Long, chief executive officer of big offshore drilling contractor Transocean, warned in a May 24 presentation to the UBS Oil & Gas Conference in Austin, Texas.
In addition to known orders for new-builds, 35 to 40 refurbished drilling rigs are expected to re-enter the market over the next few years. But right now the issue is rig availability.
“The main thing is finding a rig,” Carl Thorne, chief executive officer of another large drilling company, Ensco International, said at the UBS conference.
He added: “We can talk all we want about operator preference. But when you have a shortage of equipment like we have today, the overriding concern is to find a rig that can drill within the timeframe of some of these people who need work done.”
There’s no question the world needs more offshore drilling rigs, especially in places like the Gulf of Mexico where thousands of federal oil and gas leases are expected to expire over the next few years without ever seeing a drill bit.
Fine balance between supply and demand However, there is a fine balance between supply and demand when it comes to rig markets. For sure, the drilling industry does not want to see a repeat of the 1980s when soaring oil prices collapsed, leaving drillers holding the bag with too many rigs and too few customers. It took industry years to recover from that miscalculation.
Once again, orders for new rigs are rapidly escalating with no sign the current drilling boom will end anytime soon.
“We heard one of our competitors say recently that we are in the third inning of an extra inning game, without (mentioning) exactly how many extra innings there were going to be. Clearly, there is a lot of forward visibility,” said Bruce Streeter, chief executive officer of vessel supply company GulfMark Offshore.
“We think the long-term fundamentals of the industry are very good,” added Michael Dawson, chief financial officer for offshore contract drilling company GlobalSantaFe.
“We remain very bullish on the outlook going forward,” echoed Transocean’s Long. “Right now we don’t see anything that indicates this up cycle … is ready to turn around.”
Still, one of the most frequently asked questions put to industry leaders these days centers on how many additional drilling rigs can safely enter the market without causing rig day rates, the drilling industry’s lifeblood, to collapse.
“If demand continues to be like it is today, I think the new-build capacity is going to be absorbed,” Long said. “But the two big questions (are) will the demand continue as it is today, and will industry stop adding new capacity?”
Fifth-generation rates pushing half a million For the moment, exploration and development companies appear willing to pay any amount of money to secure a drilling rig in today’s tight market. For example, rates for high-specification, fifth-generation deepwater rigs are pushing toward the $500,000 per day mark, twice what the going rate was a few years ago.
Transocean’s contracted rig backlog alone is approaching a staggering $18 billion, causing management to rethink how it spends company money. For one, Transocean increased its share repurchase program to $4 billion from $2 billion.
“We get a lot of questions about the use of our cash,” Long said. “With the backlog, we’re going to generate much more cash than we reasonably could expect to reinvest. Our interest here is to return excess cash to our shareholders.”
Dawson said GlobalSantaFe’s ultra-deepwater fleet is booked through mid-2008, with “a little more time available in the mid-water depth category. This is a group of rigs that are seeing some eye-popping day rates.”
GlobalSantaFe is another drilling company that decided to use excess cash from operations to repurchase $2 billion of its stock. Dawson said the company would not invest in “speculative” new-builds and that existing rigs are too expensive to purchase. He said GlobalSantaFe also does not plan to take any of its rigs out of service for “marginal upgrades” because of high costs. Moreover, he said the company already pays its shareholders a handsome dividend.
“We really didn’t have investment opportunities with the cash build of the magnitude that we were expecting,” Dawson said. “We landed on stock repurchases as a way to return cash to shareholders.”
Meanwhile, Ensco’s Thorne said that over the next year another eight to 10 shallow water jack-up rigs could depart the Gulf of Mexico for better drilling contracts abroad. “I’ve heard estimates as high as 15 to 20,” he added.
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