Rig Analysis – Offshore

Improved outlook for North American mobile offshore rig market

Strong oil and gas prices have a positive effect on rig demand in the US Gulf, tempered with investment indecision based on potential of the maturing province.

Tom Marsh, ODS-Petrodata

Finally reacting to strong oil and natural gas prices, the worldwide mobile offshore rig count is poised to increase significantly over the last half of 2004. Based on a recent operator-by-operator analysis of worldwide offshore rig demand, ODS-Petrodata's research division estimates that global offshore rig demand could increase by more than 30 rigs before year-end, Fig. 1.

Fig. 1. ODS-Petrodata offshore global rig demand forecast. Worldwide rig demand through first quarter 2005.

North America's share of the forecasted increase in rig demand will be small relative to the number of rigs in the region. The US Gulf contracted rig count increased by six rigs from April to June, and an additional modest increase in activity is likely during the second half of the year. Mexico and Trinidad each will see offshore rig counts rise somewhat during the second half of 2004 as well. Drilling activity in Canadian waters is likely to decline over the remainder of the year.

At this stage, the rising offshore rig demand expected in North America over the next six months is not certain to continue in 2005. Under ODS-Petrodata's current forecast, rig demand in the region levels off in early 2005. However, the forecast is subject to revision as operators formulate their 2005 spending plans.

US GULF OF MEXICO

The US Gulf of Mexico contracted mobile rig count, which stood at 120 in January, remained below that level in early June, although the number of rigs under contract in the area recovered from the year's low of 111 set in April. Fleet utilization has improved over the last year due to a decline in supply as rig owners moved equipment out of the area in search of work. As of the first week of June, 117 of 160 rigs in the region were under contract, and US Gulf rig fleet utilization stood at 73.1%.

Fleet utilization will continue to improve during the second half of 2004 as rig demand rises; however, the rig count appears unlikely to rise by more than 10 from its current level by the end of the year. Several indicators foreshadow the increase in rig demand. The number of drilling plans filed by operators is up by almost 14% January to June compared to the same period in 2003.

As of early June, operators had filed 237 drilling plans with the US Minerals Management Service. During the same period in 2003, operators had filed 208 drilling plans. In addition, the number of offshore well permits issued by regulatory authorities stands at 385 for the year, compared to the 338 permits issued over the same period last year.

Despite the relatively small increase in rig demand forecast for the remainder of 2004, the near-term US Gulf rig market outlook is the most positive it has been in years. However, the short-term nature of that rig market will continue to dog rig owners looking for some longer-term stability. At any given time under US Gulf rig market conditions that have prevailed in recent years, 75% of the rigs under contract may have no firm commitments beyond 90 days in the future, and this has resulted in aggressive bidding on the part of rig owners, and with constrained day rates.

Changing market conditions could impact day rates. US Gulf rig supply has declined by 20 mobile rigs over the last year, and relatively few rigs are actually ready and available to go to work in the area. This has finally offered opportunities for rig owners to boost rates, and since the first of the year, rates have increased for some rig classes.

Independent-leg cantilever jackups rated for 300-ft water depths were earning $34,000 to $47,500 per day in early June, compared to the $33,000 to $39,000 per day that characterized the first-of-the-year market. Semis rated for 5,000 ft to 7,000 ft are earning $60,000 to $85,000 per day, compared to the $59,500 to $65,000 that these rigs could expect to earn at the beginning of the year. Rates should continue to climb for both jackups and floaters – particularly at the low end of the range – as the year progresses.

CANADA

The lack of discoveries off Canada's Atlantic coast has turned operators' attentions elsewhere, and the number of rigs working in the region is set to decline. As of early June, two jackups and two semis were employed off Canada, and a drillship was mobilizing from the US Gulf for a short appraisal program during the summer.

Only one jackup is working an exploration program, and it is scheduled to leave Canada for Northwest Europe in August. The second jackup working in the area has no contract commitments after September. As a result, Canada's offshore rig market appears likely to consist of only two rigs by the end of the year.

MEXICO

Mexico's Pemex has implemented ambitious exploration and production plans, and now more rigs are working in Mexican waters than have ever worked there before. This exploration push has particularly benefited US-based drilling contractors, who found work south of the border for rigs that otherwise would have sat idle in places like Sabine Pass on the Texas/ Louisiana border. The only caveat is that the Mexican state operator can cancel most of its rig contracts with little or no notice, but the wholesale release of rigs by Pemex is an unlikely scenario. The run-up in Mexico's rig count is illustrated in Fig. 2.

Fig. 2. Mexico mobile offshore drilling unit supply and demand, January 2000 to June 2004.

As of early June, 42 mobile rigs were working off Mexico. Pemex has two outstanding jackup requirements that should be filled in the second half of the year, boosting the number of rigs under contract in Mexico to 44. While the bulk of Pemex's programs are being undertaken by jackups, 10 semisubmersibles are drilling in Mexican waters where, just two years ago, only two floating rigs were working. Pemex has not yet pushed into the Gulf's deep waters; all of the current floating rig programs are in water depths less than 700 ft. However, Pemex officials have made it clear that they intend to drill in deep water as prospects warrant.

Jackup day rates in Mexico range from about $22,000 to $57,000, although the bulk of the fleet is working at rates ranging from $35,000 to $50,000, a range similar to that found in the US Gulf for comparable rigs. Semisubmersibles are earning $47,000 to $67,000 per day.

TRINIDAD

While not strictly in North America, Trinidad's offshore rig market is dominated by US-based drilling contractors, and rigs move freely from the US to the Caribbean island. While a small rig market, the ease of access for US Gulf rig owners has presented opportunities to put rigs to work that otherwise might remain idle.

At present, seven jackups are working off Trinidad, but based on operators' known plans, that number is expected to rise to at least nine by the end of the year. Three operators have possible programs that could bring another jackup and a semisubmersible to Trinidad by the end of the year.

In terms of day rates, Trinidad is a two-tier market. On one hand are the rigs rated for 200 ft and less, which are earning $24,000 to $43,000 per day. On the other hand are the higher specification units: Three jackups rated at 350 feet are earning rates ranging from $60,000 to just over $73,000.

OIL COMPANY CONFIDENCE DICTATES NEXT YEAR'S RIG COUNT

Gulf of Mexico drilling contractors and other service and supply companies operating in the region have been puzzled for some time by the fact that oil and natural gas prices are strong, and yet the rig count is weak. Part of the answer lies in the well-hashed-over fact that the Gulf is a mature province, and major oil companies for the most part have turned their attention elsewhere.

Another part of the puzzle is oil companies' perception as to where oil/gas prices are headed. Volatile prices create uncertainty and instill caution in those responsible for setting budgets. Stable, relatively strong oil/gas prices appear to be in the cards for the foreseeable future. This will translate into increased offshore rig demand in North America and elsewhere during 2005.