Keith Rappold
Drilling Editor
About this report . . . .
Despite weak natural gas prices, Gulf of Mexico jack up demand remained stable in 1995, with a good utilization rate affecting jack up demand worldwide, according to this years OGJ drilling report. The worldwide semisubmersible market remains strong too.Although technology has played a key role in improving drilling efficiency and reducing costs, new contracting strategies have likewise helped operators remain competitive, this report shows in the first of a series on alliances. The series covers some of the advantages and pitfalls for companies forming such business agreements.
Rounding out this report is an article from the Gas Research Institute examining learning curves and drilling techniques.
The major worldwide offshore rig markets have improved slightly this year, while the onshore markets generally lagged slightly.
Offshore rig utilization rates have remained strong worldwide, with some areas reaching nearly 100%.
Worldwide jack up demand has increased by 23 rigs since March, driven by an increase in the number of contracted rigs in the Gulf of Mexico. Semisubmersible demand has increased by four rigs in the same period. Deepwater drilling programs in the Gulf of Mexico, the North Sea, Brazil, West Africa, and the Far East should have a positive effect on demand for the rest of the year, especially for semisubmersibles.
This summer, the worldwide semisubmersible utilization rate was 85%. Out of 140 semis, 119 were contracted, 9 were ready stacked, 11 were cold stacked or out of service, and 1 was in the shipyard.
Jack up rigs had a similar utilization rate of 86%. Of the 386 jack ups available, 332 were under contract, 35 were ready stacked, 14 were cold stacked, and 5 were in the shipyard for maintenance or upgrades.Both jack up and semisubmersible drilling rigs held fairly stable utilization rates of about 75-85% during the past year.
The drillship utilization rate was just over 91%. Out of 23 drillships available, 21 were contracted, one was ready stacked, and one was cold stacked.
Total worldwide offshore rig (jack ups, semisubmersibles, drillships, submersibles, and barges) utilization was about 86%. Of the 608 rigs, 521 had contracts, according to Offshore Data Services.
Despite this improved activity offshore, the total worldwide rig count has fallen to an average of 1,682 so far this year, down from an average of 1,766 last year.
Most of the international gains are in South America and West Africa. The other foreign markets also show modest improvement or signs of stabilization (Figs. 1 (27127 bytes) and 2 (29116 bytes)).
The strongest gains were in Latin America, where the average rig count jumped to 265, up from 233 last year. Latin Americas gains were predominantly onshore, where the average rig count jumped from 173 to 210 active rigs.
Europe, Africa, and the Middle East all remained relatively stable. Europe's average rig count dropped by 1 to 106. Africa also lost 1 rig, down to an average of 64 this year. The Middle East was up 2, to 128 active rigs. The average numbers can be somewhat misleading, however, because each of these three markets is up considerably compared to the same time last year, indicating some signs of market strength.
The Far East lost some activity, dropping from 204 last year to 187 this year. The Far East's losses were concentrated onshore, where the average rig count dropped from 140 in 1994 to 125 this year. Offshore showed slight improvements in rig count, however.Total activity outside of North America has jumped from an average of 734 active rigs in 1994 to an average of 750 active rigs in 1995. Moreover, the number of active rigs at this time last year was only 728, compared to 784 at present.
The U.S. rig count has averaged 694 for the first half of 1995, compared to last year's average of 773 (Figs. 3 (27885 bytes) and 4 (28836 bytes)). Activity in Canada, which is almost completely onshore, has also decreased. The year-to-date rig count there is 238, down from an average of 259 last year.
Offshore drilling activity is driven primarily by oil and natural gas price expectations, according to Smith Barney. Natural gas prices tend to drive North American offshore drilling activity, including the shallow waters in the Gulf of Mexico. International offshore drilling activity and deepwater projects in the Gulf of Mexico are more closely tied to oil prices.
U.S.
In addition to oil and gas prices, technology has played a large part in the U.S. rig count staying in the 700-1,000 range, according to George S. Dotson, president of Helmerich & Payne International Drilling Co. Because of 3D and 4D seismic technology, fewer wells are required to establish and develop reserves. Other advances in technology have improved the drilling process as well.Advances in horizontal and directional drilling have reduced the number of wells needed to access a reservoir effectively. Steerable downhole motors and more accurate measurement-while-drilling and logging-while-drilling tools have resulted in more efficient use of rig time and reduced the need to pull the drillstring. Advances in drill bit effectiveness and durability have enhanced drilling performance. New completion techniques have improved recovery and reduced many downhole problems that might have required remedial workover operations in the past. Stimulation services have become more effective in increasing flow rates of natural gas and oil at reasonable costs.
As the service companies increase efficiency and improve technology, some rig demand may drop. Offsetting this trend, however, may be an increase in the number of oil and gas fields that could be economical to develop because of lower costs from more-efficient tools and techniques.
The greatest concerns of the contract drilling industry are related to economics. Improved economics (day rates and margins) will solve crew availability and drill pipe shortages both in the short term and long term.
Deep gas drilling will not be a significant opportunity during the next 5 years, according to Dotson. There will be little interest in drilling below 20,000 ft and only limited drilling below 17,000 ft. Numerous shallower prospects have been revealed by 3D seismic, making deeper, more expensive holes less attractive.
The 11-year trend of attrition in the U.S. rig fleet slowed significantly, as only 12 rigs left, according to the 1994 Reed Tool Co. annual rig census (Table 1 (36872 bytes)). The available fleet had 1,841 rigs, just 4% higher than the all time low of 1,767 rigs in 1973, according to Roy Caldwell, president of Reed Tool Co.
An oversupply of rigs continues to cloud the outlook. During the 45 days of the census, 1,221 rigs (74%) were active. More importantly, an average of 765 rigs (only 46%) earned a day rate during that period.
The Reed census active count is higher than published weekly accounts because it is a cumulative count of all rigs active during a 45-day period.
Rig utilization rates decreased to 66% from 69% the previous year. The continuing imbalance between rig supply and rig demand remains the primary reason for difficult business conditions faced by many drilling contractors, according to Caldwell. A significant trend in the 1994 census was the number (60%) of rigs drilling for gas.
Reed's forecast for the 1995 census is a decrease of 18 rigs, resulting in an available rig count of 1,823. Reed also predicts rig activity will increase 3% to 1,258 with utilization at 69%.
Drilling rig activity onshore has not been as strong as that offshore. During the first half of this year, the number of active rigs drilling onshore has declined 10%. The number of rigs drilling for oil has dropped 15%, while the number drilling for gas has declined about 7%.
Oil prices have remained as expected, trading in the $17-18/bbl range. Gas prices have been relatively weak (Fig. 5 (66076 bytes)). The drop in the number of rigs drilling for oil has been greater than expected, yet gas drilling activity has remained as expected, according to Prudential Securities (Figs. 6 (27283 bytes) and 7 (27906 bytes)). These drilling statistics may reflect the oil industry's long-term optimism on the future value of natural gas.
In August, 427 rigs were drilling for gas in the U.S., down from 516 last year. Workover rig activity has remained relatively stable, while service rig work has increased this year (Fig. 8 (28980 bytes)).
Additionally, 351 rigs were drilling deep wells (10,000 ft), and 113 were drilling exploration wells, according to Smith International.
Offshore, natural gas resources are potentially much greater than they are onshore. Thus, the major operators invest more capital offshore. The smaller independents are more concentrated on land. Their lower cash flows from weaker gas prices have reduced their spending budgets, resulting in a weaker onshore rig count.
Directional
Directional drilling activity has slowed somewhat in the U.S. In August, 172 rigs were drilling directional wells, giving a year-to-date average of 160, down from 180 at this time last year and last year's average of 172, according to Smith International Inc.Horizontal drilling activity has had a modest increase this year; 88 rigs were drilling horizontal wells in August, up from 66 last year. The 1995 average is 75, also up from last year's average of 67 rigs drilling horizontal wells. Texas continues to be the hot-spot for horizontal drilling, accounting for 56 of the rigs in the U.S.
Drillers in Canada had 29 rigs working on directional wells and 34 on horizontal wells in August, about the same as last year. The 1995 average for each is 31, up slightly from the 1994 averages.
Jack ups
Jack up rig demand remained relatively strong this summer in the Gulf of Mexico, despite relatively weak natural gas prices. In July, 116 jack up rigs were under contract in the Gulf, compared to 119 in June and a low of 88 in March, according to Offshore Data Services. Seventeen rigs were ready stacked, and 8 were cold stacked. The jack up utilization rate was 87.2% this summer, up from 82.6% last year.The continued strength in jack up demand indicates that many operators view current natural gas price weakness as temporary and are therefore maintaining current drilling and development programs, according to Jefferies Energy Group. Moreover, this relatively strong jack up demand reflects the improved drilling economics possible because of advanced technology (3D seismic, extended reach drilling, completion technology, etc.) and the extensive production infrastructure in the Gulf.
Continued soft gas prices, however, could reduce operators' drilling expenditures, particularly for independents. Strong jack up demand is expected near the end of this year based on an anticipated improvement in natural gas prices assuming a normal winter, according to Jefferies Energy Group.
In 1994, the Gulf of Mexico was generally the only area of drilling strength in the world, and many rigs moved into the market. Strengthening areas, such as the North Sea and West Africa, however, could lure rigs out of the Gulf in 1995.
Total jack up supply in the Gulf of Mexico increased from 112 to 143 rigs during the past 2 years.
In the Gulf of Mexico, day rates for low-end jack ups (slot rigs with <150 ft water depth capability) have generally increased to $17,000-19,000 this summer, up from $14,000-16,000. Day rates for >250 ft jack ups are up slightly this year, and the day rates are approaching $30,000 for premium, extended leg jack ups for water depths 350 ft.Last year, the North Sea dropped from 60 to 56 jack ups because of reduced cash flows from weaker oil prices and negative oil industry taxation, according to Prudential Securities. Demand for equipment has surged again, with virtually 100% utilization of the jack ups in the area.
Jack up day rates in the North Sea have increased to around $40,000 this year, up from $25,000 in 1994. Jack up utilization could reach 100% in the North Sea next year.
West Africa day rates strengthened last year as the politics in Nigeria stabilized and operators resumed drilling plans. Day rates for 300 ft water depth jack ups are in the high $20,000 to low $30,000 range this year.
Semis
The worldwide market for semisubmersibles is also gaining momentum. Third and fourth-generation semisubmersibles are at nearly 100% utilization rate. For the first time in several years, operators are being forced to delay drilling projects because of rig unavailability, according to Jefferies Energy Group, and the high end semisubmersible market should remain strong for the next couple of years.Term contracts are on the rise and are replacing the long-prevalent contracts for one well plus options.
In the Gulf of Mexico, semisubmersibles have had a 100% utilization rate for most of the summer. With five rigs now permanently cold stacked, the active rig supply has been reduced to 18 units, all of which have contracts. Another semi will enter the Gulf of Mexico for a specific deepwater project this year. This growing demand for deepwater semis has resulted in several receiving capital upgrades to increase their potential drilling depth.
In 1994, the number of semisubmersibles in the North Sea dropped to 46 from 65. The increase in demand this year, however, has led to a 100% utilization rate for semis. Fourth-generation semisubmersibles could hardly find employment in the North Sea in 1994, and many worked at $50,000/day just to maintain a cash flow. In 1995, the tighter market has led to contracts at $90,000-100,000/day for some of these rigs. Some third-generation semis are now receiving day rates around $70,000-75,000.
Day rates for floating rigs have reached their highest levels for the past decade. Deepwater activity in the Gulf of Mexico, off West Africa, and Brazil has pushed the utilization rate, and hence day rates, up.
Reading & Bates Corp. recently received a contract for a fourth-generation semisubmersible to start drilling in early 1997 for $120,000/day in the U.K. North Sea.
The market for second-generation semisubmersibles continues to improve also. In the Gulf of Mexico, day rates are in the low-to-mid $40,000 range this year, with deeper water rigs receiving more. Arethusa (Off-Shore) Ltd. just received a day rate contract for $46,000 for a second-generation semi which previously had a contract for $40,000/day.
Day rates for semisubmersibles (3,000 ft water depth) off West Africa remained flat at under $40,000 this summer. Day rates for semisubmersibles off Southeast Asia also remained flat in the low $30,000 to low $40,000 range for second and third-generation semis. Fourth-generation semis received higher day rates.
Rig replacement costs
Worldwide offshore drilling markets continue to show signs of strengthening, according to Global Marine Inc. Global Marine's summary of offshore rig economics (Score) rose to 42.8% of new construction rates, mainly because of market improvements in the North Sea, Gulf of Mexico, and Southeast Asia. Global Marine's Score reflects current offshore mobile drilling rig day rates as a percent of the estimated day rates contractors would need to justify speculative new construction.Global Marine calculates new construction day rates as the sum of daily cash operating costs plus a capital recovery factor of $700 per day per million dollars invested. A separate Score is calculated for jack up and semisubmersible rigs for different regions to indicate the relative conditions of rig markets (Table 2 (17560 bytes)).
Day rates for mobile offshore rigs have been increasing since spring. The North Sea Score reached 52.2%, the first time any regional market has exceeded 50% of new construction rates since 1991.
Day rates for fourth-generation semisubmersible reached $118,000. To justify new construction, the day rates for these rigs would have to reach $186,000, according to Global Marine.
Demand for offshore drilling rigs in the Gulf of Mexico is holding relatively steady, with 140 rigs under contract. Demand for large cantilevered jack ups continues to strengthen, and the day rates for premium jack ups have shown some improvement, according to Global Marine.
Prudential Securities estimates that within 2 years day rates can reach roughly 50% of replacement cost day rates.
More than 71% of the jack up fleet, 50% of the semisubmersible fleet, and 66% of the overall offshore drilling fleet are less than 15 years old (Table 3 (23153 bytes)). These rigs should be able to satisfy the drilling demand over the near-to-intermediate term, and the offshore industry will not begin to consider replacing drilling rigs until the current 16-20 year old fleet of 161 rigs fully passes the 25-year mark, according to Smith Barney.
Most companies use new construction costs of $75 million for a 116-C type of jack up and $225 million for a state-of-the-art, fourth-generation semisubmersible, according to Smith Barney. The investment company estimates the day rates needed to justify new construction are $72,000 for a jack up and $196,000 for a semisubmersible.
New construction
Five mobile rigs are currently under construction; three are jack ups, and two are semisubmersibles.The National Iranian Drilling Co. will take delivery of a 300-ft water depth, cantilever jack up in the second half of 1995. The estimated cost is $70 million, and the rig will be owner operated.
British Petroleum will take delivery of a 500-ft water depth, cantilever jack up in the second half of 1995. The rig's estimated cost is $140 million, and the rig will be owner operated.
Rowan Cos. Inc. expects to take delivery of a 400-ft water depth, jack up in May 1998. The rig's estimated cost is $135 million.
Caspmor, a Russian oil company, is having 1,000-ft and 820-ft water depth semisubmersibles built. Each rig has an estimated cost of $80 million, and both will be owner operated. The delivery dates are unknown.
In March of this year, Maersk Venezuela took delivery of Maersk Rig 62, a 125-ft water depth barge rig, which cost an estimated $35 million.
Table 1 REED RIG CENSUS DATA ------Owned By------- Percent Utilization Drilling Oil Percent Utilization Drilling Oil Year Available Change change Active rate Idle contractor company ---------------------------------------------------------------------------------------------- 1990 2,320 -222 -8.73% 1,677 72.28% 643 2,294 26 1991 2,251 -69 -2.97% 1,485 65.97% 766 2,209 42 1992 1,996 -255 -11.33% 1,192 59.72% 804 1,956 40 1993 1,853 -143 -7.6% 1,279 69.02% 574 1,806 47 1994 1,841 -12 -0.65% 1,221 66.32% 620 1,789 52 ============================================================================================== ------------------------------Depth rating------------------------------ Over 13,000- 10,000- 6,000- 3,000- Year 16,000 ft 15,999 ft 12,999 ft 9,999 ft 5,999 ft Diesel Electric Gas -------------------------------------------------------------------------------------------------------------- 1990 620 313 488 623 276 1,891 408 21 1991 590 304 491 603 263 1,798 438 15 1992 490 267 441 553 245 1,589 395 12 1993 445 240 420 513 225 1,460 380 13 1994 473 245 411 499 213 1,402 418 21 ============================================================================================================== Inland Offshore Bottom Offshore Year Land barge Floating platform supported stationary ---------------------------------------------------------------------------------- 1990 2,061 54 30 46 129 175 1991 2,006 51 24 48 122 170 1992 1,809 47 20 41 79 120 1993 1,660 46 19 36 92 128 1994 1,613 45 21 39 123 162 ================================================================================== Table 2 SUMMARY OF CURRENT OFFSHORE RIG ECONOMICS Previous % change % change % change July 1995 month on month on year on 5 years Gulf of Mexico 36.12 34.38 +5.1 +2.5 +19.2 North Sea 52.24 48.33 +8.1 +69.2 +11.8 Southeast Asia 40.21 39.46 +1.9 +8.6 -5.8 ===== ===== ==== ===== ===== Worldwide total 42.79 40.49 +5.7 +19.6 +8.2 ------------------------------------------------------------------------------------------ Jack ups 42.30 40.83 +3.6 +8.5 -6.0 Semisubmersibles 43.74 40.41 +8.2 +58.9 +31.2 Source: Global Marine Inc.
========================================================================================== Table 3 Offshore Drilling Fleet --------Age of existing fleet, years------- Rig type Total 1-5 6-10 11-15 16-20 21-25 26+ ------------------------------------------------------------------- Arctic units 4 0 0 4 0 0 0 Jack ups 391 9 29 242 78 20 13 Semisubmersibles 160 5 28 47 60 17 3 Drillships 27 0 2 8 15 2 0 Barge rigs 35 13 2 11 2 4 3 Submersibles 12 0 0 12 0 0 0 Tenders 32 3 3 16 6 1 3 === == == === === == == Total 661 30 64 340 161 44 22 Percentage 4.5% 9.7% 51.4% 24.4% 6.7% 3.3% of existing rigs Source: Offshore Data Services Copyright 1995 Oil & Gas Journal. All Rights Reserved.
