TECHNOLOGY Advanced jack up rig breaking U.S. construction drought

Paul Kelly
Rowan Cos. Inc.
Houston

The Rowan Gorilla V, under construction at LeTourneau Inc.'s Vicksburg, Miss., shipyard on the banks of the Mississippi River, will be completed in mid-1998. Shown here are the center line of the rig between the cantilever beams and the three spud cans which will be at the base of the three legs of the gigantic rig (Fig. 1). A new heavy duty jack up, due in mid-1998, will be able to simultaneously drill and produce wells in harsher environments and deeper water than current jack ups in the worldwide fleet.

Rowan Cos. Inc.'s Gorilla V is the only mobile offshore drilling unit (MODU) currently under construction in the U.S. Two more enhanced Gorilla design rigs are planned before the year 2000.

Many oil companies are considering the use of mobile offshore production units (MOPUs) instead of conventional platforms. Factors which play a role in deciding where to use a MOPU for field development include schedule, costs, timing, and variable risks.

The enhanced Gorilla class jack up represents the most technologically advanced jack up unit constructed to date. The rigs are structurally designed to meet year-round weather challenges in the harshest geographical environments.

During the second half of 1996, there were continual increases in offshore rig utilization and day rates. Worldwide rig utilization is at 93% and has been above 90% for months. Competitive utilization rates, which exclude unavailable rigs, are at 98% for all rigs and 99% for jack ups. Throughout most of the third quarter of last year, there were less than ten rigs ready stacked and available.

Furthermore, the utilization figures are high in all of the major drilling regions: the Gulf of Mexico, the North Sea, West Africa, and Southeast Asia. With no weak areas, the rig market will continue to be near full utilization, and day rates should increase in all regions.

The mobilization activity among the regions illustrates the strength in the worldwide market. For example, the Rowan Gorilla IV has recently moved from the Gulf of Mexico to the U.K. North Sea under a term contract with Phillips Petroleum Co., and the Rowan Gorilla II will move to Canada's Sable Island area in 1998 under contract to Mobil Oil Canada. Semisubmersible rigs have moved from the North Sea to the Gulf of Mexico, and jack ups from the Gulf of Mexico to West Africa.

Also, Pemex is planning to step up activity in Mexico's Bay of Campeche and will probably draw another four to six rigs out of the Gulf over the next several months. With a comparable number of rigs planning to return to the Gulf during the same time frame, the net effect will likely be little change in the rig count there. This high level of movement indicates high demand worldwide, and all indications are that the record rates of drilling activity will continue.

By October 1996, in the Gulf of Mexico there had already been as many total drilling permits awarded as there were during all of 1995, and deepwater drilling permits were at record levels. In addition, the length of drilling contracts is increasing. In the deepwater market, term contracts have been common for some time. Lower-tier semisubmersible rigs and jack ups are now receiving contracts for terms of 6 months, 1 year, or more.

Operators are moving to ensure that they will have rigs when they need them, and turnkey operators have been especially aggressive in this area. In addition, operators are becoming both more creative and more cooperative in an effort to ensure rig availability; sublets and farmouts among operators have become increasingly common in the jack up markets.

The most significant positive indicator for the offshore industry was western Gulf of Mexico lease sale No. 161 last fall. The sale generated record activity of 929 bids on 617 tracts. A total of 73 companies participated in the sale, and 57 submitted bids. There was an average of one and a half bids per tract. Total high bids of $356.1 million were submitted, more than three times the $114.3 million bid in last year's sale No. 155.

The previous record activity at a western Gulf lease sale was in 1983 when there were 773 bids on 436 tracts. The success of sale No. 161 comes on the heels of the central Gulf sale in April that generated a record 1,381 bids on 924 blocks by 78 companies. Total high bids in that sale, No. 157, were $521 million. In that sale alone the leases bid equaled 45% of the acreage currently under lease in the western Gulf.

The industry consensus seems to be that operators across the board have increased their 1997 capital budgets over the 1996 levels. On the whole, those increases are expected to be in the high single-digit percentage growth range. Not only is it noteworthy that operators will be investing more money in exploration and development, but it is also significant that the companies are using conservative assumptions in determining their expenditure levels.

Many oil and gas companies are using $18/bbl for crude oil and $1.90/Mcf for natural gas in their economic analyses. Early cold fronts in North America pushed crude oil prices over $25 and natural gas prices over $4.00, but most companies do not expect prices to remain that high.

There is still a critical difference between the boom of 15 years ago and the recovery today. In the early 1980s, industry professionals and analysts predicted commodity prices at unheard-of levels, with crude oil forecasts at well over $50/bbl. Today, the market is driven more by the demand for rigs than it is by speculation about future crude oil prices.

The ability of oil and gas companies to be profitable in a flat commodity price environment results from improved technologies in the exploration and production industries, as well as considerable downsizing by the companies themselves. Certainly, 3D seismic surveying has led to much higher success rates for exploration companies. In addition, less-glamorous technologies, like extended-reach drilling, improved mud chemistries, and the metallurgy of drill bits, have improved efficiencies and reduced costs in the exploration and production processes.

Profits in the 1990s are not as dependent on higher commodity prices as they were in the 1980s. Indications of increased levels of cash flow by oil and gas companies provide confidence of even higher levels of activity this year, both in the Gulf of Mexico and worldwide.

Heavy duty jack ups

Despite the fact that day rates have been climbing for months, according to some analysts they are not yet near the level that justifies the speculative construction of new rigs. For example, according to Global Marine Drilling Co.'s summary of current offshore rig economics (Score), jack up rig day rates were only at 57% of replacement level and semisubmersibles were at 58% in the end of 1996.

This approach to replacement investment is reflected in the fact that the few new rigs being constructed are almost all backed by firm contracts that ensure sufficient financing of these rigs. Rowan is the only company that is building jack up rigs without contracts, and in this case, the rigs are not true competitors with the vast majority of existing jack ups. The Rowan rigs are large, harsh environment jack ups capable of drilling in 400 ft of water in the North Sea or 550 ft of water in the Gulf of Mexico and are really aimed at a smaller niche market.

Rising demand for drilling rigs, coupled with a dwindling fleet, is generating supply shortages around the world, particularly at the high-specification end of the market. Even increasing the historical retirement age from 20 to 25 years, rig attrition continues at a level of about 18 rigs per year.

Putting these numbers in perspective, currently there are 163 mobile drilling units working in the Gulf of Mexico, and worldwide the working fleet of MODUs numbers about 530. Clearly, rig attrition will outpace rig construction by a significant number through the turn of the century.

Matt Simmons, president of Simmons & Co., International, believes that the petroleum industry "is out of touch with reality" in being so complacent in the face of numbers which show a coming shortage in mobile offshore rigs. He estimates that if we started tomorrow, only 20 new offshore rigs at most could be delivered within the next 5 years. The problem is more than the lack of shipyard capacity, rather the manufacturers of rig and drilling equipment are not geared up to meet a big step-up in demand. These factors should eliminate concern that the offshore drilling industry is about to construct new rigs too rapidly, leading to excess capacity.

The Rowan Gorilla V, the first of three new enhanced Gorilla class rigs planned by Rowan, is the only new offshore rig under construction in the U.S. today.

The international fleet of large hostile environment rigs, in which Rowan's present three Gorilla rigs compete, includes about 16 units, depending on the specifications applied. With the exception of one Rowan Gorilla contracted in the Gulf of Mexico and another offshore eastern Canada, the rest of the rigs in the high-specification fleet are working in the North Sea, often drilling high pressure/high temperature wells, under contracts which commit most of them until 1998-2001. Thus, demand for these heavy-duty jack ups is very high, and they are not readily available in the near term.

Drilling and production

Apart from the jack up market per se, however, Rowan's strategy in designing and building enhanced Gorillas is to improve existing jack up drilling technology and offer the versatility to operate as a drilling unit, a mobile production unit, or both simultaneously in either open water locations or alongside existing platforms.

The enhanced Gorilla is constructed under dual classification by the American Bureau of Shipping and Det Norske Veritas, which will enable it to meet relevant government regulatory requirements in the harsh offshore environments of the North Sea, eastern Canada, Australia, Argentina, and the U.S.

Cohasset project

The use of a large jack up rig as a combination drilling and production facility has been proven in Nova Scotia, where since 1992 the Rowan Gorilla III has served as a drilling and production unit in the Cohasset Project, Canada's first producing offshore oil field situated approximately 138 miles southeast of Halifax. Total production from Cohasset was 31 million bbl, up through Sept. 30, 1996.

PanCanadian Petroleum Ltd. has been the operator of the Cohasset project, with a 50% working interest, since January 1996; Nova Scotia Resources Ltd. holds the remaining 50%. Production is expected to continue until late 1998. The Cohasset project includes three fields which have been produced using the Rowan Gorilla III.

Production began from the Panuke field in 1992. Cohasset field production was added in 1993, and Balmoral field production began in February 1996. Balmoral is produced from an extended-reach well directionally drilled 3.5 km from the Cohasset jacket. Crude oil is transported from the Gorilla III into a supertanker moored nearby. The oil is then lightered by smaller tankers to ports in Canada and the U.S. The rig also does the workovers.

The Cohasset project successfully demonstrates the feasibility and economic appeal of using a jack up as a combined drilling and production facility. When the fields are depleted in 1998 or later, the operator and government regulatory authorities will have no platform decommissioning problem to worry about. When it completes its work, Gorilla III will simply jack down and move to another project.

Gorilla V

In May 1995, Rowan announced the decision to design and construct the Gorilla V, an enhanced version of its Gorilla class of rigs, at LeTourneau Inc.'s Vicksburg, Miss., shipyard. LeTourneau is a wholly owned subsidiary of Rowan. Fig. 1 (above) shows the spud cans and initial layout of the rig in the shipyard. Fig. 2 [53772 bytes] is a line drawing of the Gorilla V.

Over the past 41 years, LeTourneau has designed and manufactured more than 33% of the mobile jack up fleet operating in the world today. The Gorilla V is expected to cost some $170 million and is scheduled for delivery in mid-1998. The work force at the shipyard now exceeds 400. As the project progresses and the training of many additional welders is completed, total employment at the shipyard will top 550.

In October 1996, Rowan's board of directors approved the construction of Gorillas VI and VII for delivery in 1999 and 2000. The estimated aggregate cost of these two units is $380 million.

Enhanced Gorillas

The experience from combined drilling and production operations in Canada, the North Sea, and the Gulf of Mexico has led to the design of the enhanced Gorilla series. The enhanced Gorilla-designed operating criteria were established based on year-round operations in 400 ft of water, satisfying the North Sea 50-year storm environmental criteria south of the 61st parallel. This area is about the toughest environment drillers face anywhere in the world. Maximum operating depth in the more-benign Gulf of Mexico will be 550 ft.

The enhanced Gorilla design will greatly increase the variable deck load available. The designed variable deck load is 12,500 kips (12.5 million lb) compared to 5,188 kips on Gorilla IV. The combined hook/setback tensioning load is 3,750 kips, compared to 2,500 kips on Gorilla IV. This increased load capacity will reduce the operator's supply costs, reduce weather-related flat time associated with supply and resupply risks, and provide the capability to perform drilling and production. This can reduce the operator's production capital expenditures, increase cash flow, and provide a more rapid return on investment.

The rig will have triangular legs instead of the previous square truss type. The new triangular-type, opposed-pinion design will increase the allowable environmental loads by reducing the surface area affected by winds, seas, and currents. Also, it will further increase the efficiency of the jacking system and the maximum elevated storm criteria. The increased jacking and holding capacities of the rig will allow substantial expansion of operating criteria over historically proven Gorilla designs, allowing the unit to serve a dual role as both a mobile production platform and a self-elevating jack up drilling rig.

The expanded capacity of the jacking system will provide beneficial hull design changes resulting in additional storage area. The hull depth will increase from 30 ft to 36 ft, and the hull length will increase from 297 ft to 306 ft, while the hull width will increase from 292 ft to 300 ft.

The cantilever-deck longitudinal skidding capabilities provide a drilling operations envelope of 100 ft by 40 ft. Extension of the cantilever beams will allow drilling operations 75 ft aft of the transom, compared to 52 ft on Gorilla IV. This additional reach will eliminate capital expenditures required on large platforms or expanded wellhead platforms to support skid-off operations.

Pipe racks are arranged to facilitate drilling and production tubular segregation. The total combined pipe rack area is 7,472 sq ft. The enhanced Gorilla design eliminates many main deck obstructions. The available deck space is large enough to allow placement and operation of simultaneous drilling and production equipment. Accommodation spaces and life saving equipment are increased substantially. The unit will be capable of housing 120 crew members.

The enhanced Gorilla design includes many improvements in drilling and production capability and equipment. The unit is equipped with five turbocharged, after-cooled diesel engines rated for a total of 16,975 continuous hp and 18,672 intermittent hp. This is 70% more than the horsepower on Gorilla IV. The power generated by the unit will allow operators to supply small amounts of power for extended well tests while drilling or to supply large amounts of electric power for production equipment while supporting hotel loads.

Other features include a fully automated rig floor, 750-ton top drive, 4,000-hp draw works rated for 2,000 kips, 15,000-psi blowout preventer, four 2,200-hp mud pumps rated for 7,500 psi, 5,700 bbl of liquid mud capacity, and zero discharge capability.

Geographical range

The enhanced Gorilla class of rigs was designed to conduct exploration, development, and production operations throughout the world in harsh, ice-free environments. Three leading markets stand out for large jack ups:

In the Gulf of Mexico, a band of leases in 250-550 ft of water offers a particularly good potential market for the enhanced Gorilla. This band runs right through the heart of the subsalt trend.
Another good potential market is the Sable Island area on the Scotian Shelf offshore Nova Scotia, where Gorilla III has worked since 1992, and a number of new projects are slated for development in the next 5 years. Additional prospective areas are offshore Newfoundland and Labrador. By the turn of the century, the Canadian east coast will become established as a significant new producing basin for North America with economically attractive world class offshore opportunities.
The combined drilling and production concept should have application in the North Sea where the enhanced Gorilla will take bottom-supported drilling north to the 61° parallel (Shetland Islands) for the first time. Moreover, the enhanced Gorilla greatly extends the application of jack ups in the Norwegian sector. Measuring markets by numbers of planned developments for which the enhanced Gorilla concept would have application, the North Sea represents the largest potential market for heavy duty jack ups during the next decade.

MOPU economics

Many oil companies are considering the use of mobile offshore production units instead of conventional platforms. Factors which play a role in deciding where to use a MOPU for field development include schedule, costs, timing, and variable risks.

With regard to schedule, an available jack up unit with the right capabilities can generally be fitted for production and mobilized to its location in far less time than it takes to build a conventional site-specific structure and facilities. A contracted jack up can easily be moved to another location or retrofitted for another project, thereby minimizing the financial and market risks of using such a unit for marginal reservoirs or other projects with high degrees of uncertainty.

Offshore lease or licensing terms may put schedule pressures on operators regarding the time allotted to develop reserves. Also, a project's rate of return may be greatly influenced by the development schedule if there are material, labor, or yard space shortages that would delay construction of a site-specific production facility. The increase in net present value from several months of accelerated production can amount to many millions of dollars with a corresponding increase in project rate of return.

As more, smaller operating companies enter the offshore arena, cash flow criteria represent a significantly greater factor than in the past. These operators recognize the large demands that offshore construction places on capital and cash resources, as well as the requirement to provide evidence of financial responsibility for platform removal at the end of the life of a development.

The need to bring early production on stream to assist in project financing may become an overriding consideration in many cases. In such situations, or simply because management is more comfortable with reduced up-front cash demands, a leased mobile production facility may be the optimum choice. Jack up rigs with the capability to remain in a fixed position over a long time period eliminate concerns over platform removal costs and liabilities when reserves are depleted.

The Author

Paul L. Kelly is senior vice-president of Rowan Companies Inc., with responsibility for special projects and government and industry affairs. He represents the oil service/supply industry on the U.S. Secretary of Interior's Outer Continental Shelf Policy Committee and serves as a member of the U.S. Coast Guard's National Offshore Safety Advisory Committee.
Kelly is also a director of the Alaska Oil & Gas Association and International Association of Drilling Contractors. He is a member of the American Petroleum Institute's executive committee of exploration affairs and an advisory member of the executive committee of the Gulf of Mexico offshore operators committee. Kelly holds a BA in political science and a law degree from Yale University.