WHAT'S AHEAD IN 2001

Contract drillers see new investments in rigs begin to stir

Paul L. Kelly, Senior Vice President, Rowan Companies, Inc., Houston

The law of supply and demand gives every indication that 2001 will be an excellent year for drilling contractors, with land and offshore rigs both in high demand. As we enter the second year of the new millennium, the worldwide petroleum industry is faced with steadily rising energy demand that challenges the industry’s ability to provide adequate supplies of natural gas, crude oil and refined products. With challenges come opportunities, however, and our company is moving on several fronts to take advantage.

"More land rigs will be needed to replace those lost through attrition, as well as to double the number of wells that must be drilled to meet a 30-Tcf gas market."    – Paul Kelly

Meeting the 30% increase in natural gas demand forecast over the next 10 years in several studies will require more rigs onshore and offshore, as well as drilling in deeper horizons, deeper water and below the salt. Rowan’s foremost strategy in this regard is an $800-million investment in a series of four LeTourneau Super Gorilla class jackups that are designed and engineered for high-pressure / high-temperature drilling in harsh environments throughout the world. Gorillas V and VI have been delivered on time and on budget, and are now employed offshore Nova Scotia and in the Gulf of Mexico (GOM), respectively. Gorilla VII is due to be completed late in 2001, while Gorilla VIII will be activated in second-half 2003.

While these new units have proved their operating capabilities in the North Sea and offshore Eastern Canada, they are also proving themselves to be an exceptionally good tool for subsalt and deep gas drilling operations on the GOM shelf in water depths as great as 550 ft. The GOM remains the world’s most important geographic market for drilling rigs – rising electricity demand means more natural gas usage. With gas imports from overseas limited, the U.S. depends almost exclusively on North American supplies. Today, 27% of those supplies come from the GOM – future supplies must come from both its deepwater and shelf areas.

Rowan Cos.’ shore base at Sabine Pass, Texas, is host to heightened activity.

Following the huge success of the deepwater royalty relief program in stimulating GOM exploration and development, the MMS will next offer new incentives to encourage deep and sub-salt drilling on the shelf, recognizing the potential that deeper horizons have for increasing U.S. natural gas supplies. Rowan’s strategy for this next frontier in the Gulf is to provide customers with jackup rigs that have longer legs, higher horsepower, greater mud-pumping capacity and other features that will enable operators to drill deeper and below, or around, the salt.

While Rowan’s strategic plan does not call for investment in deepwater drillships and semisubmersible rigs, the company has employed some business tactics that will take advantage of opportunities in this market. First, we have deployed six new, deepwater, anchor-handling / tug / supply vessels that feature the latest technologies in vessels of this class. The primary mission of this fleet will be to provide transportation services for our fleet of 21 mobile rigs now operating in the GOM. At the same time, these vessels are selectively marketed in the deepwater OSV market of the Gulf, where the supply of these specialty vessels is tight. Shore bases for this fleet are located in Port Fourchon, Louisiana, and Sabine Pass, Texas.

Second, our shore base at Sabine Pass has expanded as the result of acquisition of neighboring properties. This gives us a half-mile of shoreline dock space and yard facilities. This property has developed into a fully integrated service facility that supports marine construction, repair and maintenance activities. At the same time, it provides large crane capabilities, as well as space and logistical services for Rowan, its drilling customers and other parties working on shelf and deepwater projects.

Similarly, our Era Aviation division is taking advantage of deepwater market opportunities by adding to its helicopter fleet. Ideally suited for long hauls to deepwater locations, three S-61, 19-passenger, long-range craft and two S-76 A++ helicopters have been added. For the convenience of its customers, Era has expanded its base in Venice, Louisiana, which (along with its base at Port Fourchon) services deepwater locations.

Natural gas demand continues to grow, and the nation struggles to reduce its dependence on imported oil. Thus, more land rigs will be needed to replace those lost through attrition, as well as to double the number of wells that must be drilled to meet a 30-Tcf natural gas market. As this year comes to a close, the total U.S., onshore rig count is close to 1,000. For the first time since 1982, land rig refurbishment and manufacturing activities have recommenced. The newfound rig demand reflects the rush to find natural gas while it sells for nearly $5/Mcf, as well as oil that receives more than $30/bbl.

The challenge of meeting rising rig demand must be met by a much smaller drilling industry. Today, we have just over 200 companies owning land rigs, compared to nearly 700 in 1987. In response to this opportunity, Rowan is upgrading its land drilling fleet, which now numbers 14. Three of our rigs have been relocated from Alaska to the highly active Gulf Coast area. One new land rig is being constructed by using internal design, engineering and manufacturing capabilities. This rig is a prototype for additional land rigs that we could manufacture and sell in the future.

In a related strategic move, our firm last year acquired the Ellis Williams Co., a small mud pump manufacturer with a fine reputation for a high-quality product. Ellis Williams has become a subsidiary of Rowan’s LeTourneau division, where collaborative opportunities are being pursued to expand manufacturing capability for mud pumps and other drilling products. While 85% of our assets are still jackup rigs, these developments give the company a slightly new look for related areas of growth potential.

Looking ahead to the future, a major focus on drilling systems will continue in the contract drilling industry. This is because drilling time is a major component of rig cost and, thus, total well cost. Significant strides have been made in the last several years with regard to rates of penetration, equipment dependability, downhole data gathering and drilling dynamics. The ability to steer and extend the wellbore, both vertically and horizontally, to zones of interest has increased significantly with the advent of extended-reach wells, horizontal drilling and multi-laterals.

Many forecasts of future oil and gas production depend on the drilling industry to continue increasing the annual, average footage drilled per rig. This will require a strong research and investment commitment on the part of drillers and their suppliers, as well as recognition by customers that the value received from these advances justifies payment of higher rates than we have seen in the recent past.

Paul L. Kelly is senior vice president of Rowan Companies, Inc., responsible for special projects and government and industry affairs. He represents the oil service / supply industry on the U.S. DOI’s OCS Policy Committee (serving as chairman from 1994 to 1996). Mr. Kelly also served on the U.S. Coast Guard’s National Offshore Safety Advisory Committee (1993 to 1999). In addition, he is a director of the Alaska Oil & Gas Association and IADC. He sits on API’s Executive Committee of Exploration Affairs and advises the executive committee of the Gulf of Mexico Offshore Operators Committee. From 1985 to 1987, Mr. Kelly served as managing director of British American Offshore Ltd., London, Rowan’s main contracting entity in the North Sea. He is a director of the British-American Business Association in Houston (serving as president in 1989). He has served on various subcommittees of the National Petroleum Council, including the Coordinating Subcommittee on Natural Gas. Mr. Kelly has written widely on the subject of energy and has appeared on behalf of industry in numerous congressional and federal agency hearings. He holds BA (political science) and law degrees from Yale University.