June 2000 Vol. 221 No. 6  Offshore

Robert E. Snyder,  Editor

Modest UK recovery seen, rig market still confusing

The first signs that confidence appears to be returning to the offshore oil and gas industry have been revealed in a survey by the UK Offshore Operators Association (UKOOA), the representative organization for companies operating on the UK Continental Shelf. Of UKOOA’s 31 members, 22 companies, accounting for about 95% of all the oil/gas produced offshore UK in 1999, responded to the mid-March survey on what they expect to spend on exploration / development over the next three years. They were also asked to predict – on that basis – what future activity was likely to be for the same period.

Responses suggest that expenditures for both exploration and development in 2000 are set to rise above 1999 levels. Development spending is expected to reach £3.5 billion ($5.4 billion) this year – compared with an estimated £3.2 billion in 1999 and £5.1 billion in 1998 – while exploration budgets are also up slightly, from £0.3 billion in 1999 to a predicted £0.4 billion this year.

The survey also indicates that the number of exploration and appraisal (E&A) wells drilled this year is expected to rise to 48, compared with 31 in 1999. However, UKOOA notes that activity was slow during the first three months of this year, with only six E&A rigs on location and, despite predictions of 54 wells in 2001, the figures still lag behind 1998 levels, when 59 wells were drilled.

New developments over the next three years could lead to orders for 25 jackets or offshore production platforms, about half of which would be destined for the southern sector. Greater demand is expected for subsea equipment, with some 68 subsea tieback clusters projected over the same period. One new FPSO is expected for 2000, but none thereafter.

The results compare favorably with a survey carried out by the DTI in February, which painted a bleaker outlook for the offshore oil/gas industry. "The DTI survey was constrained by budgets set when oil was still hovering at $15 levels, and the figures now seem to be conservative," commented James May, UKOOA Director-General.

"Consistently higher crude prices mean that operators are reassessing their budgets and appear to be more optimistic, a mood which is reflected in the survey. However, the figures also reveal the impact of increasing maturity in the North Sea – demonstrated by the greater call on subsea technology – as industry seeks to maximize cost-efficiency by tying back new satellite field developments to existing infrastructure," May added.

API sues MMS over oil valuation rules. The American Petroleum Institute filed a lawsuit in the U.S. District Court for the District of Columbia against the Department of the Interior and its agency, Minerals Management Service (MMS), for issuing new, unlawful oil valuation rules for royalty purposes. The final MMS rules were issued March 15, as amendments to existing federal regulations covering crude produced from leases on federal lands.

In its complaint, API, on behalf of its 400 member companies, alleges the new rules are unlawful because MMS exceeded its authority under federal statutes. The rules are also: "inconsistent with terms of existing oil/gas leases, arbitrary and capricious, an abuse of discretion, unsupported by evidence in the record and not otherwise in accordance with the law," the complaint stated.

The new rules are unlawful because they require most oil produced from federal leases to be valued at market-place locations away from the wellhead or point of production. This starting point for valuation based on mandatory use of index prices, coupled with the categorical disallowance of downstream marketing costs and inadequate allowances for other post-production costs, results in inflated values and royalty obligations, the complaint continues.

The legal challenges will be closely coordinated with the IPAA, which filed a lawsuit challenging the same regulations on April 16. API says a far-better methodology, already permitted by law, would be royalty-in-kind, whereby the government receives royalty payments in actual barrels of oil, not cash. API is working closely with MMS to improve pilot RIK programs in Wyoming and the GOM, which appear promising.

Jackup action, semi concerns. Return of the offshore market is slower than expected, considering the steady $25 oil price. As the Gulf of Mexico Newsletter notes, "2000 was supposed to mark the beginning of the offshore industry’s recovery. In many market segments, a recovery is underway, while in other sectors, contractors are scratching their heads as demand for their services remains in the doldrums."

Owners of GOM cantilever jackups rated for 250-ft water are pleased – all but one of these rigs currently have commitments, and the lone available unit has a contract pending. Near-perfect utilization has been propelling dayrates skyward and contract terms are getting longer. These jackups are getting new deals in the $20,000 to $32,000-per-day range, vs. only $12,500 to $19,000 in May 1999. The 300-ft cantilever jackup story is much the same.

Semi owners, conversely, are not so happy. In May 1999, second-generation semi utilization was only 50%, but dayrates were in the $35,000 to $42,000 range. One year later, for these rigs, utilization has fallen to 32%, dragging dayrates down to the $28,500 to $35,000 range. Fourth-generation semi owners have been able to keep utilization above 90%, but at the expense of dayrates.

Logic would dictate that the $160,000 dayrate these rigs were making in May 1999 was bound to come down as long-term contracts rolled over and operators signed new deals more in line with market conditions. However, the magnitude of the decline was unexpected, the Newsletter says. Last week, a fourth-generation semi was contracted to work for a paltry $49,000 per day. The U.S. Gulf now boasts a jackup that is making $500 per day more than a fourth-generation semisubmersible.

When will things turn around for semi owners? Possibly relatively soon, the Newsletter says. Over the last 90 days, U.S. Gulf operators have filed 31 drilling plans for wells in water depths greater than 500 ft and with estimated 2000 start dates.