July 2000 Vol. 221 No. 7  Drilling

Robert E. Snyder,  Editor

Rig market improvements, courting investors

Two operators have announced ambitious drilling programs this year to help dispel the pervading pessimism about when drilling will turn around, with the high oil and gas prices we are seeing. Conoco says it will drill 25 – 30 exploratory wells in the Gulf of Mexico, Viet Nam, Nigeria and other locations, to hopefully continue a 50% success ratio achieved last year. And Kerr-McGee plans up to 30 exploration wells, with 8 – 10 in the deepwater GOM, 5 – 6 in the North Sea and 10 – 14 elsewhere.

Rig market improvement. The May Offshore International Newsletter notes that several newbuild rigs are "hitting the water." Pride International’s drillship Pride Angola started operations off Angola for Elf Exploration Angola on Girassol Block 17 in 4,900-ft water, under a 3-yr contract. Sistership Pride Africa is completing testing in South Africa and is expected to resume operations with Elf Angola under a 5-yr contract.

Drillship Saipem 10000 was underway to Italy, following completion of construction and sea trials at Samsung in South Korea. The rig is expected to mobilize to West Africa for one well with Agip Angola and another with Agip Congo, followed by two wells on sublet to TFE Gabon, all under a 5-yr contract with Agip. Navis AS’s drillship Navis Explorer 1 left Singapore en route to Brazil, where it will commence its one-year Petrobras/BP Amoco charter.

Transocean Sedco Forex’s semi Cajun Express will begin its journey to the U.S. somewhat later than expected. Upon arrival around mid-August, it will undergo final testing before commencing a 5-yr program with Marathon. And Transocean Sedco Forex’s drillship Discoverer Deep Seas will begin mobilization to the U.S. from Spain’s Astano Shipyard. After final outfitting at Ingleside, Texas, it will begin a 5-yr, plus three-option program for Chevron.

SCORE barometer rising – slowly. Houston-based offshore contractor Global Marine reported that the company’s worldwide SCORE (Summary of Current Offshore Rig Economics) for April 2000 increased 1.6% over the previous month. Chairman, President and CEO Bob Rose said, "The increase reflected improvements in all major markets, with the largest increase coming from the Gulf of Mexico. Strong U.S. natural gas prices and low gas storage levels will continue to promote drilling activity there, where 35% of the world’s competitive offshore rigs are located."

SCORE compares the profitability of current mobile offshore rig rates to those at the 1980 – ’81 peak of the offshore drilling cycle, when speculative new-rig construction was common. A separate SCORE is calculated for various types of rigs and regions to indicate relative condition of rig markets.

April’s worldwide SCORE for all types of offshore rigs increased 1.6% to 27.5% – but it still has a long way to go. The April level represents a 6.3% decrease from April 1999 and a 27.8% decrease from the same period five years ago. For two specific rig types, with a 3.4% increase from March 2000, the 31.0% SCORE for jackups has increased 7.0% from a year ago and 20.0% from five years ago. April’s 23.9% for semis is a 0.4% increase from March, but an 18.6% decrease from last year, and 35.4% below five years ago.

Make better deals for investors. TOGA, the Tennessee Oil and Gas Association, offers some sound advice for operators trying to attract much-needed project investments. Quit over-promoting deals and start structuring better drilling programs that give investors an honest opportunity to earn a return on their investment, an oil company executive urged TOGA members at their recent annual convention.

"We have to do better or capital will totally dry up from the fund-raising side of this business," said Ed Stillie, president/CEO, Blue Ridge Energy. "With crude at $30 and gas at $4, the investing public is once again looking favorably at domestic oil/gas exploration. E&P companies must attract outside capital to fund their exploration activities and capitalize on these higher oil and gas prices. Investors are now demanding at least the chance to get a good return on investment. But in too many cases, they haven’t even gotten a return of principal," he noted.

"To capitalize on investors’ renewed interest in domestic oil and gas exploration, operators must offer them excellent drilling prospects, carefully structured with lower promotion costs and an equitable revenue sharing. They deserve an opportunity to see a substantial return on their investment.

"For too long, exploration firms have attracted millions of dollars in investment money with presentations showing complex geological prospects. The drilling may have been successful, but the payout for investors wasn’t very good for a variety of reasons, including excessive sales costs, highly promoted programs, low oil/gas prices, and even poor completion techniques," Stillie added.

"At Blue Ridge, we are generating high quality drilling prospects and putting them in programs that are structured to give investors every opportunity for success. I urge you to consider doing the same thing. If you do, we will attract enough drilling capital to make the Appalachian basin one of the hottest oil and gas plays of 2000," Stillie concluded. Sounds like good advice for any area, and a way to turn drilling around even faster.

UKOOA drill cuttings initiative. The offshore oil/gas industry’s drill cuttings initiative moved into its final phase in May, with tenders being gathered for a second, year-long program of research budgeted at £3.4 million ($5.4 million). Contracts are expected to be in place by the end of July.

The initiative, launched in June 1998 by the UK Offshore Operators Association (UKOOA), seeks to determine how best to deal with old accumulations of cuttings on the seabed in accordance with principles set out by the OSPAR Convention for the Protection of the Marine Environment of the North-East Atlantic.

The new program will build on research findings from the £1-million first phase. Key stakeholders met in February to discuss findings of the first phase and help shape direction of the new program. Full reports and executive summaries for the Phase 1 study are available on the UKOOA website: www.oilandgas.org.uk/issues.