Nov. 2001 Vol. 222 No. 11  Drilling Developments

Robert E. Snyder,  Editor

Jackup market drop; deepwater strength

The market for jackup rigs in the Gulf of Mexico continued its free fall in early October as utilization hit 56.7%, down 3.3% from the previous week, according to the Gulf of Mexico Newsletter. Presumably, this drilling slump is related to the drop in natural gas prices, as the shallow Gulf is gas prone, and an infrastructure exists to put new gas wells on quickly, once drilled and tested.

In other words, smaller operators can pick and choose their times to invest in sales, farmouts, etc., to jump into, or out of, the market. A friend once told me that the standard reply from his management to U.S. Gulf gas drilling proposals was, "Do you have a contract?" Several contractors have begun to ready-stack jackups, besides those that have moved out of the GOM to "greener pastures."

Beyond shallow Gulf waters, the rig market is holding up better. The Offshore International Newsletter says worldwide floating rig demand has remained "remarkably buoyant" over the last three months. While some market sectors continue to underperform, the floating fleet is poised to close out the year in a solid fashion.

That was not always the case. In July, the floater fleet was at a crossroads. Worldwide demand had been rising steadily, but had seemingly reached a plateau. The uncertainty of those 90 days has passed, and while some rig market sectors have taken a hit, the worldwide fleet remains on solid ground. Dayrates most likely will erode in select regions, most notably the U.S. Gulf. But the overall floater fleet should enter 2002 in a good position to make up ground lost over the last half of 2001, if global economic conditions permit, OIN says.

The number of second-generation semis under contract is down slightly since July. The U.S. Gulf has the largest cache of idle second-generation units. Ten of the world’s 17 idle semis are located there. Worldwide utilization is currently 76%.

The third-generation semi market struggled even more than the above over the last 90 days, at least in terms of dayrates. Demand is up by three rigs since July, and with 46 of the world’s 47 third-generation semis under contract, utilization is a robust 97.9%, and stability in the market should carry forward into 2002.

The fourth-generation market remains strong. Utilization is back to 100% after taking a brief dip in August. Most of the world’s market in this class will change little over the rest of this year. However the U.S. Gulf is in a precarious position, OIN notes. Six of the seven units scheduled to complete their known commitments before year-end are in the GOM.

For DP drillships, not much has changed in the last seven months. Since April, 27 of the world’s 28 units have been under contract and utilization remains at 96.4%. The lone rig without a contract remains stacked cold; but that rig is under new ownership. With a little luck, DP drillship utilization could hit 100% in the near future.

Deepwater activity strong. Major oil company operators are obviously placing their big money on deepwater prospects that require multi-billion dollar, long-term investments, but offer promises of high-rate oil production not available anywhere else. OIN’s comprehensive analysis of October 1 gives lots of information on specific rigs and operator plans. Despite near-term global economic uncertainties, this new frontier promises to drive technology and increase production for many years.

In early October, the worldwide offshore drilling fleet had 61 rigs rated for water depths greater than 4,900 ft – 37 of these joined the fleet since 1998, and another six rated for similar water depths are under construction. Deepwater rig utilization is near 100%. Of the 61 units noted, 56 are working in waters ranging from 1,000 to 8,141 ft in the U.S. Gulf (27 rigs), Brazil (18 rigs), plus Northwest Europe, West Africa and India.

Deepwater activity continues to benefit others in the service industry. Halliburton told OIN that the "outlook for deepwater opportunities remains strong" and the company’s existing backlog of deepwater contracts plus a long list of new project opportunities will keep it very busy through the next several years. It expects growth opportunities in all of the key deepwater markets – the Gulf of Mexico, Brazil and West Africa, plus some emerging arenas elsewhere.

Offshore support vessel owners are pursuing deepwater opportunities. Tidewater, for example, believes the market is a good bet. It has announced several new construction initiatives in recent months.

ITC probe raises drill pipe concerns. As reported in IADC’s monthly Drill Bits newsletter, President Bush requested the U.S. International Trade Commission (ITC) to institute a "Section 201" investigation to determine whether any rise in steel imports has resulted in serious damage to the U.S. steel industry. This move could threaten the available supply of drill pipe to U.S. contractors, even though almost all drill pipe utilized in the U.S. is manufactured domestically.

The reason is, U.S. manufacturers secure raw materials, such as green drill pipe tubes and tool joints, from outside the country. This is done primarily for quality reasons, enabling U.S. manufacturers to produce drill pipe exceeding API standards. Similarly, tool joints are sourced from non-U.S. mills, primarily for quality reasons, but also because of limited supply available domestically.

IADC joined drill pipe manufacturers and distributors in opposing the Section 201 investigation, specifically requesting exclusion of drill pipe components from the inquiry. Noting that the volume of imported steel directed toward such oil field use is too small to adversely affect the U.S. industry, the letter opposes the investigation to the extent it would limit, in any way, the quality and supply to the contract drilling industry.

"The 201 investigation has important – and potentially very harmful – consequences for the drilling industry, and we support the effort to remove drill pipe components, including green tubes and tool joints, from the investigation," reports IADC Sr. VP-Government Affairs, Brian T. Petty, who can be contacted at 1 202 293 0670 for more information.