What's Ahead in 2005

Brighter outlook seen for drilling

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

Record high energy prices in the US tell the same story as Gross Domestic Product statistics, namely, that another economic expansion is underway, and our record large economy needs more fuel. At the same time, China's rapidly growing economy is causing worldwide demand for oil and gas to grow significantly each year, with Middle Eastern oil progressively heading more East than West.

Will 2005 be the year when government policymakers finally face the reality that we must eliminate all the roadblocks to increasing domestic production, whether in Alaska's ANWR, the Rockies or offshore? The proposed Alaska gas pipeline needs a push, also. The US petroleum industry is ready to do its job, if access can be granted to areas now off-limits to exploration. In so doing, we will create more jobs here, at home. If there was ever a time to implement a good energy plan like President Bush's, this is it.

The overall outlook for contract drillers in 2005 is optimistic. As 2004 comes to a close, market conditions for both land and offshore rigs are improving; demand continues to rise, and the supply of viable rigs is becoming increasingly scarce in the US and international regions. Land rig fleet utilization has reached 85%, the inflection point at which meaningful day rate increases are possible. Rowan's 15-rig land fleet is now booked six months out. Offshore, we are almost exclusively in the jackup rig market, where worldwide utilization is 83%. We believe that US and international markets will be strong during 2005.

The Gulf of Mexico (GOM) will continue its advance toward equilibrium, due to continued jackup rig migration and increased demand. Between 2001 and October 2004, 47 jackup rigs left the Gulf. Nine to 13 more rigs are forecast to leave by third-quarter 2005. This could result in 100% utilization next year, or even in a jackup supply shortage. Another factor not to be overlooked is the large number of LNG facilities that are under construction or planned throughout the world. Jackup rigs are the workhorses of natural gas development, and it is not unreasonable to assume that anticipation of these projects will further increase demand for rigs in the near term.

Another trend that is of great interest is deep gas drilling on the GOM Shelf. Results of Western GOM Lease Sale 192, held last August, demonstrated growing industry interest in water depths of less than 200 m (655 ft). Independent and major oil companies bid on 135 tracts in these depths, a 22% increase over bids received last year.

Besides geological prospects, operators are no doubt enticed by the Deep Gas Relief Incentives announced by Secretary of the Interior Gale Norton last January. According to the Minerals Management Service (MMS), as of October, 54 Deep Shelf wells had been drilled this year, including 39 to depths between 15,000 and 18,000 ft, and 15 wells greater than 18,000 ft. Deep Shelf drilling will continue to gain more momentum, as majors continue to increase their role on the Shelf, and as both majors and independents strive to replace gas reserves.

In the UK, the Department of Trade and Industry's award of 97 offshore licenses in the 22nd Round to oil majors, independents and some smaller companies is encouraging. This, together with the Promote License initiative, where 58 licenses were awarded, demonstrates that interest in exploring for oil and gas prospects is far from dead. The UK Department of Trade and Industry has instituted a progressive, innovative licensing system that is attracting international attention. A number of the new operators plan to begin drilling next year.

On Sept. 20, 2004, the US Commission on Ocean Policy delivered its final report to President Bush and Congress. After three years of hard work, the commission has written a balanced, comprehensive review of all the issues facing the nation with respect to its oceans and coastal resources. “An Ocean Blueprint for the 21st Century” is available on the Web at www.oceancommision.gov.

The report demonstrates for the first time the extent to which oceans and coasts are major contributors to the US economy, and how they hold more potential for jobs and economic benefits in the future. At the same time, it points out how ocean and coastal resources and ecosystems are in trouble from years of neglect. An entire chapter in the report is devoted to “Managing Offshore Energy and Other Mineral Resources.”

The petroleum industry will be pleased to see that the OCS program is treated in a fair and balanced manner, with due recognition expressed for the industry's technological advances and outstanding environmental safety record. Among the commission's recommendations concerning offshore energy are:

• Congress should use a portion of the revenues that the federal government receives from leasing and extraction of OCS oil and gas to provide grants to all coastal states. These grants can be invested in the conservation and sustainable development of renewable ocean and coastal resources. For those states where OCS oil and gas are produced off their coastlines, a larger share of such revenue would be given to them, to compensate for the costs of addressing environmental and socioeconomic impacts of energy activity. None of the programs that already receive revenues from OCS oil and gas activities should be adversely affected by this new allocation.
• The US Dept. of the Interior should expand MMS's Environmental Studies Program. Priorities for the enhanced program should include 1) conducting long-term environmental research and monitoring at appropriate OCS sites, to better understand cumulative, low-level, and chronic impacts of OCS oil and gas activities on the natural and human environments; and 2) working with state environmental agencies and industry to evaluate the risks to the marine environment posed by aging offshore and onshore pipelines, particularly in the Gulf of Mexico.
• Ocean.US, working with the National Ocean and Atmospheric Administration (NOAA) and MMS, should include the offshore industry as an integral partner in the design, implementation and operation of the Integrated Ocean Observing System (IOOS), especially in areas where oil and gas activities occur. Specifically, Ocean.US, NOAA and MMS should work with the oil and gas industry to 1) employ industry resources, such as pipelines, platforms and vessels, as part of the IOOS; and 2) incorporate nonproprietary data into IOOS informational products and larger environmental databases. This should be done while protecting the security of proprietary data and meeting other safety, environmental and economic concerns.
• The National Ocean Council (NOC), working with the US Dept. of Energy and other appropriate entities, should review the status of gas hydrates R&D, to determine whether methane hydrates can contribute significantly to meeting the nation's long-term energy needs. If such contribution looks promising, then the NOC should recommend an appropriate level of investment in such R&D, and determine whether a comprehensive management regime for industry access to hydrate resource deposits is needed.
• Congress, with input from the National Ocean Council, should enact legislation providing for the comprehensive management of offshore, renewable energy development as part of a coordinated offshore management regime. Specifically, this legislation should 1) be based on the premise that the oceans are a public resource; 2) streamline the process for licensing, leasing and permitting renewable energy facilities in US waters; 3) subsume existing statutes, such as the Ocean Thermal Energy Conversion Act; and 4) ensure that the public receives a fair return from the use of resources, and that development rights are allocated through an open, transparent process that considers state, local and public concerns.
• MMS should systematically identify the nation's offshore, non-energy mineral resources and conduct the necessary cost-benefit, long-term security and environmental studies to create a national program that ensures the best uses of those resources.

Finally, in Chapter 24, the Ocean Commission report contains an excellent, well-written review of the OCS program, from its quiet beginning to prohibitions on leasing – including its processes, politics and successes. This is a must-read for anyone involved in offshore energy.

THE AUTHOR
	Paul Kelly is senior vice president of Rowan Companies, Inc., responsible for special projects and government and industry affairs. He is a member of the US Commission on Ocean Policy, as well as a member of the Ocean Research Advisory Panel under the National Ocean Partnership Program. Mr. Kelly has served on the US Secretary of the Interior's Outer Continental Shelf Policy Committee under four administrations, serving as chairman of the committee from 1994 to 1996. From 1985 to 1987, he was managing director of Rowan's North Sea operations in London. Upon his return to Houston, he was elected to a two-year term as president of the British American Business Council of the Southwest. He served on the data integration and writing team for a landmark study of U.S. natural gas supply and demand published by the National Petroleum Council in 2000. Mr. Kelly holds a BA degree in political science and JD degrees from Yale University. He serves on the Advisory Board at the Center for Oceans Law and Policy at the University of Virginia School of Law.