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Drill, Baby, Drill

By MarEx 2012-04-24 10:19:17

By Barry Parker

Like a phoenix rising from the ashes, the market for offshore drilling rigs, particularly for deepwater and ultra-deepwater-capable units, has come roaring back. In February Norwegian driller Seadrill announced the construction of two new drillships at Samsung Heavy Industries at a cost of $600 million each and stated that “The increased demand for ultra-deepwater rigs has been driven by high oil prices and significant exploration successes in both new and established deepwater regions, leading to a ramp-up in drilling programs.” Analysts have suggested that even the most challenging offshore projects make economic sense at $80/ barrel and above.

On the political front, any loud beating of war drums from the Middle East encourages exploration and production in friendly regions, particularly in drilling’s “Golden Triangle” – Brazil, West Africa and the U.S. Gulf, where exploration has resumed in ultradeepwater fields after a long, Macondo-induced hiatus. Brazil and West Africa, lacking an underwater pipeline infrastructure, have also supported robust demand for Floating Production, Storageand Offloading (FPSO) vessels.

A “superspike” in rates?
Hire rates tell the story. Day rates for sixth-generation “floaters” (semi-submersibles and drillships), capable of drilling in water depths of 10,000 to 12,000 feet, have climbed out of their 2009 trough and moved up to nearly $600,000/day. Morgan Stanley, in its Offshore Playbook for 2012, recommends a trio of firms with exposure to the high end of the market – the aforementioned Seadrill, a John Fredriksen-related dividend payer; Diamond Offshore, offering exposure to both deepwater and midwater (1,000 to 5,000 feet) rigs; and Transocean, still battered due to concerns about Macondo liabilities.

In February, Ocean Rig, majority-owned by the George Economou-controlled DryShips, announced a three-year charter of its harsh environment-capable, semi-submersible Leiv Eiriksson to a group of drillers led by Norwegian Rig Management at an estimated day rate of $610,000. The limited availability of such high-end floaters is likely to command premiums. Following a lull in contracting after the Macondo blowout, a spate of new rigs was ordered beginning in late 2010, but the first tranches will not begin delivering until 2013. With very few high-end rigs available for charter in 2012, Economou was trumpeting the availability of the semi Eirik Raude, currently drilling for Tullow in West Africa, and the drillship Ocean Rig Olympia, a dual-derrick design also working in West Africa. Morgan Stanley’s top analyst, Ole Slorer, told investors recently that a “superspike” in rates for high-end floaters could be imminent, noting that only two or three ultra-deepwater rigs will be available in 2012 versus anticipated demand of 25 to 30. Dahlman Rose, a New York-based investment bank, said that utilization for the high-end segment could reach 99 percent in 2013, reminiscent of early 2008 when the market peaked and hires exceeded the $600,000/day threshold. And sure enough, in mid-March Dahlman Rose reported that Transocean had leased the ultra-deepwater drillship Deepwater Expedition to Saudi Aramco at the “monster” rate of $650,000/day for two years with three eight-month options at $695,000/day.

Turnaround in the Gulf
The turnaround in demand for higher end equipment in the U.S. Gulf was evident from the remarks of David Williams, Chairman of driller Noble Corporation, in a February conference call: “In 2011, we saw all five of our active U.S. Gulf of Mexico-based semi-submersibles return to their full operating day rates following the drilling moratorium.” Noble provided a further highlight when Williams told listeners that “The drillship Noble Bully I successfully deployed its blowout preventer in the U.S. Gulf of Mexico and is expected to begin its five-year contract in the next couple of weeks. The Noble Globetrotter I has completed its required incline test and will conduct sea trials and mobilize to the U.S. Gulf, commencing a 10-year contract at the end of March.” A highly automated Huisman-type multipurpose tower, an alternative to conventional derricks (enabling a compact design), is deployed on Noble’s rigs.

Both rigs will be working for Shell at minimum day rates of $469,000 and $422,000, respectively (fixed before the market’s big move upward). A sister Bully-type drillship will be starting a 10-year contract with Petrobras for work offshore Brazil with the first five years priced at $461,000/day.

Brazil in the driver’s seat
Brazil, the clear driver of demand, has already increased the number of drillships to be built domestically for exploration and development work in the pre-salt formations found mainly in the Santos Basin. Brazilian yards will build the 28 drillships contracted from financial owner Sete Brasil and another five – with the dual-derrick specifications – from a Brazilian affiliate of Ocean Rig. Stiff local content rules, typically 55 to 65 percent, will buttress the development of new yards and the infrastructures to supply them. Some analysts have questioned the ability of the nascent Brazilian yards to complete these 33 rigs within the announced timeframe, i.e., by 2020. The first seven rigs awarded to Sete Brasil, said to cost around $662 million each, will be built at the Estaleiro Atlântico Sul (EAS) yard, a new facility in Pernambuco near Recife. The rigs are set to enter into 15-year charters to Petrobras at day rates in the mid-$500,000 range. Rates on the remaining 21 Sete Brasil units are estimated at $530,000/day and, for the five Ocean Rig units, $548,000/day. Jack-up rates soaring too For high-specification jack-up rigs, which drill in shallower waters close to shore at depths of up to 450 feet, day rates are expected to challenge cyclical highs of $150,000/day for term deals. Seadrill, in announcing a trio of jack-up fixtures in early February, showed the market to be ready to break through this “resistance” level. In deals involving oil majors, ExxonMobil E&P Malaysia chartered the West Leda for an 18-month development drilling program off Malaysia at $136,000/day, while the Offshore Defender was chartered for four years by Brunei Shell Petroleum at a rate of $137,000/day.

Colombian charterer Equion Energia took the Offshore Mischief (finishing up work for Anadarko in Brazil) for a firm 180 days, starting in late March, at more than $170,000/day. In the ultra-premium sector of the jack-up business Ensco’s Ensco 120, the first in a series of three newbuilds from Keppel suitable for harsh environments, has been chartered to Nexan in the central North Sea at $230,000/day, commencing on delivery in 2013.

Dahlman Rose has a “Buy” on Ensco predicated partly on strength in the jack-up sector. Analysts Jim Crandell and Doug Garber noted: “Ensco's jack-up fleet is highly leveraged to tightening markets in the GOM, North Sea, Middle East, and Asia/Pacific. The company has eight rigs working in the Gulf of Mexico that are rolling off contracts in 2012 – all of which we expect will be awarded sequentially higher rates and longer contracts.” They added that the North Sea, where Ensco has five conventional jack-ups that will come open in 2012 and two additional high-spec newbuilds delivering in 2014, would also be a source of strength.

The FPso solution
As oil is discovered farther from shore with no embedded infrastructure, FPSOs – fed by subsea wells – continue to grow in importance. Though FPSO solutions have long been established in Asian waters and offshore West Africa, Brazil again provides the way forward. Petrobras’s complement of working FPSOs includes Sevan Piranema on a 15-year charter that began in 2007, one of several units that has transitioned to Teekay Offshore Partners in an October 2011 acquisition. BW Offshore, the owner of an FPSO in the Gulf of Mexico, has its BW Cidade de San Vicente on a ten-year contract with Petrobras, the first FPSO to produce oil from the Lula Field in the pre-salt region of the Santos Basin.

OSX, a company within Eike Batista’s EBX group, has plans to build a fleet of 21 production platforms, including 19 FPSOs. In late January the FPSO OSX-1, originally built at Samsung and completed at Keppel, achieved first oil at a field in the Campos Basin operated by sister company OGX. Two additional units are in progress at Asian yards, OSX-2 (to be built by SBM Offshore) and OSX-3 (to be built by Modec), each costing roughly $800 million, and will be leased to OGX for 20 years.

Brazil will be transitioning to local construction of FPSOs as part of its ambitious local content plans. Petrobras, with eight FPSOs already under construction at the Estaleiro Rio Grande yard in southern Brazil, was reportedly tendering in February for some $7 billion of topside modules. The first unit, dubbed P-66, would be completed in late 2013. The UCN Açu shipyard complex, an OSX sister company, is slated to perform installation of topside modules on OSX-2 and OSX-3, paving the way for 2013 deliveries.

Roberto Monteiro, Chief Financial Officer of OSX, told MarEx: "The UCN Açu, OSX's shipbuilding unit, will begin integration of FPSO OSX-4 in the second quarter of 2013. OGX’s demand for offshore units until 2019 is expected to be equivalent to $30 billion, based on an order book of 48 offshore E&P units. Furthermore, the potential demand for offshore E&P units in Brazil within the next 10 years is expected to be larger than 180 units."

BG Group, an operator of fields in the Santos Basin, announced in early March that it was on course to securing $1.8 billion in financing from the Brazilian Development Bank (BNDES). The loans will comprise part of a package to fund the construction of eight FPSOs at Brazilian yards.

Something for everyone
A host of service providers benefit from the requirements to build out subsea infrastructure in the Golden Triangle and elsewhere. Among recent announcements, Technip, the Paris-based oilfield services specialist, won a Petrobras tender for risers and flowlines for gas reinjection at the Guara and Lula Nordeste Fields in the Campos Basin at 7,000-foot depths. Technip also won a job in the Gulf of Mexico supplying subsea infrastructure to support Hess’s production at the Tubular Bells Field in 4,500 feet of water.

Like the drillers, the service providers (Technip, Saipem and Subsea 7) are top Morgan Stanley picks poised to benefit from the tremendous activity in the sector. The big Korean yards (Samsung, Hyundai and Daewoo) and component suppliers like National Oilwell Varco and Cameron will also profit from the rising tide of rig construction – which may be a tsunami, depending on how events play out. - MarEx