Shortages of jack-up rigs drive up production costs

Research shows demand for jack-up rigs is far outstripping supply in the Middle East and worldwide.

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By  Stuart Matthews Published  December 5, 2006

A significant global shortfall in offshore rig capacity is looming, with an expected deficit of more than 30 jack-up rigs, from a total of 410 required in 2007. What’s more, contract a jack-up rig to work a site and the delay before it will be available could be 400 days or more – the average length of time each rig is already contracted for. These figures come from research by ODS-Petrodata, an independent research company, on the state of the global offshore rig market. In a presentation to oil industry figures in Dubai, company principal Gavin Strachan offered his forecasts for demand over the next few years. “The figures point to a global deficit of about 30 rigs; a level we’ve never seen before,” he said. “The deficit is already impacting on [oil] supply and it will be extremely difficult for operators to work as effectively as they would like in the medium term.” ODS-Petrodata thinks the numbers will translate to a shortage of 6-7 rigs in the Middle East in 2007. It predicts an average demand of 94 rigs, peaking in September at 101, based on 100% of rigs working. Supply will average 93. “However, there is no such thing as 100% utilisation. Rigs move locations and need repairs, so you only get something like 95% actual useage,” said Strachan. Look back as far as 1992 and only about 50% of the available rigs were kept fully occupied. Go back even further, to 1983, and 46% of the world’s offshore rig fleet was controlled by major international oil companies, such as ExxonMobil, Shell, Total and BP. This proportion had been gradually shrinking, as independent and national oil companies have got more involved. The low point came in May last year when the international operators controlled just 23% of the world fleet. Predicted shortages are seeing this situation start to change, as these major companies take a renewed interest in controlling rigs. Shell, for example, is investing in 12 new rigs. In the Middle East, Saudi Aramco, which had only nine rigs 18 months ago, is due to have 26 by April next year. Increases can be seen in Qatar too, mostly through Qatar Gas, where another 10 rigs are due over the next 18 months. This is in response to regional demand that ODS-Petrodata measures at 73.3 rig years for 2006, rising to 99.8 rig years by 2008. Strachan sees operators as having limited choices in this market climate. “Drilling contractors at the moment are being very hard nosed. They want good long-term contracts at reasonable day rates,” he said. “In the Middle East, national oil companies may be able to think longer term than international operators. They may be more able to offer drilling contractors long-term deals and therefore benefit from that. “The forecast for jack-up owners is good for the next six years as the market is likely to remain like this until at least 2012.” Day rates have risen in line with this demand, leaving drilling contractors smiling, while operators just have to grin and bear it. ODS-Petrodata predicts a peak rate of around $200 000 per day in the Middle East, but the gradual appearance of new-build rigs may trim this figure back to $180 000 per day. This will see new-build rigs coming into a healthy market: 62 are currently on order worldwide and will come to market at steady intervals until the end of 2009. While it takes two years to build a jack-up rig, problems can arise in securing the gear to equip them. A combination of the specialised skills needed in the shipyards, steel that has to be ABS certified and only a handful of companies supplying other critical equipment mean the rig-building industry has its own bottlenecks to cope with. “For instance, the preferred brand of top drive, which has roughly 90% of the market, could take up to 14 months to be delivered when ordered,” said Tony Bromham, project director for QGM. QGM is currently working on refurbishing a rig that will go to Saudi Aramco in the first quarter of 2007. The rig had been damaged to a point of ‘total constructive loss’, but it has been rebuilt and extensively upgraded in a project that QGM sees as a first of its kind. With two new build rigs also due for completion at the end of next year and the start of 2008, the company has a buoyant year ahead. “I think the market will stabilise from a constructor’s point of view and the current feeding frenzy will level out,” said Bromham. “But an important issue is the lack of available resources and trained people, which are driving up the prices of new build projects.” Equipment costs are rising too and commodity price increases are also having an impact, with steel being one of the biggest contributors. “Only a few companies in the world can supply some of the critical items used on the rigs and the right kind of steel,” said Ian Anderson, business development director for Maritime Industrial Services (MIS). “Since we signed a contract to build new rigs in April 2007, the steel price has gone up 17%. Our bid prices are only valid for 14 days, though some companies ask for 180 day validity. We can’t live with that, it would be commercial suicide.” Other challenges may lie in wait for the industry as new rigs will need crews and resources will need to be found to provide offshore support. In the meantime, drill contractors can look forward to busy schedules.

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