Mobile drilling rig fabrication ending 10-year long drought

Leonard Le Blanc
Editor

A recent history of mobile rig fabrication shows a roller coaster plunge in the mid-1980's with now recovery until recently. The spike in semisubmersible orders in 1984-85 reflected an earlier deepwater thrust, just before the price of crude oil collapsed. Jackup fabrication never recovered after 1983.
The hull of this 5th generation [20587 bytes] semisubmerisble drilling unit is being fabricated for Odfjell Drilling, with an option to complete the unit for drilling or production when a contract materializes.
Rowan's Gorilla V [28335 bytes] will be the largest jackup when completed, and able to drill in 400 ft water depths anywhere. The unit is under construction.
What Mobile Rig Upgrades Cost
MODU Construction/Upgrade Survey I[.pdf file]
MODU Construction/Upgrade Survey II[.pdf file]

The beginning of the end is near for offshore drilling contractors - the end of a 13-year-long period of stacked and under-utilized mobile offshore drilling rigs. Growing demand for offshore rigs is providing contractors with a chance to recapture a long-stranded investment.

Drilling fleet utilization in the US Gulf of Mexico, measured as a percentage of all rigs with hard contracts, moved into the 82-85% range in June, and depending on the activation of ready-stacked units, could hit 90% by late September. Rig utilization in the North Sea wasn't far behind.

Many ready-stacked rigs (ready for work with minimum refurbishment) have been pulled out of storage to meet growing demand in the past six months. Others have been slotted for upgrading, to meet newer drilling or water depth requirements, or both. The cost of activating ready-stacked units can range from $0 to $3 million, depending upon how long the unit has been idle.

A small number of cold-stacked units (older units requiring major refurbishment) have been activated and contractors are making plans for about 40% of units cold-stacked.

Refurbishing cold-stacked units is estimated to cost $25-40 million for semisubmersibles and $10-30 million for jackups, without upgrading capabilities. A generation upgrade for a semisubmersible can cost up to $100 million.

In comparison with newbuild prices and delivery times, these costs are attractive, but without a payout type contract (return investment in three years), only a few contractors have been willing to risk speculative refurbishment. If evaluation of the rig's hull and superstructure indicates the steel plate, joints, and heavy equipment cannot handle 5-8 more years of duty, the units are likely to remain stacked at the present time.

The target threshold assumed by many drilling contractors for new construction has been a three-year contract at $120,000/day for a third generation semisubmersible/drillship and $52,000/day for a cantilevered jackup. In either case, newbuild costs can be recovered in 3-4 years. That dayrate threshold has flexed somewhat, especially since operators are likely to make pay-as-you-go deals to obtain use of present equipment. Such a contract was signed between Sonat and Amoco recently.

Six units planned

Despite the still-too-large gap between current day rates and those needed to build new drilling units, six units are in advanced stages of planning or actually in construction. The six, by date of first contract or completion, are:

Drillship Peregrine IV - Falcon Drilling - 1997: Falcon has purchased a Russian hull with full marine gear and will add drilling, dynamic positioning, and moonpool packages. The unit will be capable of drilling in 9,000 ft water depths.
Semisubmersible Deepsea Stavanger - Odfjell Drilling - 1997: Hull construction is underway in Norway. Topsides and drilling package fabrication will not proceed without an contract, leaving open the production unit option. Equipped to drill, the unit would be the first 5th generation semisubmersible.
Drillship Discover Explorer - Sonat Offshore - 1998: Sonat is deciding whether to purchase an existing double-hull tanker or build one, and will move to contract soon afterward. The 850-ft-long vessel will be capable of dual functions in water depths up to 10,000 ft.
Jackup Gorilla V - Rowan Drilling - 1998: Fabrication of the Gorilla V began earlier this year. The unit will be the largest jackup ever built, capable of drilling in 400 ft water depths anywhere in the world, able to cantilever 75 ft, and featuring 18,000 hp of total engine power.
Semisubmersible I (unnamed) - Japan Drilling Co. - 2000: Japan Drilling is conducting feasibility studies on this unnamed unit, and is holding off an order decision until later in the year.
The second of two semisubmersible units under consideration by Japan Drilling will be ordered after the first is in construction, with completion planned within the same year as the first.

Depth upgrading

Much of the demand for semisubmersible and monohull drilling units is driven by the increasing water depths at which oil and gas are being found. The pressing need for units capable of drilling in excess of 3,000 ft water depths has lead to the upgrading of 3rd generation and some second generation units, which in turn leaves a smaller fleet of 3rd generation units, and so on. This cascading demand now leaves only a small number of 2nd generation semisubmersibles stacked.

Jackup drilling units are experiencing a smaller demand, primarily because there is such a large idle fleet of ready-stacked and cold-stacked rigs. In the US Gulf of Mexico, cantilevered drilling units are in strong demand because of their ability to re-drill and deepen wells on existing offshore production platforms.

One of the capabilities created in the design of Rowan Drilling's jackup Gorilla V is to be able to cantilever up to 75 ft (drill line to edge of hull), compared with the maximum 50 ft now on the largest drilling units. This cantilever distance, along with the 400 ft all-weather water depth capability, will allow the contractor to access larger platforms with high production decks in deeper water.

Innovative financing

Without adequate day rates to fund new construction and only marginal rates for rig upgrading, some contractors are moving ahead with innovative financing agreements with operators. These arrangements are largely based upon the demonstrated presence of oil in deepwater, but also upon growing demand for oil and support for present oil prices.

Three such price-construction/upgrade arrangements reflect not only the opportunities, but some modest risk:

Sonat Offshore: The contractor will spend $320 million to upgrade one rig and build another for one contract, receiving in turn $330-375 million over six years. The firm will purchase and upgrade a semisubmersible to drill in 3,500 ft water depths by early 1997. The new Discoverer Enterprise will be available by early 1998, and will commence the remainder of a six year contract, after which it can be optioned back to the operator. The unit will be able to drill in 7,000 ft water depths.
Global Marine: The contractor will spend $200 million on two projects, receiving in turn about $210 million in drilling contract payments. One project will be to buy the semisubmersible Polycastle and upgrade it to drill in 5,000 ft water depths. The contract for the rig will extend over three years. The second project will deploy an Arctic class semisubmersible rig in 3,000 ft water depths, with minimum refurbishment, for a period of 16 months.
Odfjell Drilling: The contractor is paying $46 million for the hull of a Bingo 8000 class semisubmersible hull (pontoons, columns, bracing), and will invest no more until receiving a contract. The completed vessel will cost about $220 million, but completing the hull at minimum expense now will cut nearly one year off completion later.

The future

The six new drilling units, if all completed, will have only a modest impact on the rig fleet. At least 14 more units will be needed, especially for deepwater. Rig upgrades require 7-10 months, a much shorter period than new construction. However, the number of available rigs that can be upgraded at costs under $100 million is diminishing rapidly.

A surer indication of the new construction materializing should develop by the end of 1996. In the US Gulf of Mexico, one-third of all leases, including a great deal of deepwater acreage, will expire in the 1998-2000 period. Such an event will force lease operators to surrender undrilled acreage or find a way to drill the acreage.

However, plans to drill deepwater acreage off West Africa, West of Shetland, off eastern Indonesia, and the opening up of opportunities in Brazil could force the issue of availability on operators much sooner.

Plans for additional drilling units will have to go forward by the end of 1996 or early 1997, if the rigs are to be ready for work during 1998-2000, a period of maximum need.