Are rig contractors running out of upgrade candidates?

Diamond Offshore's Ocean Clipper drillship currently undergoing a conversion.

The number of mobile offshore drilling unit conversions, upgrades, and newbuilds continues to climb, a necessary trend as worldwide rig demand passes the 88% (available and cold-stacked included) mark. Contractors have already or are planning to upgrade and convert some 14% of the existing drilling fleet, and are searching for ways to acquire or improve any existing capacity, before opting to build new units.

In any case, 13 newbuilds are expected to join the current fleet of 611 MODUs in the coming years.

Currently, there are 86 vessels under construction or conversion, or have been completed recently. Drilling contractors are waiting anxiously for completion of the upgrades and conversions to be able to take advantage of the skyrocketing dayrates.

A majority of these projects were started in 1995 and 1996 and completion is expected within the next year and a half. However, the backlog of units awaiting upgrading should decline soon, for two reasons:

• Drilling contractors are beginning to run out of rigs that can be converted economically. The two major requirements are hulls with sufficient steel thickness remaining and enough useful life remaining in the equipment not easily replaced.

• Rising dayrates for existing units are discouraging contractors from pulling units off jobs for upgrading. For example, obtaining a 30% higher dayrate on an upgrade is not worth while if the unit, which no longer has debt obligations, must be taken off line for 7-10 months.

Most of the newbuilds and upgrades have contracts with producers of sufficient length to pay for most of the cost of the upgrades or new fabrication, especially those capable or working in water depths exceeding 3,000 ft.

Despite contracts of longer duration, along with higher dayrates, most drilling contractors are planning for market weaknesses somewhere in the future and are conserving higher revenues to tide them over. Purchasing existing market share, not building new units, is the route that most are taking.

However, the tide of rig upgrades may be nearing an end as contractors have run through all but the weakest rig candidates. Whether they choose to pull additional units will depend greatly on projected day rates and forecasts of future oil and gas demand and supply.

1997 survey data

This year's survey includes jackups, drillships, barge rigs, semisubmersibles, and submersibles. A total of 99 offshore drilling units are listed in the survey, from 26 drilling contractors. Thirteen of the units are newbuilds (8 jackups, 4 drillships, and 1 semisubmersible). Of this number, 11 are in the planning stage. The remaining two are under construction currently. The remaining 86 are being converted or upgraded.

The majority of these vessels are jackups (34), followed by semisubmersibles (31), and drillships (12). Of the upgrades and conversions, 41 projects are currently under construction, 13 are planned, and 32 have been recently completed.

Each vessel listing includes the name and type of vessel, whether it is a newbuild, the stage (planned, underway, or recently completed) the construction is in, the new capabilities or upgraded features, the proposed date of completion, and the construction yard. Most information contained within the survey was submitted by the companies with the remainder gathered from other sources.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.