Beyond the Horizon

Tom Marsh Managing Editor Offshore Data Service, Houston Talk around the industry keeps returning to new rig construction. The discussion has shifted from "When will we need to build new rigs?" to "How can we pay to build new rigs?" The answer to the new question is "Through internally generated funds," but this is not the real issue. The real issue is the assumption in this change of focus that the time to build is near, if not here.

Jan 1st, 1997

New rig construction: Now? Never?

Tom Marsh
Managing Editor
Offshore Data Service, Houston

Talk around the industry keeps returning to new rig construction. The discussion has shifted from "When will we need to build new rigs?" to "How can we pay to build new rigs?" The answer to the new question is "Through internally generated funds," but this is not the real issue. The real issue is the assumption in this change of focus that the time to build is near, if not here.

This assumption is built on a very shaky foundation, which has as one of its components the warm fuzzy feeling drilling contractors are experiencing as a result of the current rig market. Worldwide offshore rig utilization has increased more or less steadily since early 1995, and currently is hovering around 93%. The increase has been accompanied by the expected rise in day rates, and cash is once again flowing to drilling contractors' bottom lines. Standard & Poor's forecast that offshore drilling contractors' earnings and cash flows would set new records over the next several years. Rig owners' recent quarterly earnings reports paint a picture of a financially fit industry: Most are peppered with phrases like "announced record profits" and "significantly higher net income."

Despite the rampant optimism that has gripped some industry players and analysts, the question of whether or not the long-awaited, long-term industry turnaround has arrived remains to be answered. The driving factor in the industry is the price of the product, and oil and gas prices cannot be predicted.

However, with profit margins on the upswing, worldwide rig utilization over 90% and the near- and long-term outlooks the most positive in over a decade, is new rig construction, including speculative newbuilding, within the realm of possibility?

Unfortunately, the answer may be "yes."

Case in point: Rowan Companies' board of directors has approved construction of two new Gorilla class jackups on speculation, in addition to one already being built. Also, a former official of a defunct drilling contractor reportedly has been scouting around Canadian shipyards, making inquiries related to the construction of six new jackups.

However, little new construction is justified by the current and foreseeable state of the offshore drilling industry.

Specialized units for specific programs, yes.

General fleet replacements and additions, no.

The logic

A new jackup will cost anywhere from $70 million to $150 million depending on the design. A new semisubmersible will cost upwards of $200 million to $300 million or more. By most estimates, delivery will take 24 to 48 months. This puts delivery of new equipment ordered today outside the time frame of most current drilling contracts. Other than for a highly specialized unit, why would an operator pay a premium price for a newbuilding, when a suitable rig most likely is available in the same time frame at a lower day rate?

While drillers' earnings forecasts are extremely positive, no forecast in general circulation is making the claim that contracts and day rates will improve enough in the foreseeable future to alter the situation.

Global Marine's monthly Summary of Current Offshore Rig Economics (SCORE) illustrates the situation. The SCORE reflects current day rates as a percentage of the estimated day rates needed to justify new construction. The SCORE stands at about 58%, that is, worldwide day rates are only 58% of what they would need to be to justify new construction.

Despite rising day rates, Global Marine's SCORE shifted very little in the second half of 1996. This happened because estimated replacement costs are on the rise. With more than 40 upgrade and conversion projects taking place, and several newbuilding projects underway, shipyard capacity and the ability of suppliers to provide specialized materials and equipment needed for rig construction are strained.

There's more: A senior BP official commented recently that his company could not justify paying the day rate that would be required to fund construction of a deep water drilling unit unless that rig could perform multiple functions simultaneously, such as drilling two wells at once, and even then, the economics would have to be better than those attached to many current exploration and development programs.

A top Shell official has predicted that the contract drilling industry will find itself with over-capacity in as little as four or five years if the industry embarks on a new construction campaign.

Contractors should heed that warning.

Operators are not clamoring for new rigs to be built. They will deal with the current, temporary, tight rig market through other means, such as rig sharing and more efficient project scheduling. Shell already is considering establishing an entity to handle a ll of its worldwide deepwater rig contracting, so its various units can employ equipment with maximum efficiency.

Contractors need to stay as lean as their customers, exercise self-discipline, and avoid a disastrous repeat of their over-zealous rig building history.


This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that will shape the future of our industry. Offshore Magazine invites you to share your thoughts. Send your manuscript to Beyond the Horizon, Offshore Magazine, Box 1941, Houston, TX 77251 USA. Manuscripts will not be returned.

Copyright 1997 Offshore. All Rights Reserved.

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