DRILLING RIG ECONOMICS: Harsh-environment, ultra-premium jackups taking advantage of US market shifts
Global JU utilization now at 90%
Energy demand in the US is projected to increase 32% from 1999 to 2020, reaching 127 quadrillion BTUs. LNG imports into the US and pipeline supplies from Canada and Mexico are capacity constrained, yet the demand for US gas continues to grow with rising electricity demand and tougher environmental restrictions on fuels for generation plants. - ENSCO 101 is shown undergoing repairs at the Verolme Botlek shipyard in Rotterdam.
In addition to some onshore areas in the western and eastern US, Gulf of Mexico deepwater and shelf areas will likely be the targets of sharply increased drilling. Until recently, it was thought that the Gulf of Mexico deepwater regions would provide the needed supplies, but geologists are finding a great deal more oil than gas in deep-water.
As a result of the renewed US energy search, analysts at Lehman Brothers are predicting a substantial multi-year upcycle for contract drilling, beginning this year. Oil and gas producers have increased exploration budgets for the next twelve months after a very slow 2000, and drilling companies are scaling up to take advantage of the opportunity.
As a result, worldwide jackup utilization has now reached 90%. Day rate averages for December were $44,040 for independent cantilever jackups and $40,583 for independent slot jackups. Estimates point toward substantial increases in day rates over the 2001-2003 time period, which in return, will lead to increased earnings for drilling companies. The challenge for drilling companies will be to provide the rigs and personnel to capitalize on these economic conditions.
Paul L. Kelly, Senior Vice President of Rowan Companies, says that the driller's strategy for making the most of these opportunities includes an $800-million investment in harsh-environment jackups, designed and engineered for high-pressure/high-temperature (HP/HT) drilling in harsh environments.
Rowan's fleet of harsh-environment rigs includes seven such jackups. Gorilla V is drilling offshore Nova Scotia, while Gorilla II, Gorilla IV, and Gorilla VI are working in the Gulf of Mexico. Gorilla VII is scheduled for completion late this year, and Gorilla VIII will be ready for action in the second half of 2003.
Long leg jackups
Built for the severe conditions of the North Sea and offshore Eastern Canada, the Rowan rigs are proving to be exceptionally good tools for subsalt and deep gas drilling operations in the Gulf of Mexico. Their water depth capabilities, ranging from 400 ft to 550 ft, make them suitable for drilling in the deeper regions of the outer continental shelf (OCS), which extends out to depths of 656 ft.
With considerably increased natural gas usage in the United States, Rowan should be in position take advantage of the expansion of gas drilling in the deeper regions of the OCS over the coming years.
At present, Rowan is the only provider of harsh-environment jackups with rigs working in the Gulf of Mexico.
Not surprisingly, the vast majority of harsh-environment jackups are working in the North Sea. All five of Maersk's harsh environment jackups are drilling there, as are Smedvig Offshore's West Epsilon and Transocean Sedco Forex's Transco Nordic. Noble Drilling's Kolskaya is also drilling in the North Sea.
Ensco International has the largest fleet of premium jackups in the world as well as three harsh-environment jackups. However, none of its harsh-environment rigs are currently deployed. The ENSCO 100 is undergoing modification, and the ENSCO 101, having undergone repair work following an accident last year, is undergoing an enhancement of its legs. It is scheduled to be available as early as this month. The ENSCO 102 is still under construction.
Santa Fe has begun preparations to take advantage of the deep-drilling needs in the US Gulf by building what it says are less costly rigs with comparable depth capabilities. With four harsh-environment jackups in the North Sea and one offshore Canada, Santa Fe is looking in a new direction for the rigs it is now planning to build.
In December of last year, Santa Fe's Board of Directors announced authorization for construction of up to four jackups to be delivered at 12-month intervals beginning in late 2002, with the final jackup being completed in 2005.
Santa Fe's current newbuild jackups may not qualify as harsh-environment jackups, in the true sense of the definition, although that could change. Preliminary design plans are for larger-than-average rigs capable of drilling in 350-400 ft water depths in benign areas, and 300-350 ft depths in harsher environments. Santa Fe appears to be adding to its premium jackup drilling fleet by going for greater depth instead of harsh environment with its new rigs.
Chiles Offshore, Inc. is developing its fleet along the same lines as Santa Fe. Chiles has three ultra-premium jackups in operation and has commissioned the construction of two more. According to Bill Chiles, President and CEO, the market is reflecting a movement toward deep gas drilling around the world. With that in mind, there is an obvious need for deep-drilling capability, but in his view, less of a need for harsh-environment jackups. Chiles notes that as far as the US market is concerned, "the thrust of the market in the future will be to drill for deep gas on the continental shelf."
Deep, not harsh?
The cost savings of building ultra-premium jackups, instead of harsh-environment jackups, are considerable - $55 million to $80 million per rig. Specifications for the Chiles rigs provide for the same drilling depth capabilities and the same water depth capabilities as their harsh-environment counterparts, with a cantilevered drilling structure and substructure that allow the unit to drill or workover wells on existing fixed production platforms.
Chiles expects delivery of the two commissioned jackups in March and August of 2002 and is considering the option for a third rig down the road, although no definite plans are in place.
A number of drilling contractors are carving out specialized niches in the industry.
Among these are Transocean Sedco Forex, which signed an agreement with KFELS in May of 1998 for the construction of a Mod V jackup, specially designed for the Caspian Sea. The rig was partially built in Singapore, with the main sections built in the new KFELS shipyard in Baku. The Trident 20 was completed in the fourth quarter of 2000 and moved into the Caspian Sea for operation in October. Though Transocean Sedco Forex doesn't consider the Trident 20 to be a true harsh-environment jackup, the rig has a rated water depth of 350 ft, a rated drilling depth of 25,000 ft, and is winterized to withstand temperatures of -10° Celsius. This rig is the first Western-built jackup constructed in Azerbaijan for operations in the Caspian Sea, where it is the only jackup in operation.
625-ft depth rating
While Transocean Sedco Forex corners the Caspian jackup market, Maersk is beginning construction of two ultra-harsh-environment jackups that exceed the specifications of every other harsh-environment jackup. The two new jackups will have a rated water depth of 625 ft in environments such as the Gulf of Mexico and 492 ft in harsh environments.
The unique design will provide tremendous flexibility allowing the rig to drill subsea wells, in addition to traditional surface completed wells. The new ultra-harsh-environment jackup will be able to compete with semisubmersibles and will also be able to replace platform rigs in some cases because the drilling envelope has been increased to twice that of traditional units.
The cantilever maximum distance from the stern to the well center is 90 ft, and the maximum distance from the centerline to each side is 32.5 ft. This, combined with the 673 ft (plus optional 132 ft) leg length, will allow the new jackup to reach most wells on platform installations. By designing in capabilities that exceed the competition, Maersk has set itself up as the only company in the world able to provide a jackup of this magnitude.
With strong activity levels, consistently high oil prices, and improved technology in jackup design, the market is ripe for more innovation. Even assuming conservatively that oil prices settle out at near $25/bbl, the outlook for harsh-environment and ultra-premium jackups is promising.
Consistently higher prices in 2000 stimulated more exploration, drilling, and field development offshore US and Canada, and in pockets around the world. With the promise of an upturn for the industry, the next few months will presage several excellent years for drilling contractors.