Singapore captures the market
The newbuild jackup market has reached record levels, and Singapore is raking in the profits. The country’s two major yards, Keppel FELS and PPL Shipyard Pte. Ltd., have captured a commanding lead in worldwide jackup construction, with a current total of 28 of the 34 rigs on order through 2009.
In the five-year period from 2000 to 2004, the industry saw 15 newbuild jackup rigs capable of drilling in excess of 350 ft water depth. As of June 2005, the newbuild count for the next five-year period (2005-2009) is 34 rigs recently delivered, under construction, or on order. And there are more rig options and letters of intent in the works.
The new jackup fleet
Twenty-five of the 28 rigs being built in the Singapore yards are capable of drilling in the 350 ft + water depth range.Offshore’s 2004 deepwater jackup rig poster featured 66 rigs worldwide that are capable of drilling in 350 ft water depth or deeper. Since July 2004, two of those rigs have been retired. The Ensco 64 suffered severe hurricane damage when Ivan swept through the Gulf of Mexico last September, and GlobalSantaFe removed the GSF Adriatic IV from service last August following a blowout in the Mediterranean offshore Egypt.
The 2005 poster featured in this issue ofOffshore lists 90 jackup rigs capable of drilling in the 350 ft or deeper water. The net increase is 24 rigs in the course of 12 months, including 26 newbuilds, a 39% increase in deepwater jackups.
Timing is everything
Utilization rates for jackup rigs are at all-time highs, nearing 100% in the GoM and topping out at 87% in Southeast Asia and Australia, according to day rates listed last month by Rigzone. And the numbers are steadily increasing. Operators are again starting to sign more term contracts for jackups.
Global LNG demand also seems to be driving the recent strong up-tick for jackup rigs, particularly in the Middle East and Persian Gulf. Day rates are rising, especially for the harsh environment jackups, which are leasing at an average of $65,500, according to Rigzone, with some bringing in over $70,000/day.
Prior to 2000, an industry rule of thumb had been that a mobile offshore drilling unit had a natural life of about 25 years. In the last decade, however, drilling contractors have embarked on a program of life enhancements that has dramatically extended the life of the jackup fleet.
Most of the major drilling contractors with deeper water jackups have undertaken enhancement programs. Of the 49 rigs included in the 2005 deepwater jackup rig poster, 32 (65%) have undergone upgrades.
Most upgrades consist of some combination of adding a third mud pump, upgrading the mud circulation system pressure, changing out the mud processing equipment, adding a third crane or upgrading existing cranes, upgrading the top drive and derrick, adding a pipe handling system or rotating mousehole, upgrading the choke and kill manifold, and increasing BOP operating pressure. Many rigs have also seen quarters enlargement and upgrading.
Financing the market
The price of oil for the last six months has rarely fallen below $40/bbl and has hit levels considerably higher. Besides driving gas prices up at the pump where consumers feel the pinch, the consistently high price of oil has had a serious impact on operating companies. E&P investment is up over last year because oil companies have raised their pro-ject sanction price from $20/bbl to $25/bbl.
As the price of oil rose last year, analysts predicted that the price per barrel would not go as high as $50, but they were wrong. And their error has given operating companies more faith in their own assumption that the price of oil will remain high for a sustained period.
In a report released last December by the Energy Information Administration (EIA), part of the US Department of Energy, a high world oil price case puts the price of oil at a conservative $32.80/bbl in 2010 and $34.90/bbl in 2025. This prediction places the floor price of oil for the immediate future at $32. And recent indicators point to a floor price that could be higher.
The high cost of oil per barrel coupled with the global demand for energy has spurred both majors and independents to more exploration and development drilling. And many of the regions being targeted as major oil and gas plays are the domain of the 300-ft to 400-ft jackup rigs. As a result, utilization figures for the high-end jackup market should remain high for quite some time.
The new rigs
The 2005 deepwater jackup rig poster reveals eight new owners/drilling contractors that have committed to building from one to five rigs. Of the current 28 newbuilds for which the Singapore shipyards hold orders, 13 are being built for new Norwegian investment groups. Only three major drillers - Ensco International Inc., Diamond Offshore Drilling Inc., and Mærsk Contractors - have joined the current newbuild construction fray. National drilling companies or smaller drilling contractors are building the remainder of the new rigs.
The jackups now under construction in Singapore are being built to Keppel FELS’ B class (formerly called Mod V-B), Baker Marine Pte. Ltd.’s Pacific class, or Marine Structure Consultants’ MSC CJ50 designs. In the previous newbuild cycle, deepwater jackups were built to the Gorilla and Super Gorilla class, MSC CJ70, Hitachi Zosen, or Friede & Goldman Ltd.’s JU2000 designs.
Keppel FELS has developed and enhanced the Mod V and VI designs since the late 1990s. Today, there is a successful range of the ‘A’ and ‘B’ class rigs in all parts of the world. There are 12 rigs of these designs operating worldwide in the North Sea, Canada, Southeast Asia, and the Gulf of Mexico. As of May, 2005, another 11 were under construction.
The Baker Marine Pacific class rig design came out in 2003, with the first jackup built to that design to be delivered to the Sinvest group in early 2006.
Capabilities
Today’s rig drilling equipment packages are more capable than in previous newbuild cycles. The newbuilds on order routinely feature 30,000-35,000 ft drilling depth capability, with total rig power increasing almost two-fold from 6,000-6,500 hp to 11,000-12,000 hp. The newbuild rigs also reflect an elevated variable load increase of around 50%, from a standard 3,000 to 4,500-6,000 tons.
The current cantilever designs typically have a maximum 70-ft reach, with 15 ft on each side of the hull centerline. Derrick ratings are generally 1,500 kips, with either a 3,000- or 4,000-hp draw works. The circulating systems on the newbuilds normally comprise three 1,600-2,200 hp mud pumps rated at 7,500 psi. And the BOP control systems are either 10 or 15 ksi, usually with a single 18.75-in. BOP stack.
Power systems on the new rigs are moving toward all AC-drilling motors with variable frequency drives. And the new drill floors are fitted with cyber-based driller’s cabins, pipe handling systems, and rotating mouseholes.
The newbuilds also feature quarters capacity increases from 90-95 persons to the current norm of 120 persons, containing more contractor and operator office space, recreation space, and larger galleys and kitchens. Helidecks for the newbuilds are increasingly being constructed out of a strong durable extruded aluminum.
Building in Singapore
Singapore first entered the rig construction industry in the mid 1970s. Additional shipyards came along, and Singapore capitalized on its geography and resources. With proximity to steel sources, plentiful skilled low-cost labor, a consistently good climate, and excellent engineering talent, Singapore continues to be the world leader in rig construction and repairs at a time when other countries have quietly closed their rig building shipyards.
Having a supportive government has also been helpful to Singapore yards. Even now, both of the country’s major yards are undergoing expansion to fabricate panels and blocks at an accelerated rate.
The Singapore shipyards have been able to extend some very attractive financing offers to rig owners in which the amount of money to be paid during the construction period is minimal. Both yards have also taken an equity position in the ownership of several of the rigs.
Time to build
As recently as early 2003, the construction time for a 350-ft water depth rig in Singapore was 22-26 months. In mid 2005, the time to construct has expanded to 30-36 months, or nearly three years. The backlog of rigs on order, shortage of yard space, and delivery of high-strength leg materials and jackcase materials have all contributed to the longer construction time frames.
With the huge number of newbuilds on order, pricing has escalated. A mid-range 350-ft jackup rig has increased by about 50% from $95-$100 million a couple of years ago to $140-$150 million today.
That price could increase by the time the yards begin taking additional orders, which could be soon. Despite the fact that the Keppel yard is near capacity, the company is optimistic about taking in more work.
According to Michael Chia, executive director of Keppel FELS, “Our yards are busy with the contracts that have been secured, but we are still in a good position to take in more orders in various product segments. Running a shipyard is a bit like running a high-end restaurant,” Chia says. “When you first arrive, there may not be a table available, but after a short wait, something will eventually open up.”
The PPL yard is also close to capacity. Part of that business, according to K.Y. Tan, marketing manager at PPL, is a tendency for builders to extend their orders.
“Owners who signed construction contracts in 2004/2005 have usually taken options on additional rigs, which has helped to fill the PPL yard’s capacity through 2008,” Tan says.
Though some speculate that the jackup market will suffer from the large influx of new rigs, most drilling contractors are not worried about saturation. The much bigger concern is personnel.
Operating another 28 jackup rigs will require more than 2,700 qualified rig hands. The newbuild boom is occurring in the face of a graying talent pool, and the problem is not confined to the jackup market. Several tender rigs and a couple of newbuild semi-tenders and submersibles, ordered by Smedvig and Mærsk Contractors, are also in the works, which adds to the burden of attracting, training, and maintaining personnel.
Taking in the big picture, then, the question arises, “Are drilling contractors overbuilding once again?” That is indeed this industry’s 64-million-dollar question.
The price of oil seems to have stabilized above $40/bbl, and global demand remains high. Industrializing countries like China and India have demonstrated enormous appetites for hydrocarbons, and many areas of the world are looking to meet domestic energy consumption with domestic production. In fact, a lot of signs point toward a sustained up cycle in the drilling industry.
Drilling contractors and operators hope that this time the industry has gotten it right in terms of the drilling demand versus the supply in the number of available rigs.
While the number of jackup rigs suited to 350-ft and greater water depth has increase by 39%, the worldwide demand for newer drilling equipment in the 350- to 450-ft water depth range is still growing at a very strong rate.
Shallow-water, deep shelf drilling continues to grow in market share in the jackup arena, not only in the GoM, but also in the Persian Gulf and offshore Vietnam, as well as other regions of the world. The world’s major operators have targeted deep gas and will continue to lay out money for jackups that can test the many deep shelf, shallow-water plays that have yet to see the drill bit. In short, the future for the jackup market looks bright.•
