Norwegian speculators driving surge in jackup construction

High oil prices, strong drilling market

The booming drilling market is proving irresistible to investors in Norway, who are responsible for many of the newbuild jackups currently under construction. High oil prices and a strong drilling market explain the recent rush of speculative orders, all due for delivery in 2006 and 2007.

The last round of heavy rig investments, which focused on semisubmersible rigs in the late 1990s, proved painful for Norwegian owners, as both newbuild and upgrade projects ran up hefty cost overruns and delays. Now optimism reigns again. Norwegian interests are behind 15 of some 33-34 current jackup orders worldwide.

Jackups have limited application - the latest designs are capable of working in water depths up to 400 ft. However, they are the rig of choice for drilling deep, high-pressure gas fields, and that ranks high on oil companies’ agendas these days. Gas is in demand, and a lot of the new reserves lie in complex reservoirs. There are relatively few units in the existing jackup fleet capable of taking on this task.

As oil prices have soared, the rig market has tightened. In its worldwide report for June, ODS Petrodata estimated worldwide market take-up for jackups at 96.2%. “Everything that can work is working,” says Rod Hutton, the consultant’s senior rigs editor. “For the foreseeable future, demand is only expected to increase. As long as the oil price remains high, we don’t see anything in the works to cause demand to fall. There are a lot of programs coming up.”

Traditionally, Norwegian rig owners and investors are not associated with jackups, which have little application in the Norwegian offshore sector. The current rush of jackup orders, however, is based on international demand, particularly in benign areas. Another common feature is that all the orders have been placed in Far East yards, either with Keppel FELS or SembCorp Marine’s PPL and Jurong shipyards.

Both groups have proprietary designs. Keppel FELS has the Kfels B Class design, and SembCorp the Baker Marine Pacific Class 375. Though capabilities vary a little from one newbuild to another, in general they are designed to drill in water depths of 350-400 ft, and to 30-35,000 ft in the subsurface. They are also equipped for high-pressure/high-temperature drilling. Prices generally are around $130 million.

One of the first out of the blocks was Sinvest, which in late June had five units on order, three at Keppel FELS and two at PPL. Sinvest is the vehicle for Norwegian investor Bjarne Skeie, one of the founders of Ocean Rig in the late 1990s. The jackup assets have now been split out into a separate subsidiary called Deep Drilling Invest.

Another contender is Awilco Offshore, part of the Oslo-based Awilco shipping group, which has three units on order, two from PPL and one from Keppel FELS. Awilco’s first rig,WilPower, is due for delivery next spring. The company is looking to tie up a contract, possibly in Asia or the Middle East, in the second half of the year, chairman Sigurd E Thorvildsen said recently.

Sinvest and Awilco will coordinate marketing and operation of their respective fleets through a jointly owned company, Premium Drilling, which will be headquartered in Houston. This indicates a focus on the Gulf of Mexico market, traditionally a hard nut for newcomers to crack.

Odfjell Invest, based in Bergen, was established last year as the owner of the Odfjell group’s jackup assets. Through Odfjell Drilling, the company also has a fleet of semisubmersibles. Odfjell Invest has two jackup units on order at Keppel FELS.

“Offshore drilling activities are on the rise and Odfjell is expanding its fleet to meet the increasing demand for premium jackups,” explained Ketil Lenning, Odfjell Drilling’s CEO.

The fourth new jackup owner is Petrojack, one of whose directors is Berge Gerdt Larsen, another investor with a background in rigs. The company has four rigs on order - one at PPL and three at Jurong.

“With the robust offshore oil and gas market, we are confident that these three premium jackup rigs will enhance our ability to serve our customers,” Larsen commented after the third order was placed.

Last but certainly not least there is John Frederiksen, the world’s leading tanker operator who also has interests in floating production and storage units. His company Seatankers placed an order for one jackup with Keppel FELS in March.

In June, Frederiksen made moves for both Petrojack and Odfjell. His offer for Petrojack failed - analysts described it as ridiculously under-priced - but he succeeded in taking a 23.4% stake in Odfjell. Part of the purchase was in exchange for shares in Frederiksen’s Seadrill, a newly established rig company that has placed an order for a new semisubmersible at an unidentified yard.

Although the new jackup owners are busy positioning themselves for work, by mid-year none had signed any contracts. The flow of new rigs onto the market will start next year and continue into 2008. It remains to be seen whether the market can absorb such a large number of additional units and what sort of return will be forthcoming on the nearly $2 billion invested in this sector by Norwegian interests.•