JACKUPS: new market niches for aging drilling equipment

Why build high-specification units?

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Deepwater drilling garners the majority of attention in the offshore industry with high costs and massive finds, making shallow water an easily over-looked sector. But, the vast majority of the world's drilling operations take place in water depths out to 350 ft. With natural gas prices pushing record levels, and operators divesting a huge number of shelf properties to the independents, shallow water may become a very busy area.

The 0-350 ft water depth range is known as "jackup country." While most attention, and most producer investment, goes to deepwater drilling activity, jackup drilling units continue to toil quietly in shallow water, drilling double the number of wells as their high-priced deepwater counterparts. Even so, when the oil price drops, as it recently did, the first rigs to be stacked were the jackups.

Furthermore, when it comes to contract terms, a long-term contract (over two to three years) is fairly rare for jackups. When a jackup is built, it is usually on spec, at contractor's cost. But the jackup does offer some advantages that floaters do not. Jackups:

  • Have a stable fixed bottom, which eliminates most motion and positioning problems
  • Can work over a platform and perform workover services that semisubmersibles and drillships cannot
  • Offer operators a dry wellhead to eliminate any subsea problems.

Out of storage

Now that the oil price is relatively strong, gas is over $4/Mcf, and independent oil and gas producers are scaling up drilling, the result is that: jackup day rates are on the rise, and drilling units are being pulled out of cold stack and put back into operation. Three prime examples illustrate this activity:

  • Global Marine received contract extensions with Coastal for three of its 250-300 ft jackups at significantly higher day rates. The company increased the day rate for the Adriatic X (300 ft water depth capability), from $28,000 to $61,000, the Main Pass IV (300 ft water depth capability), from $18,500 to $49,000, and the High Island I (250 ft water depth capability), from $20,000 to $40,000.
  • R&B Falcon, in response to market strength, brought nine shallow water units (six jackups and 3 drill barges) back into service. The company added that three of the rigs have firm contracts, four have contracts under negotiation, and two are in preliminary discussions with operators.
  • Global Marine's SCORE (Summary of Current Offshore Rig Economics) report, an index comparing the profitability of current mobile offshore drilling rig rates to the profitability of rates at the 1980-81 peak of the offshore drilling cycle (when speculative new rig construction was common), listed a rise in jackups for April from March. The jackup index increased 3.4% from March, 7% from April 1999, and 20% from five years ago. Furthermore, the index for jackups has far surpassed that of semisubmersibles.

But, there could be a problem on the horizon. The jackup fleet is the oldest fleet operating offshore. Over 94% of the rigs in the fleet were constructed before 1990, and like most old equipment, may not be suitable or economic for refurbishment. So the question arises: Is it time for a new jackup building cycle similar to the one that occurred in deepwater over the last three years?

What retirement?

The general rule of thumb in the industry is that a drilling unit has a natural life of about 25 years. According to statistics from Bassoe Offshore, almost 40 units of the jackup fleet has reached this age limit and by definition should be retired. But some disagree with this limit.

"The offshore industry is relatively young, and to a certain degree, rules are being made up as we go along," said Gavin Strachan, Director of Bassoe Offshore Consultants Ltd. "Until fairly recently, drilling contractors used the criteria of shipowners when it came to deciding on the useful lives of their rigs. This dictated that it was uneconomic to keep a ship, and hence a rig, past its 20th or 25th year, when particularly onerous and expensive special surveys are due."

"However, as the first modern offshore drilling rigs were not delivered until the early 1970s, it was not until the 1990s that they reached this anniversary and owners were confronted with requirements. While older, redundant designs tended to be scrapped, it became apparent to contractors that, provided the basic design of the rig was acceptable to operators, there was no need to retire a rig at 20 years. This is because the offshore drilling procedures have not changed, so the original hulls, provided they are in good condition and adaptable to the more sophisticated (although essentially the same) machinery that is now in use, remain perfectly acceptable," he added.

"These rigs are being extended to 25-30 years, and some cases, beyond that. For standard wells that are not technically challenging, the older rigs work fine. They are not as efficient, but they work fine," concurred Bill Chiles, President of Chiles Offshore.

Bob Palmer, President of Rowan, added, "Jackup rigs that were built prior to 1970 are so obsolete that no one will put any money into trying to upgrade them. Prior to that time, there was no class for jackup rigs. Then the US Lands Act Amendment came in and rigs built prior to then had a number of grandfather provisions. If you look at rigs built from 1978 on, most of them are of sufficient value that people would continue to do upgrades."

Rig design

While age is an issue, the real factor limiting the usefulness of a jackup is design. "If a rig is properly designed and properly maintained, it has an infinite life," said Bob Rose, President of Global Marine. "Theoretically, if a design is competitive and you've maintained it, it can last forever. The industry used to think that they all had a 20-year life. Now we know that they last a lot longer than 20 years," he added. - Santa Fe's Galaxy III is one of the new fleet of jackups.

So the question now becomes: which designs are capable of being extended for longer and more useful life?

The limiting factors are chiefly variable loading and integrity of the structure. Most contractors said that, of the designs in operation, the independent leg rigs with a rack and pinion jacking system were the most suitable for upgrade. These include the LeTourneau designs, the Friede & Goldman L-780, and the Livingston 111. At the same time, most said that a majority of the mat jackups could not be economically upgraded.

The problem with mat jackups, compared to independent leg units, is that if the mat increases torque on the hull and begins to deteriorate hull integrity, it will no longer pass class certification. But Pride International, who owns and operates 13 Bethlehem 250 mat-supported jackups disagrees, and has upgraded two units in their mat rig fleet.

The company refurbished the Pride Texas and the Pride Kansas mat rigs. These upgrades included a complete overhaul of the structural integrity of the unit, a complete re-equipping with new owner-furnished equipment, and increasing the size of the mat, thereby improving the bearing pressure capacity and the variable deck load capacity.

John O'Leary, Vice President Worldwide Marketing for Pride said, "Mat jackups are suitable for soft bottoms and are not suitable for every type of seabed environment. For example, the units do not have the capability of being upgrading to harsh environment jackups, but they can drill wells just as well as any other jackup, once on location."

Maintenance, inspection

During inspections, contractors can determine the future of a drilling unit. Every year, each rig goes through an annual classification society test. Every five years, each undergoes mandatory testing to maintain class. Additionally, on five year schedules, the rigs undergo periodic surveys to check structural integrity.

When rigs do not meet the requirements of these tests, then retirement becomes a real option. The most stringent of the regulatory areas is the North Sea, where jackups must meet harsh environmental criteria. While this could result in retirement, some companies just move the rigs to another areas of the world. O'Leary pointed out that if a rig is in class, then it is by definition capable of operating.

Upgrading units

The overall consensus among drilling contractors is to upgrade rather than purchase a new rig. The decision comes down to a return on capital deployed. If a company can make the necessary return on capital based on the cost of the construction program, it will be done. The average upgrade costs for a jackup vary, depending on construction. The lowest average is about $3 million, and $40 million on the high side. This compares to $100 million average for new construction. If the resulting productivity is the same, then the numbers favor the upgrade.

There are limits on what can be done to jackups. The most common upgrades involve adding leg, extending cantilevers, adding jetting systems to assist in pulling legs, adding horsepower, adding additional pumping capacity to help pre-load faster, and adding owner furnished equipment, which in itself is interchangeable.

The most upgradeable of the designs has proven to be the LeTourneau designs, post 1978. This is the only design that offers the advantage of being able to add leg. Palmer (Rowan) said that the majority of the rigs came with 410 ft of leg and that they now know the units can by upgraded to 477 ft. This involves strapping the leg to increase the strength of the leg and adding additional gear units to gain variable load.

Three recent upgrades were executed by Noble Drilling. The company upgraded the Bill Jennings, Leonard Jones, and Eddie Paul rigs, all 300 ft independent leg slot rigs. The company performed the upgrade because they did not have the cantilever reach necessary for development projects. The upgrades included adding leg lengths to 500 ft on each leg and reinforcing the legs so that the units could operate in water depths greater than 350 ft. In addition, the company added 65 ft and 70 ft reach cantilevers on the rigs. The company said that the upgrade made them more desirable, supported by the fact that since the upgrades, the rigs have not been off contract.

"If they can't charge enough money for the rig to justify its ownership then they scrap it," Palmer commented. "And I think you will see that, if you look at some of the rigs that are cold stacked in the Gulf of Mexico. Some will face multi-million dollar refurbishment plans and the owners will not do it," he added.

Newbuilding

The newbuild jackup market is the only sector of the drilling industry where new contracts have been signed. In the last few months, Chiles Offshore, Rowan, and Maersk signed contracts to build three new high-specification jackups:

  • The Chiles vessel will be a KFELS MOD V "B" design, cantilevered jackup. The rig will be an "ultra-premium" deepwater jackup built with a leg length of 475 ft, with an option to extend it to 545 ft.
  • Rowan is building the Gorilla VIII, an enhanced version of the company's Super Gorilla Class rigs, called the Super Gorilla XL. The Gorilla VIII will be outfitted with 708 ft of leg, 134 ft more than the Super Gorillas, and have 30% larger spud cans for working in water depths up to 400 ft, making it the jackup with the deepest water capability.
  • Maersk has contracted for what it calls "the world's largest and most advanced harsh environment jack-up." The rig will have 205 meters of leg for operation in water depths up to 150 meters in harsh environment conditions. It will also have double the variable load capacity and drilling envelope of traditional rigs.

New market niche

These deep shelf rigs fall into a new category of jackups called high specification ultra-premium deepwater jackups. The owners of these units have created a new market niche. Some have argued that these rigs are not economic because they are operating in water accessible to second-generation semisubmersibles at a cheaper day rate. But this comes back to the advantages of jackups over semis: dry wellheads, working over platforms, and fixed bottoms.

"The niche market we are looking for is the deeper water locations, those that require extended reach cantilever, or wells that are technically very challenging - deep, high temperature, high angle," Chiles said.

"If someone is drilling an exploratory well and they don't need this higher capability, we run head-to-head with those rigs. For development drilling over a platform, we have an edge. And, if the well is a difficult well where the customer needs to run multiple casing strings, the wellhead design on a floater limits the number of contingent casing strings that can be designed at the wellbore."

Palmer added in support of new Gorillas: "What helps us is that virtually anyone drilling a subsalt or high temperature well will want to have a bottom supported unit, or if they are going to be looking at well problems." All three rigs are being built on spec, without a confirmed operator contract.

Speculative business

Most newbuild jackups have been fabricated without a firm contract. The reason for this, Rose (Global Marine) explains, is that it is difficult to get a long-term contract on a jackup. "Long-term contracts are the exception rather than the rule on a jackup. Jackups are going to have to get very, very tight before you get term contracts," he said.

Chiles, who has constructed two of these high-spec jackups, concurs. "It's the nature of the beast. There are just no long-term contracts available in the jackup world with exception of a few in foreign areas. Certainly in the Gulf of Mexico, the operators are reluctant to sign long-term contracts."

Palmer said that spec building will always continue in the jackup market. "I don't think you will ever see a long term contract on a jackup, for several reasons. The first is that very few companies have long-term programs for jackup drilling rigs, unlike ultra deepwater, where the large number of tracks ensure use of the unit for three to five years. The shelf in the Gulf of Mexico is about 85% independent operators now, and very few of these independents have more than four or five wells in front of them that they can commit to. So you just don't have the demand there with a single customer for a long period of time. And there are a lot more of us in the jackup business willing to build a jackup on spec. Rowan has never built a jackup with a contract in hand."

Rowan does have a competitive advantage, however. The company owns Marathon LeTourneau, which owns the LeTourneau designs and the LeTourneau shipyard, where all of Rowan's rigs are built. This helps ease some of the finances of speculative building. In his defense, Palmer said, "That advantage didn't exist until 1995, and we have been building jackup rigs for 32 years." Global Marine, Noble, Pride, and Santa Fe representatives all said their companies would not build without a contract.

"We think it's a bad idea to build units on spec," O'Leary said. "There are companies who will go out and raise the money on the strength of growth projections in the market. And by and large, these companies will sink or swim, depending on the accuracy of their projections. "We have enough opportunities to fall on our face; we don't need another," he added.

There are exceptions to the rule. Santa Fe recently built the Galaxy II and Galaxy III jackups under contract. Transocean Sedco Forex is constructing the Trident 20, which is contracted to TotalFinaElf.

New fleet expectations

After design, upgrades, and retirement are considered, does the fleet still need expansion? The opinions vary. One industry source explained: "If you are a jackup drilling contractor, to remain a viable contractor you will need replacement equipment and the older rigs will need to be retired." He also said that the market to justify newbuilds will not be back. "There will be a time when there will appear to be enough contracts, but they still will not make much economic sense."

Rose (Global Marine) commented: "Because jackups have attrition, from time to time we will have to add jackups to the fleet. But, I think the industry has shown that we have enough jackups."

Palmer said it would be a gradual shift. "To some extent, these new rigs will be the replacements. What I think will happen is that, over the next 5-10 years, the shallower water rigs - Bethlehem Mats and Baker Marines - will get scrapped. Following that, what are now the 300-350 ft rigs will move into shallower water, and the high-specification rigs will take over in deeper water. But, it will not happen in the next 18 months."

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According to O'Leary, day rates are improving, but not enough to justify newbuilds. "I don't think we need newbuilds right now. Only 40 of the jackups have reached the 25-year-old level and life enhancement programs can extend the life beyond that benchmark. The next blip on the histogram is 2007. We will need new jackups some time in the future, but I don't think there is an immediate need to go out and build jackups."

Chiles (Chiles Offshore) was asked if the need to build new jackups was there. "If I said no, I would be shot. We've felt that way for the past few years. Of course, we had a false start in the market in 1997 and now we seem to be back on track. These new high specification ultra-premium rigs will prove that the new equipment is worth the investment.

"People will upgrade existing fleets, but new jackups will continue to be ordered in the next three to five years with similar specifications to ours and higher specification like in the harsh environment area," Chiles said.

Natural flow

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The consensus is that the jackup fleet will not expand like that of deepwater rigs. Rigs will be retired in a natural stream and new rigs will replace them. The new jackup rigs will be of high-spec design, similar to that of the present rigs on order. All of the new rig designs emerging, such as the Friede Goldman JU-2000, are high-spec 300-350 ft jackups.

Also, the jackup fleet will not grow larger quickly. "One of the problems (in newbuilds) is that these Gorilla Class or MOD VI class rigs requires 2 to 2 1/2 years to build, and there are not many shipyards that can build them," Palmer explained. "A lot of places can build ship-shape hulls and semisubmersibles, but not jackups."

"There is just no way, as we did once before, to build 40-50 rigs in a year. That can never happen again," he said. Only a handful of yards, including LeTourneau, AmFELS, and Friede Goldman Halter in the US, and several in Korea can handle a jackup newbuild. So, for now, the industry will need to keep jacking up the existing jackups.

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