US GULF OF MEXICO Technology, old fields, development activity countering low gas prices

Low natural gas prices haven't been able to push down drilling in the US Gulf of Mexico, because other factors have served to encourage activity. Global Marine's summary of current offshore rig economics (SCORE) and analysis shows that three factors are countering the effects of low product prices: Technology: 3D seismic and horizontal drilling technologies are lowering exploration and development costs across the board and around the world, keeping profit margins up despite weakening

Mar 1st, 1995

SCORE report shows why US Gulf drilling remains high

Low natural gas prices haven't been able to push down drilling in the US Gulf of Mexico, because other factors have served to encourage activity. Global Marine's summary of current offshore rig economics (SCORE) and analysis shows that three factors are countering the effects of low product prices:

  • Technology: 3D seismic and horizontal drilling technologies are lowering exploration and development costs across the board and around the world, keeping profit margins up despite weakening gas and oil prices.
  • Deregulation: The removal of price constraints on gas sales from old fields is allowing producers to re-enter depleted wells to pursue pockets of gas or oil located nearby. 3D seismic and re-entry and horizontal drilling technologies are assisting the process. Global Marine says this activity favors cantilevered jackups since these rigs can move over platform wells without removing processing equipment.
  • Low-cost development: Where platforms, processing equipment, and pipelines are already in place, further development drilling provides new reserves at much lower cost than new exploration. Consequently, producers have shifted from exploration to development drilling.

"Where the ratio of exploration to development wells during most of the gas bubble was about one-to-one, it has shifted to two-to-one in favor of development over the past two years," explained John Ryan, CEO of Global Marine Drilling.

One major reason is that development drilling programs allow producers to bring natural gas onstream quicker than new exploration, reducing vulnerability to short-term gas price changes.

Utilization rates for large cantilevered jackups have been higher generally than other types of mobile drilling units. The inflow of slot-type and small cantilever jackup drilling units from other parts of the globe has driven down jackup day rates, which have been further hampered by weak gas prices.

"If gas prices continue to disappoint (in 1995), there may be a lot of idle rigs in the Gulf, but few of them are likely to be large cantilevered units," Ryan stated.

Conditions in other parts of the world somewhat reflect global rig utilization levels, but the cost of moving units from one theater to another and certification requirements imposes short-term market fluctuations in rig supply and demand. Among the observations made by Global Marine at the presentation of year-end SCORE study:

  • All regions: Strengthening oil prices are causing most operators to expand drilling in 1995 over 1994.
  • North Sea: Operator intentions and planned departure of some rigs indicate that markets for North Sea semisubmersibles and jackups are likely to be tight by summer.
  • Long-term: The demand for oil is increasing and sooner or later the fundamentals will push up prices for both oil and gas.

Rig contractors need 140% gain in day rates to fund new construction

Drilling contractors will have to receive an eight-year contract with a day rate 140% more than the average rig earns today in order to fund new rig construction. Having 22% of surplus and repairable drilling rigs idle holds rig day rates down and postpones planned replacement of aging units.

These day rate and utilization results were presented recently by Global Marine. Details on the findings, which were part of the Houston drilling firm's SCORE report, include the following:

  • A 300-ft, moderate environment jackup in the US Gulf is earning $22,000-29,000. A new jackup for this market will cost $65 million and require a day rate of $61,000.
  • A semisubmersible drilling unit in the North Sea is earning $45,000-65,000. A new unit for this market would cost $125-200 million and require a dayrate of $130,000-165,000.
  • Of a global drilling fleet numbering 560 units, 124 were idle (22%) at the end of 1994. This idle number includes 38 cold-stacked units that would enter the market at day rate levels below the new construction threshhold.

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