Comment

1 August 2006

Dramatic increase in offshore rig building

Oilrigs are leaving the Gulf of Mexico in droves for higher paying jobs elsewhere. That is the biggest long-term threat to oil and natural gas production in the region, not hurricanes.

For $200 million to almost $1 billion, one can build a new oil-drilling platform.

The Wall Street Journal reported jack-up and deep-water rigs, the massive platforms and ships that drill for oil and gas in the ocean, are leaving the Gulf of Mexico for more lucrative jobs. 

This will accelerate production declines in the Gulf, putting upward pressure on U.S. energy prices. The rig exodus is squeezing what was an already tight market for drilling equipment. 

In 2001, about 148 rigs were in the Gulf. Now, about 90 remain, and more will leave soon.

The Energy Information Administration, a government agency that tracks data on the industry, predicts natural gas will cost $10 a million British thermal units by the end of 2007, up from the July 2006 price of $6.104 in New York Mercantile Exchange futures trading. Gas cost $2.43 a million BTUs as recently as the end of 2001.

Why has the rig count dropped so sharply? The duo of Hurricanes Katrina and Rita in 2005 destroyed five rigs. However, the bigger factor is drilling companies are signing long-term deals to send rigs overseas.

Houston’s GlobalSantaFe Corp., for example, agreed late last month to send four jack-ups—rigs that stand on stilts and in shallow waters—to the Persian Gulf, where Aramco, the Saudi national oil company, will pay more than $160,000 a day to drill for oil and gas for four years. 

Ensco International Inc. will send a jack-up to Tunisia next year, where it will fetch day rates of more than $200,000 for as much as two years of work. Contracts for the larger deep-water rigs are fetching day rates exceeding $500,000.

For years, the Gulf of Mexico, which is the birthplace of offshore drilling and a very active region for underwater exploration, dictated global contract terms for drilling equipment. 

However, with the emergence of several offshore zones, the Gulf is losing out to hotter prospects off the coasts of Africa, the Middle East, and China. By contrast, many of the Gulf of Mexico’s richest targets have already drilled out, leaving only expensive deep-water and ultra-deep reservoirs untapped.

The demand has sparked a dramatic increase in offshore rig building. Companies worldwide are currently building 91 major offshore rigs, up from fewer than 10 in 2003, according to ODS-Petrodata, an offshore-oil-and-gas market-analysis firm. 

To build a jack-up rig costs $160 million to $190 million and deep-water rigs can cost as much as $600 million, according to ODS-Petrodata.