Recession, energy prices depress rig demand

The ongoing global recession and decline in energy demand, along with uncertainty about oil and natural gas prices, continue to put downward pressure on exploratory drilling efforts worldwide. Cancellations or delays of drilling programs, falling day rates and financing issues are plaguing the rig market. Much new work coming available is trending towards sublets and short drilling programs.

While the long-term outlook for deepwater drilling rigs remains more optimistic, jackup markets continue to soften as operators delay or cancel drilling programs to wait out the recession. However, deepwater drilling also is being affected by the credit crisis and low energy demand and prices.

According to data compiled by ODS-Petrodata, 550 of the world's 667 jackups, semisubmersibles and drillships are under contract this month. Worldwide offshore rig fleet utilization stands at 82.3 percent.

This year, 39 new jackups, semisubmersibles and drillships are scheduled for delivery. The number of jackups under construction remains a cause for concern as the jackup market already is over-supplied. ODS-Petrodata forecasts a significant surplus of jackups in the market into 2011 at least.

Given the oversupply of jackups compared to demand and the lack of available capital, it remains to be seen whether those rigs that are planned but construction of which has not started will actually make it past the drawing board. The start of hurricane season this month will likely worsen market conditions for the U.S. Gulf jackup market and, combined with other factors, could further hasten the stacking of jackups.

The drying up of contracts has prompted drilling contractor Transocean to stack several rigs that had not secured contracts. In total, Transocean has 13 rigs warm or cold stacked worldwide. Jackup GSF Galaxy II has been warm stacked in Dundee, Scotland. The rig ended its previous contract drilling offshore the UK for Centrica at the end of May.

Transocean has also warm stacked jackups GSF Adriatic II and GSF Adriatic VI in Gabon. GSF Adriatic II finished a contract for Cabinda Gulf in Angola on May 7. GSF Adriatic VI ended its contract with Addax in April.

Deepwater rigs continue to find work, though the number of contract announcements has slowed considerably. In April, Petrobras signed a contract with Dryships Inc. subsidiary Ocean Rig ASA to use semisubmersible Leiv Eiriksson for exploration drilling in the Black Sea.

Despite the market downturn, one newbuild deepwater rig was able to secure work before leaving the shipyard. Odfjell Drilling semi Deepsea Stavanger, which will go to work offshore Brazil for Petrobras in 2010, will be delivered from DSME in South Korea in June 2010.

U.S. Gulf of Mexico

Total offshore rig utilization for jackups, semis and drillships in the U.S. Gulf of Mexico continues to decline, reaching 58.49 percent as of the beginning of this month.

Currently, 62 rigs out of 106 available in the region are under contract.

Declining utilization can be attributed in part to the weakening jackup market in the region. Jackups continue their exodus to more profitable markets elsewhere. As of June 5, the jackup fleet utilization for the region stood at 39.4 percent, with 28 jackups out of 71 under contract.

Meanwhile, the region's deepwater segment continues to yield promise for future drilling efforts as deepwater discoveries continue to be made. The drillship fleet remains at full utilization, while 26 out of 28 semis in the region are contracted for utilization of 92.9 percent.

Latin America

This month, 101 out of the 109 jackups, semis and drillships available in Latin America are under contract for a utilization rate of 92.7 percent.

Mexico's state energy company PEMEX and Brazilian national energy company Petrobras appear to be forging ahead with exploratory drilling plans, unlike other regions.

Petrobras continues to contract for deepwater-capable drilling rigs, such as Deepsea Stavanger, for work offshore Brazil, as well as for exploration efforts in other parts of the world. The company is expected to move ahead with plans to contract more newbuild deepwater rigs this year.

Meanwhile, PEMEX is expected to continue contracting jackups for work offshore Mexico. In March, Pemex agreed to a 785-day contract for Rowan jackup Rowan Gorilla IV, and the rig is expected to begin work in the second quarter of 2009.

North Sea

In the North Sea, 72 out of 75 jackups, semis and drillships are under contract this month. Total fleet utilization stands at 96 percent.

Drilling activity in the region appears to be slowing. Day rates have weakened, and operators appear to be waiting for prices to fall further before contracting for long-term work. Rigs are more likely to be chartered for one- or two-well jobs for the rest of this year.

West Africa

This month, 45 out of 59 jackups, semis and drillships available in the West Africa region are under contract, with utilization at around 76.3 percent.

The jackup market in West Africa has softened considerably, with 12 jackups stacked and four more scheduled to come off contract by the end of July. Any jackup demand that emerges will likely be in the form of short-term contracts. However, the long-term outlook for floating units, particularly deepwater rigs, still holds promise.

Asia/Australia

This month, 102 jackups, semis and drillships out of 119 available in the Asia/Australia region are under contract for a utilization rate of 85.7 percent.

More floating rigs are available for sublet in the region, particularly deepwater units. Four standard floaters in the region will be available for most of the remainder of this year. Most floater requirements in the Asia-Pacific are for shallower waters.

Some renegotiations for existing jackup contracts are taking place in order to keep rigs working through the market slump, which is likely to continue into 2010. Demand for jackups has revived somewhat in Vietnam and Indonesia, while the Australia/New Zealand jackup market remains fairly balanced.

In the Far East, China's jackup market remains robust, with the country's demand absorbing the jackups constructed there.

For additional information, visit www.energycurrent.com. To attribute quotes on text above:

Karen Boman, ODS-Petrodata, kboman@ods-petrodata.com.