The scramble to secure rigs for deepwater development in the wake of $100 oil prices and rapidly tightening, global, spare-production capacity is now impacting day rates for down-market units.

A recent increase in fixtures for midwater equipment -- in two cases involving rigs that are old enough in human terms to be approaching a midlife crisis -- echo the rapidly rising rates that hitherto were confined to the ultra-deepwater sector (UDW).

In March, Noble’s Max Smith was awarded a three-year contract with Shell offshore Brazil that will generate $407,000 per day (including a 15% performance bonus). The 7,000-foot rated, fourth-generation, semisubmersible will commence work in December 2012.

Elsewhere, Transocean’s 36-year old Discoverer Seven Seas, a 7,000-ft drillship, signed on with ENI for a three-well contract in Indonesia at $445,000/d beginning in May 2012. Analysts had modeled rates for the Transocean unit in the $385,000 range. The floater had a storied history following its commissioning in 1976 as the most advanced drillship of its time. The unit set a number of depth records, including several for Shell in the Gulf of Mexico (GOM) before being surpassed by newer higher-spec units.

A driver behind the recent inflection point for midwater or lower-spec deepwater rig rates is the rapidly diminishing visibility for UDW unit availability. That intensifying dynamic prompted Morgan Stanley’s Ole Slorer to project a super spike in rig rates to greater than $700,000/d for UDWs.

“Over the next 12 months, true UDW availability is down to three units while third-generation/fourth-generation availability stands at 25 units. With requirements for 30 floaters over the same period from current firm tenders alone, we see a ‘short squeeze’ playing out over coming quarters,” Slorer wrote in an early March research report.

Separately, Barclays Capital has identified 12-marketed deepwater units rated from 5,000 to 7,499 ft with some availability in 2012, including four that belong to Transocean.

“Recent fleet status reports, tender announcements and exploration successes indicate favorable trends are set to continue for the offshore drillers,” noted James West, Barclays Capital oil services analyst. “Activity in West Africa, the North Sea, and the Middle East is improving while the recovery in the GOM is set to reach another inflection point, in our opinion.”

West expects rates for UDW units will top $600,000 by midyear. UDW rates breached the $500,000 threshold less than six months ago.

Utilization in the midwater market tightened significantly over the last six months and is now closing in on 95% globally. The Noble Max Smith had been operating offshore Mexico for Pemex for $380,000 prior to its reassignment to Brazil.

Deepwater Gulf Accelerates

Meanwhile analysts at Global Hunter Securities highlight an accelerating recovery in the GOM as recent high profile discoveries “portends the likely return of meaningful production growth in the deepwater GOM later this decade,” wrote Jeff Spittel, GHS senior analyst.

Operators are aggressively targeting deeper portions of the GOM based on lease sale data. Despite the challenges following the Macondo well blowout nearly two years ago and the region’s ongoing production decline, Spittel projects deepwater GOM production could rebound to 2.0 million barrels of oil per day (MMb/d) as early as 2016 as current projects come online.

As additional proof of a revitalizing GOM, Spittel cites the $712.7 million committed to exploration blocks in Lease Sale 218, most notably by ConocoPhillips and ExxonMobil, who are angling to get into a game dominated by BP and Shell.

Both Conoco and Exxon were the two top bidders at Lease Sale 218, accounting for 31% of value, with Conoco submitting 75 bids totaling $157.8 million, and Exxon following in the number two spot with 50 bids at $63.3 million.

The $712 million in bids is nearly double the total for the last five lease sales. Deepwater targets accounted for 93% of the value in submitted bids during Lease Sale 218, though the blocks covered just 5% of the offered acreage.

U.S. GOM Deepwater Development Projects

Field

Prod. (M b/d)

Start up

Operator

Big Foot

65

2014

Chevron
Jack/St Malo

170

2015

Chevron
Mars B

150

2015

Shell
Pony/Knotty Head

250

2015

Hess
Hadrian

N/A

2015

Exxon
Lucius

80

2015

Anadarko
Tubular Bells

50

2015+

Hess
Heidelberg

N/A

2015+

Anadarko
Horn Mountain Ph 2

N/A

2015+

BP
Tahiti Ph 2

50

2015+

Chevron
Atlantis Ph. 2-3

N/A

2015+

BP
Mad Dog South

N/A

2015+

BP
Na Kika Ph. 4

N/A

2015+

Shell
Stones

N/A

2015+

Shell
Kaskida

N/A

2015+

BP
Tiber

N/A

2015+

BP
Cardamom

50

2016

Shell
Appomattox

100

2018

Shell
Vito

100

2018

Shell
Source: Global Hunter Securities Inc.  

Meanwhile GOM permits in waters deeper than 2,000 ft witnessed a breakthrough in February, climbing to 22 approvals for new wells. It is the largest monthly new well permitting total in more than half a decade and more than doubled the 10 permits recorded in October 2011, which was the highest total for 2011. Virtually all of the new well permits were approved for Chevron USA Inc. (13) and Shell Offshore Inc. (seven).

In Chevron’s case, the permits suggest activities at Walker Ridge are moving forward rapidly. Chevron’s GOM projects include Jack/St. Malo, Big Foot, Tahiti-2, and Tubular Bells with the Jack/St. Malo and Big Foot projects roughly 20% complete with first production planned for 2014.

Chevron’s GOM 2012 capex program will split $9 billion targeted for the U.S., which also includes the Marcellus shale, the Permian Basin Wolfcamp, and upgrades to the Chevron refinery at Pascagoula, MS.

Shell’s GOM program in the Mississippi Canyon is part of a $4 billion 2012 capex effort to develop 250,000 boe/d in seven projects that also encompass efforts in Brazil and Malaysia as the company moves on a three-year growth plan outlined in 2010.

In February, Shell announced a successful appraisal operation to its Appomattox discovery in Mississippi Canyon Block 348 in 7,257 ft of water on a well drilled to a total depth of 25,851 ft. Shell’s efforts in 2012 will center on continued appraisal of the Appomattox discovery witha second appraisal well planned for the southwest fault block and a separate sidetrack into the northwest fault block as the company delineates hydrocarbon accumulation on the discovery.

Are NOCs Poised To Order Newbuild Offshore Rigs?

Other indicators of the tightening market across all rig classes can be found on the newbuild rig front where contractors have ordered 141 offshore rigs since October 2010, including 79 floaters and 62 jackups. Orders have fallen in volume recently but are likely to pick up going forward.

Barclays’ James West forecasts that national oil companies (NOCs) will begin ordering rigs in the near future, including Petrobras, Pemex and SOCAR, Azerbaijan’s state oil company.

That development could spur a two-tiered market in which NOCs operate their own, lower-spec rigs while multi-national contractors specialize in higher-spec or specialty engineered equipment.

As if on cue, Seadrill Management AS announced contracts to build two, dual-derrick, $600 million, UDW drillships at the end of February. The units are the same design as Seadrill’s three prior dual-derrick drillship orders in 2010 and 2011 and are capable of operating in water depths up to 12,000 ft.

The units, which will be delivered in 2014, support increased hook load capacity of 1,250 tons and will be outfitted with a seven-ram configuration in the blowout preventer (BOP) stack along with a second BOP stack.

Contact the author, Richard Mason, at rmason@hartenergy.com.