The mobile rig market remains a unique sector of the global upstream oil and gas industry. Big Oil is continuing to emerge blinking from the darkness of its recent cash-starved existence to bask in the glory of a resurgent oil price. But the rig sector is once again lagging behind the pace being set by operators as they open up their wallets for new or delayed exploration and production projects.

But this is no surprise to many of the more experienced players in the market.
As J.Michael Talbert, president and chief executive officer of Transocean Sedco Forex commented recently: "Some industry observers have assumed a marked improvement in customer demand for offshore drilling rigs is warranted. Yet utilization of the worldwide mobile offshore drilling fleet today is about 70%, compared with 95% two years ago - the last time that West Texas Intermediate and North Sea Brent crude prices reached US $22 and $24 a barrel."
This disparity, he continued, raised the simple question: "Where is John Q. Customer?"
The current activity levels shouldn't be a surprise though, as the lag effect has been seen before. The previous oil price recovery that started in February 1994 wasn't followed by higher rig utilization until May the following year, and this has been the case on all previous occasions since the 1970s.
Talbert commented: "Instead of responding immediately to brief and highly uncertain improvements in crude prices, major integrated oil companies have cautiously elected, time and again, to wait for a sustainable pricing range that will support an appropriate level of spending. This pattern can be aggravated by other factors. Some customers, for example, utilize increased cash flow from higher oil and product prices to reduce debt levels, strengthen their balance sheet or postpone spending decisions, until after they complete acquisitions or reorganizations."
He added though that certain industry developments suggested improving conditions, such as an oil price averaging above $21 per barrel since mid-1999, OPEC's continued production quota adherence, and the IEA's projected global crude demand level for 2000, which is predicted to grow by 1.8 million bbl to 77 million b/d.
"Perhaps most encouraging is our customers' response to these positive industry developments. A Salomon Smith Barney survey indicates that 70% of respondents plan to increase spending levels during 2000. So John Q. Customer has not forgotten about the offshore drilling business. Rather, he is just adhering to an historical pattern of behavior," he concluded.
Unfortunately, the time lag doesn't look like being overcome just yet. The first rig count of the new year from Offshore Data Services showed a decline in offshore rig activity, with two rigs less in the US Gulf of Mexico now active. The Gulf active rig count as Hart's E&P went to press stood at 147, out of a total fleet of 193 in the region (it's highest since August 1991). This means a utilization rate of 76.2%.

Worldwide count
A similar picture in other regions meant the worldwide offshore rig count stood at 480 active units out of the 635 rigs available globally, resulting in a utilization rate of 75.6%.
Recent financial results from drilling contractors such as Global Marine and Diamond Drilling have included comments from their executives, however, that they felt a recovery was already now under way, led by the US Gulf and likely to spread slowly to the other markets if oil prices maintain their current strength.
Global Marine's chairman, president and CEO Bob Rose said he felt the market was showing signs of improvement. The company's rig fleet utilization rate in the US Gulf for the third quarter of 1999 was 96%, topping the industry average of 67% for the region, he said.
"The North Sea and West Africa offshore rig markets, where the company has a significant presence, have not yet enjoyed the resurgence we are finding in the Gulf of Mexico. We are, however, encouraged by the level of inquiries from operators in West Africa and expect that market to improve in 2000 following completion of oil company budget cycles. The North Sea market will likely be the last of our three major markets to recover due to the high cost nature of that more mature region," he commented.
Their situation will be helped by the continued focus on deepwater drilling activity, both for exploration and development projects. This has proved to be the fulcrum that has pushed the offshore rig market forward into building new units and upgrading older ones, some of which are highlighted later in this feature.
With global demand for crude oil and natural gas continuing to rise by an average of 1% to 2% annually (while worldwide depletion rates are estimated at 3%-plus), the need to find new reserves remains paramount for E&P companies. With deepwater break-even costs often significantly lower than those in shallow water, the search of deepwater basins continues to provide the rig market with its most promising new business opportunities.
This whole process has been aided by drilling cost reductions. Several companies, such as Shell (through its "Drilling to the Limit" program) and Unocal, have in recent years prioritized the reduction of idle rig time. At dayrates often above $100,000, idle rig time is typically a major drilling-related expense, so these and other companies have instilled corporate cultures accentuating, and incenting, improved efficiency.
In many cases, this has simply meant empowering personnel on the rig floor and employing geologists and geophysicists directly in the drilling process, which has all helped reduce the time required to drill a well in any water depth over the past decade.
Drilling of both exploration and development wells, which in the past could take up to 6 months, is now done in less than 3 months in most cases. Water depth is becoming less of an issue, and in areas with relatively shallow reservoirs, such as Brazil, drilling times are typically shorter.
New technology advances pushed forward by the deepwater demands are typified by innovations such as Transocean Offshore's dual-derrick concept, for example, which is installed on the company's three newbuild drillships: Discoverer Enterprise, Discoverer Deep Seas and Discoverer Spirit. This unique, state-of-the-art system was designed to enable continuous drilling, potentially decreasing downtime by 25% to 40%.
With industry consortiums containing both major oil companies and service companies developing next-generation technology such as subsea mudlift drilling (also known as riserless drilling), the weight and deckload restrictions of rigs should be greatly reduced, enabling drilling at even greater water depths. The consortium hopes to commercialize this concept by mid-2002, targeting per-well savings of $5 million to $12 million.
There is however another key change taking place within the offshore rig market. And that is the clear disparity in capabilities between the old and new generation rigs, and the increasingly deep and complex wells being drilled by oil companies worldwide. This was pointed out in a recent report by Salomon Smith Barney that stated: "As a rising proportion of global reserves, and consequently production, emanates from ultradeepwaters, we believe demand for a limited number of high-end units will increase relative to older, smaller units (only 51 of the 214 floating rigs will have 5,000ft-plus water depth capability). This trend underlies, in our opinion, the fact that deepwater capacity increases since 1996 have been focused on high-end, ultradeepwater capable units. Most of the new units will drill exploration programs."
It adds that, despite the rapid growth of the deepwater rig fleet (estimated to have increased by 30% between 1998 and 2001), the global jackup fleet will remain essentially unchanged. "Specifically, due to recently surging interest in exploration activity, the drillship fleet is expanding at twice the rate of the semisub fleet. In fact, we understand that the majority of long-term contracts for new units will be occupied by exploration, rather than development drilling programs. Furthermore, 31 of the 49 new units, or 63%, are equipped to drill in more than 7,000ft of water."

Under contract
This is why deepwater activity is getting so much of the limelight at present. According to another consultant, Bassoe Offshore, ultradeepwater drilling activity will rocket in the US Gulf and Brazil particularly over the next 2 years. According to a recent study by the consultant, 98% of the world's deepwater fleet will be under contract by the first quarter of this year.
The research suggests there will be 36 rig years' worth of work next year with more than 20 operators in water depths of over 5,000ft rising to 45 rig years in 2001. This demand may be supplemented by additional programs in 3,500ft to 5,000ft of water.
Despite the prolific strike rate in deepwater acreage offshore Angola and Nigeria, the two areas of significance in terms of ultradeepwater drilling over the next 2 years are the US Gulf and Brazil (more than 97% of the wells drilled in more than 5,000ft have been spudded in these two areas).
The rig contractors will be hard-pressed to keep up.