US Gulf boom leaves fabrication yards scrambling to meet rig demand

Alabama Shipyard and Atlantic Marine share combined facilities on Pinto, a private island covering 650 acres. The shipyards cover 150 acres. Pinto accommodates shipbuilding and conversion work with 45-foot water right at the head of the company's piers.

J. Ray McDermott's fabrication yard in Morgan City, Louisiana has built more offshore structures and platforms than any other fabrication facility in the world. McDermott also owns a fabrication yard on Harbor Island in Aransas Pass, Texas.

Newbuilds are all but a foregone conclusion. Virtually every fabrication facility along the US Gulf Coast has received inquiries from companies interested in newbuild rigs. However, working at or near capacity for the last year, the yards are starting to feel the pinch. Drilling companies are rushing to upgrade fleets for greater water depths - the very capability contractors are asking for. Welders and shipfitters are being trained day and night to meet demand, and capacity at many yards is floating close to 100%.

As yards across the Gulf of Mexico continue to expand, drawing in new employees and bolstering the economy with new orders of durable goods, all eyes are on the rising Survey of Current Offshore Rig Economics report, designed to indicate how close current day rates are to the cost a new build.

Rising fabrication costs

Global Marine, which compiles the monthly report says the SCORE tabulation fell for the first time in January after a prolonged, steady rise. The reason was not a fall in dayrates, but an increase in shipyard construction costs. With virtually all trained welders, fabrication workers, and shipfitters on the job, Gulf of Mexico yards are struggling to find new people to handle the increased growth.

Many yards are sponsoring their own training programs and are also reaching out into community high schools and technical schools to help train students for specific professions that are currently in high demand. In the past, when the local work force was fully employed, there was a surge of trained workers from the northern US, which was feeling an economic pinch at the same time the oil industry was scaling up operations.

This is not the case with the current US economy. Shipyards report that with unemployment down around the natural level of 5% across the US, there simply are no workers willing to relocate. Such is the stuff inflation is made of as this near total employment begins to put pressure on wages.

Growing into the market

• AMFELS: AMFELS Vice President of marketing John Purvis said his yard in Brownsville, Texas has doubled its workforce in the last year to accommodate the increased business brought on by rig upgrades. He estimated the yard has $150 million in projects underway including the upgrade of five semisubmersibles and one jackup rig.

  He said the yard is recruiting new workers heavily and provides training to get these new hires up to speed. He compared the boom in business and the labor shortage to the chicken and the egg. When business increases, the yard needs more workers to get the rigs out on time, this means drawing workers from outside the state and using subcontractors to meet the short-term needs. Purvis said he anticipate new rig construction will become more pervasive over the next few years, meaning permanent expansion of staff and facilities.

• HAM Marine: HAM Marine of Pascagoula, Miss. is gearing up in a big way. HAM recently leased a dual carrier from Rotterdam-based Workships Contractors for operation in the Gulf and has signed a lease with Jackson County Port Authority for the "D" Dock to expand the company's shipyard capacity by 33% and add 500 employees.

  The "D" Dock terminal includes two covered buildings covering a combined 160,000 sq ft, HAM President J. L. Holloway said his company need the space and employees to meet the increased demand for rig conversion and construction.

  The company also will invest $26 million in a joint effort with the port authority, Jackson County Board of Supervisors, and the Mississippi State Department of Economic and Community Development to lease 105 acres of land on Greenwood Island, where the HAM will build a new state-of-the-art shipyard dedicated to rig upgrades and conversions.

  While the HAM expansion may seem aggressive it is more the norm than the exception. All across the Gulf ship and fabrication yards are coming up with innovative ways to use their space, materials and manpower to take full advantage of this boom in upgrades and the predicted market for new builds.

• Halter Marine Group: Halter Marine Group has signed a deal to acquire 51% of Texas Drydock with an option to buy the remaining shares of that company. TDI owns six shipyards in southeast Texas and operates offshore drilling and workover units. Halter CFO Keith Voigts said this is an attempt to vertically integrate his company at a time when contracts are running high and there is pressure to expand.

  Halter owns one shipyard in Pascagula, Miss where it manufactures offshore support vessels, double-hull tank barges, tugs, research vessels, and towboats. Voigts said the company is in the process of expanding these facilities to perform rig upgrades and possible new builds. He said this yard has expanded its staff from six to 350. The yard, will also add concrete slabs, new covered buildings and a centralized iron plate preparation facility to the yard.

• LeTourneau Shipyard: At the center of the new-build storm is LeTourneau Shipyard in Vicksberg, Miss. This yard has the dubious distinction of working on the only speculative newbuild rigs on the US Gulf Coast. Recent estimates show these rigs would need to command at least $175,000 a day, according to the Global Marine SCORE report, to turn a profit.

  The yard was transformed by this gamble into a budding symbol of the new oil boom. LeTourneau was shut down when Rowan bought it and provided it with a contract for three Gorilla V jackup rigs built on speculation for operation in up to 400 ft of water and a harsh environment.

  Now the yard is running its own welder training program day and night to churn out certified welders to work on these projects. Vice President of Vicksberg Marine Donald Cross said the yard currently employs 570 workers and is building toward a total of more than 700 to handle the contract for three rigs. Cross said the yard is interested in pursuing other contracts, but will be working on the three jackups until June 2000.

  "We are still bidding on other work," he said. The yard receives queries every day for additional work, but Rowan was the first to sign a contract and is credited with pulling LeTourneau.

• Ingalls Shipbuilding: While most ship and fabrication yards around the Gulf of Mexico are struggling to keep up with the recent boom in business, Ingalls Shipyard in Pascagoula, Miss is soliciting new business. The 60-year-old shipyard is primarily capitalized for building war ships.

  Jim MacIngvale, president of Ingles, said the shipyard has plenty of capacity, located on 800 acres, but with defense spending down Ingles needs to look elsewhere for future growth. MacIngvale said Ingles was recently involved in the Neptune Spar project and has an upcoming repair contract for a damaged jackup. Ingles hopes this type of fabrication work will provide a bridge of transition between the shipbuilding it has done in the past and the building of new jackups and semisubmersibles that will spell future prosperity.

  MacIngvale said there are no new-build deals he can discuss, but there has been some indication that contracts may be let in the future. Ingles is also interested in building floating production, storage, and offloading vessels.

  In the meantime, MacIngvale said his company is working to reestablish itself in the rig market after a hiatus of about 15 years. Ingles did construct a number of rigs back in the early 1980s, and many of its employees at the time are still with the company. "We have the capacity and a skilled workforce of 9,600 ready today," he said.

• Alabama Shipyard: Other shipyards are following this strategy of using equipment and facilities primarily designed for shipbuilding to help upgrade, repair and convert rigs. Buddy McCormick, president of Atlantic Marine and Alabama Shipyard said he has his hands full upgrading rigs and converting offshore vessels.

  The company has three yards in Jacksonville and two in Mobil Alabama. The shipyard and fabrication yard work in tandem to do the steel work and installation required for the current rush of rig upgrades. McCormick said the shipyard uses a lot of automated equipment, installed for its shipbuilding business, to assist in upgrading rigs.

  The yard is currently upgrading The Ocean Clipper for Diamond Offshore and the Discover Seven Seas for Transocean at Atlantic Marine. The yard is also converting the derrick barge Hercules to a pipelay barge. Both Atlantic Marine and Alabama Shipyards are expanding to keep up with the sudden rise in demand.

  McCormick said he is adding a $16 million conversion pier at Atlantic Marine. Alabama Shipyard is upgrading and renovating a workshop and putting about $60 million into a new construction shop. Because both yards are located on Pinto, a private island covering 650 acres, there is plenty of room for future expansion. McCormick said the shipyards cover 150 acres of the 650 acre island. Because of its unique location, Pinto accommodates ship building and conversion work with 45-foot water right at the head of the company's piers.

  McCormick said his company, like many others affected by all this new business, has initiated training programs for welders, pipefitters, and shipfitters. The company now employs about 1,600 people, up from 900 a year ago. McCormick said his workers have experience with new build offshore rigs from the 1980's when the yard built seven semisubmersibles. He too has had several inquiries from companies interested in new build rigs, but said none of the companies showed interest in building a rig on spec.

• J. Ray McDermott: The J. Ray McDermott North American Operations fabrication yard in Morgan City, Louisiana says it has fabricated the highest number of offshore structures and platforms of any yard in the world. McDermott offers engineering, fabrication, and installation services which gives it the ability to bid on turn-key projects.

  Human Resources Director David Bowe said McDermott is taking a sober approach to the current boom in business. Bowe said the fabrication yard has plenty of capacity, covering 589 acres, but is choosing to limit the number of new jobs it accepts and the number of new employees it takes on. Bowe said the company sets growth projections rather than responding directly to market demand. "We've made a conscious decision to control growth," he said.

  For example, the growth projection for last year was 250 employees, McDermott was able to meet this by working with local schools which help provide an educated and trained work force. This controlled growth plan means McDermott turns away some jobs, but Bowe said the company does not want to run the risk of taking on too many new workers in the short term in case the market makes a down turn in the future. As it stands, Bowe said McDermott has a back log of work that will keep it busy for several years to come.

• Pelican Island Terminal: While ship and fabrication yards across the coast remain very busy this surge in activity is also acting as a shake out process. An example of this is the Pelican Island Terminal Facility in Galveston, Texas. Leased from Galveston by Bechtel, this deepwater shipyard employs more than 200 staff workers and 70 contractors. There is a steady stream of work, but Bechtel is looking for a subleasee to boost the final three years of its commitment, and is even willing to set up a backlog of work to ensure there will be no layoffs.

  Why would Bechtel walk away from a steady stream of work when shipyard space is going for such a premium? Project manager Mike Crookshanks said Bechtel is not primarily interested in the fabrication business and thinks a subleasee could get a better return on the projects the company has lined up. While this may be a strategic move for construction giant Bechtel,there is not doubt access to this deepwater facility, already staffed with trained workers and shored up with a steady stream of work is an opportunity for any company specializing in fabrication work.

  Regardless of when day rates hit the magic number needed to justify new builds the recent explosion in offshore leases will demand new rigs. While some of the deeper leases run 10 years, industry analyst Matt Simmons said there are not enough free rigs in the world to explore all the leases bought in the last Central Gulf of Mexico sale over the next 10 years.

  Once the oil companies realize the seriousness of this shortage new rigs will be ordered. While it takes an average of three years to produce a new build offshore drilling unit it seems the regional ship and fabrication yards, driven by the on rush of upgrades, will be staffed and ready to take on these orders as they come.

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