Jaime Kammerzell • Houston
Jackup rates to recover
Raymond James believes offshore drilling will make a strong recovery in the next few years. The worldwide shallow-water market holds the greatest near-term upside and could see utilization nearing an inflection point to propel day rates much higher, the company says.
The Gulf of Mexico, the biggest jackup market in the world, holds 30% of the global jackup fleet. The historical inflection point in the GoM has been 80% to 85%, which is historically the utilization range where day rates increase. Currently, the GoM jackup market is at a 74% utilization rate, despite supply near a 10-year low of 114 jackups. But five rigs are scheduled to leave the GoM market. Ensco is moving three jackups out of the GoM to the Middle East and Southeast Asia, and the company sold the Ensco 55 jackup, which will move to Southeast Asia. Further, GlobalSantaFe will move the Adriatic II to West Africa this month.
Raymond James believes 10 to 16 rigs could leave the GoM for international markets in 2004. If 13 rigs leave the area in 2004, utilization will climb to 83%, which is in the middle of the historical inflection point range.
Potential catalysts that could improve demand in the GoM include property divestitures by the majors to the independents, pending shallow GoM lease expirations over the next few years, and new royalty relief provisions.
In the past, the GoM jackup market has fueled worldwide day rates, and once the GoM hits an inflection point in utilization, Raymond James expects worldwide jackup rates to follow suit. The company sees the GoM jackup market hitting the inflection point at the end of the year with no improvement in demand, which could prove overly conservative given the potential catalysts in that market.
Deepwater work declines
The Minerals Management Service report, Deepwater Gulf of Mexico 2004: America's Expanding Frontier, blames a recent dropoff in deepwater Gulf of Mexico drilling on reluctance by operators to invest in the Gulf when foreign prospects are better and more affordable, and the fact that operators don't have access to areas they'd like to explore.
"We hope the industry hasn't lost its taste for this adventure," Johnnie Burton, agency director, said in May at the Offshore Tech-nology Conference in Houston.
In the last 12 years, the average number of rigs operating in the GoM is down about 30%, and the number of wells drilled is down more than 35%. About 90% of the 3,200 leases acquired in the mid-1990s will expire in the next few years, which equates to 2,527 leases to be returned to the MMS in 2006-2007. These leases are off the coasts of Texas, Louisiana, Mississippi, and Alabama. The expired blocks will show up in future lease sales.
Dominion Exploration & Production has started production from the Devils Tower field A-1 well, 140 mi southeast of New Orleans on Mississippi Canyon block 773 in the deepwater Gulf of Mexico. The A-1 well is the first of eight completions to be brought on in sequence through 1Q 2005. Dominion expects Devils Tower will produce 60 bcf of gas in the first 12 months of production.
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Chris Oynes, MMS regional director for the Gulf of Mexico, thinks one reason so many leases weren't drilled is that oil companies acquired more than they could drill or afford to drill.
The MMS blames the decrease in deepwater drilling that occurred over the past two years on several factors:
- Worldwide competition for limited exploration and development budgets and a limited deepwater rig fleet
- Some long-term, deepwater rig contracts may have expired, allowing new companies to use these rigs and take them to other hot exploration basins around the globe
- As operators focus on drilling in deeper waters and to greater total depths, it takes longer to drill individual wells.
The report says there does not appear to be any scientific reason for the decline in drilling. The average volume discovered on a newly tested lease remains high.
"The deepwater Gulf of Mexico continues to be an expanding frontier," Burton said.
She pointed to the 90 deepwater projects on production at the end of last year, a 48% increase in the past two years. Production from the deepwater frontier grew to 959,000 b/d and 3.6 bcf/d by the end of 2002. Deepwater oil production accounted for 61% of the Gulf's oil production in 2002. In the last three years, there have been 11 industry-announced discoveries in water depths greater than 7,000 ft, and these ultra-deep discoveries have the promise of opening up entirely new geologic frontiers.
Pemex to expand drilling
Pemex has awarded $624 million in contracts for 20 rigs for the Gulf of Mexico as part of oil expansion program. The company said that 18 of the 20 contracts went to Mexican construction firms. Pemex will award another $1.5 billion in contracts by January 2005 with completion slated for 2006. From May through December this year, the company will award contracts for four production and compression rigs, 10 drilling rigs, seven accommodation rigs, and two well recovery rigs.
Pemex's oil expansion program aims to increase output from the Ku-Maloob-Zaap, Marine Light Crude, and Lankahuasa fields in the Mexican Gulf of Mexico, which will require 47 rigs and 56 new pipelines. Once completed, the project is expected to add 1.5 MMb/d of crude to its current 3.4 MMb/d, and 1.4 bcf/d of gas to its current 4.6 bcf/d.
