Rick Von Flatern
Houston
Rig rates must keep reaching
Dayrates for offshore drilling rigs are hurtling towards heights that could hardly be guessed at just two years ago. Still contract terms fall far short of spurring contractors to deepwater-capable rig building. Global Marine's SCORE (Summary of current offshore rig economics) uses a formula of $700 of dayrate per $1 million of building costs to express dayrates as a percentage of the rate necessary to economically justify newbuilds. And while the SCORE has moved steadily higher since early 1995 it is still only about 65% in the North Sea and about 50% in the Gulf of Mexico.Operators who still hear past expert voices telling them $100/bbl oil was just around the corner are today hedging their bets by evaluating their oil reserves at $18/bbl and gas at $2/Mcf despite a prolonged period of more than $20/bbl. They heed the warnings of advisors whose basic philosophy devolves to a golden rule: the oil business is a cyclical one and prices that go up must soon come down.
Historical evidence of a cyclical industry is of course indisputable. But oil and gas executives might consider that the last oil industry boom was very short, very high, and largely the result the actions of an OPEC cartel not then subject to free-market forces. Today the cartel is no longer much of an influence because so many non-OPEC nations have entered the exploration and production business. Also OPEC member countries, as a result of the crude oil price crashes of the mid-1980, are beset by their own financial difficulties that make it impossible for them to withhold product from the market with impunity as they once could.
Operator decision-makers might do well to consider that those economists smugly certain that oil will soon find its natural $17-$18/bbl range and bring rig rates back down to their proper levels, are the same ones that counseled them in 1981 to build budgets around $100/bbl oil.
The dictate that prices and dayrates must eventually retreat holds sway even with rig contractors who probably would like to believe otherwise. But they are leery of wanting more. Burned by a downturn that caught everyone by surprise in the first half of the 1980s, they are determined to not be seduced by the current boom. They are reluctant to see an era of dayrates that not only justify new builds and perhaps usher in a business climate in which contractors must build to compete. It is, after all, their stockholders' several hundred million dollars that will be forfeit if it all suddenly comes apart.
An element almost entirely unique to the contractor-as-capital-investor is that his investment, the rig, has no intrinsic value. It is only worth what the market says at any given moment. Theoretically, then, rigs have no value ceiling. Their value floor is nearly invisible and can descend to well below zero since a non-working semisubmersible rig can be a costly item to maintain just in resale condition. Salvage values are so unpredictable that rig resale value alone justifies new builds now since in today's market no currently working rig is worth less than it cost to build it - a fact tempered by the perspective that just two years ago rigs were barely worth the expense to keep them from rusting to dust.
Around the industry it seems the common consensus that no harm will accrue should rig rates never reach the 100% SCORE level. But a case could be made that contracts of sufficient dayrate and length to trigger newbuilds are indeed necessary to protect the new prosperity. Nothing lasts forever, not even multimillion-dollar steel drilling rigs. They leave the fleet at a predictable rate, even in the best of times. If they are not replaced the boom could stagnate and even, as attrition reduces the fleet, shrink from neglect and timidity.
Riserless drilling tames deep water limits
In most offshore arenas, pore pressures and fracture gradients can approach within fractions of equality. Traditionally this precarious balance between kick and lost circulation has been maintained during drilling operations with additional casing points. But as the oil and gas industry steps from the deep to the ultradeep waters beyond the world's continental shelves, certain longtime practices are reaching limitations and forcing more creative thinking.
For example, drillers have known since the 1960s that stress factors limit current riser practices to about 7,500 ft. Just as they have always known that as water depths increase, so does the length of the column of the riser fluid, its hydrostatic weight at formations, and the number of casing points.
More casing strings necessarily results in smaller tubulars through the formation, not a fatal flaw when the final well bore must accommodate only logging tools.
But at extreme depths, equally extreme drilling and operating costs dictate that only wells producing more than 10,000 bpd of oil (or equivalent volumes of gas) will be economically justifiable - an impossibility through less than 5 1/2-in. tubing. The conclusion is as sobering as it is inescapable - the industry cannot today produce a usable wellbore in 10,000 ft of water.
The solution, believes Conoco's Allen Gault and some of his colleagues, lies in a riserless system dismissed as not technologically feasible when it was first discussed in the 1950s. Riserless or mudlift drilling uses a mud pump at the seafloor to pump mud back to the drilling unit through a six- to eight-in. flowline, eliminating the 21-in. riser. In essence the formation is tricked into reacting as if the rig were on the seafloor. (When previously considered - at least twice - other, less radical technologies were chosen since the maximum water depth considered at the time was 3,000 ft.)
Replacing the traditional riser with a mud return line also permits the rig more station-keeping leniency, rig weight reduction, and a closed fluids system that may be suitable to such systems as foamed muds and underbalanced drilling.
The joint interest project headed by Conoco and Hydril has grown to include 18 service and operating companies, including nearly all majors. Conceptual engineering, expected to be completed by April, 1997, cost $500,000. Prototype design and testing is to begin May 1, 1997, take two years to complete, and cost about $10 million. Project costs are easily justified by industry-wide benefits. And its timing borders on urgent as operators prepare even now to drill in 10,000 ft of water.
Copyright 1997 Offshore. All Rights Reserved.
