Sustained high oil prices have made exploration and production in areas such as offshore Brazil and West and East Africa more viable, even though companies working in these frontier areas are having to ensure they aren't laying themselves open to huge penalties for leaks, fires and equipment failures. With more than 50% of the total offshore world rig fleet over 25 years old and given tougher rules governing the sector, there has been an acceleration in the dismantling of older offshore facilities, triggering a wave of new orders.
"The oil spill has actually helped [boost orders for new rigs]. Safety features on the rig were never taken into notice so much as they are now," said Wong Kok-Seng, the managing director of Keppel FELS Ltd., a unit of Keppel Corp. Ltd., BN4.SG +0.18% the world's leading offshore-rig builder. "Safety is a game changer for the market." Rig operators are requesting additional blowout preventers, which failed in the 2010 disaster in the Gulf of Mexico, and improved well-control systems. As a result, all the major drilling contractors have started constructing new-generation rigs to replace their older fleets.
This month alone, the world's two biggest rig builders—Singapore's Keppel and Sembcorp Marine Ltd. S51.SG +1.20% —announced orders for new offshore rigs valued at close to $9 billion. The rigs will all be chartered by Brazil's Petróleo Brasileiro SA, PBR -0.32% or Petrobras, for offshore drilling at presalt fields in the Santos Basin.
"Companies are now demanding new-generation rigs with better safety features," said Manav Kumar, director at Dynamic Offshore Drilling, a unit of Deepwater Drilling & Services, an emerging Indian offshore-drilling contractor. Problems in offshore operations can have a major impact when things go wrong. For example, U.S. oil major Chevron Corp. CVX +0.55% is appealing a Brazilian court order earlier this month banning it and drilling-rig operator Transocean Ltd. RIG +0.29% from operating in the country for their alleged roles in an offshore oil spill last year. They firms have denied any wrongdoing. The two were given 30 days to halt operations or face hefty fines.
The surge in orders for a range of offshore rigs and platforms comes despite uncertain global economic conditions, which have left the related global shipbuilding industry bleeding. One of China's largest shipbuilders, Yangzijiang Shipbuilding Holdings Ltd., BS6.SG -0.50% this month predicted more trouble ahead for the industry, warning that half of all shipyards world-wide could be acquired or forced to stop operations next year due to lack of orders. Meanwhile, the world's top five rig builders—Keppel and SembCorp and South Korea's Hyundai Heavy Industries Co., 009540.SE -1.65% Samsung Heavy Industries Co. 010140.SE +0.13% and Daewoo Shipbuilding & Marine Engineering Co. 042660.SE -0.97% —have all experienced a surge in new rig contracts, with order books filled until 2014 or 2015 and some orders reaching well into the second half of this decade. The world's total drill-rig fleet counts 825 units, up from 809 a year ago, according to data from the IHS industry consultancy.
Construction yards around the world saw order books increase by a net of 15 rigs in 2012, or nearly 13% compared with 2011 building on growth that continued despite the Macondo disaster. In June this year, 143 rigs were under construction globally compared with 127 rigs in June 2011, according to South Korea's STX Offshore & Shipbuilding, 067250.SE -1.20% the world's fourth-biggest shipbuilder. With Brent crude-oil futures mostly trading above $100 a barrel during the past 18 months, oil producers have plenty of incentives to drill in frontier areas, which mostly means in deeper waters and harsher conditions.
As long as global crude-oil prices average between $70-$80 a barrel or above, producers will keep investing in offshore exploration and production—and in new oil rigs, said industry executives. And as oil majors mostly have strong balance sheets while at the same time are struggling to achieve production targets and build reserves, the increase in exploration and production is expected to continue. "Oil companies now have a belief that the average oil price will stay at a high level, which makes it economically viable to explore," said Alf Thorkildsen, chief executive of SeaDrill Ltd., SDRL -0.68% one of the world's biggest offshore-drilling companies.
In July, the Norwegian company received a commitment from a major oil company to charter three new drillships valued at as much as $4 billion. The company currently has 18 drilling units under construction to be delivered by 2015 at a total cost of $6.9 billion. New technological advances have made drilling possible at water depths of about 12,000 feet. Coupled with high oil prices, deep-water drilling activity has risen fast, with governments world-wide promoting the industry in hopes of achieving energy self-reliance. The hot spot for deep-water offshore drilling remains Brazil along with West and East Africa and the U.S. Gulf.
Other busy drilling areas include Mexico, the North Sea, the Middle East, India, China, Indonesia and Australia.Rigs for deep-water drilling are in tight supply, with day rates touching $700,000 for sixth-generation deep-water drilling vessels, up from about $450,000 three years ago. Demand for jack up rigs—used in shallower waters to about 400 feet—is also strong, with day rates up to $230,000. source: online.wsj.com
