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Wed 6 Feb 2008 04:43 PM

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Cartel to cash in?

The Middle East has become the jackup rig capital of the world, according to new research, but this hasn't always been the case.

Research from ODS Petrodata confirms the Middle East has become the jackup rig capital of the world. This hasn't always been the case, thanks to a regional abundance of onshore wells, and large offshore provinces in the North Sea and Gulf of Mexico that were relatively easy to tap. However, Gavin Strachan, principal at ODS Petrodata says we have come to the end of such ‘easy oil' and as such, the long-awaited reduction in jackup rig day rates may yet be some years off.

In 2007 the average day-rate for jackup rigs worldwide stood in the region of US$134,000 - the highest rates the market has ever seen. This has led to a flurry of new building from suppliers keen to exploit the huge demand for offshore production. Indeed, in 2008 more new build jack-ups are due to hit the market than the combined total for 2006 and 2007.

This combination of a plentiful fresh supply and record high prices has tempted many operators into a wait-and-see approach to signing contracts for jackups in 2008. "The operating community are holding off taking rigs right now because these day rates are so high, and pointing to all of the new builds currently under construction or soon to be delivered," says Strachan.

Analysis of the statistics reveals this is very much the case. In 2008 ODS Petrodata figures suggest 67 new jack-up rigs are coming forward, and only seven have been signed on to contract.

Such an influx of supply will surely bring the prices down. However, the picture is not quite that clear. The new rigs being built are all high specification, technically advanced rigs that will command day-rates significantly above the market average. The rigs in operation that are veterans of the offshore market have tempered this average day-rate, many built and put to work over 20 years ago. Whilst still working well, and generating very healthy returns for the contractors, these rigs are not all capable of moving to where the demand is, which right now is the Middle East.

The principal factor controlling the jack-up rig day rates will be how the contractors choose to tackle the supply, or over-supply issue. By opting to retire or overhaul older rigs a cartel of contractors could easily manipulate the Middle East supply and with it the price. "There are few enough contractors to control this," explains Strachan.

Assuming the oil project price doesn't drop too significantly, the upcoming demand regionally, and worldwide could mean the long anticipated reduction in rates may not materialise in 2008 at all.

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