Font Size

- Aa +

Sat 8 Nov 2008 04:00 AM

Font Size

- Aa +

Rig review

Gavin Strachan, principal at ODS-Petrodata reveals exclusively to Oil & Gas Middle East what the financial crisis holds in store for the rig market.

Gavin Strachan, principal at ODS-Petrodata reveals exclusively to Oil & Gas Middle East what the financial crisis holds in store for the rig market.

Rig owners and operators alike will be scratching their heads this November, asking what the turbulent market situation will actually mean for business. The last two years have delivered a period of such dynamism for the jack-up rig sector, that the impact of a global financial crisis, following what has been termed a commodity, and particularly oil, ‘super-cycle' is unclear.

The crest of the wave does appear to be behind the oil price - for now - and the era of cheap credit from traditional sources also seems confined to the annals.

That said, it is possible that a sustained period of oil above US $100 has enabled a string of new players to emerge on the rig financing scene, ones that may prove capable of plugging the gap left by financing institutions in this dry-credit period.

Sovereign wealth funds, major yards, national oil companies and IOCs have all benefited from the exceptional events of 2008, and find their coffers awash with funds.

A new era in rig financing may be a stretch too far, but the impact such wealth concentration in the hands of upstream players may have is not to be understated. It is quite likely to herald solutions for the jack-up market, which counter the impotence of a banking system in crisis.

Gavin Strachan, principal at leading upstream consultancy firm ODS Petrodata, speaks exclusively to Oil & Gas Middle East ahead of this year's ADIPEC event.

Exceptional times

"It's fair to say that the current situation is indeed exceptional for two primary but interlinked reasons. Firstly, it is impossible not to look at the tightening of the supply of credit as a critical factor. Secondly, the credit crunch has come at a time when the oil price is falling. It's nearly impossible to forecast precisely, but that combination of factors mean it is quite likely that we'll see a temporary diminution in demand of jack-up rigs," says Strachan.

The drying up of finance is potentially going to cause problems in the financing of new builds, indeed there are indications that at least one drill ship has been stopped already.

"There are signals from banks that they are not going to be supporting stage payments of jack-ups for non-core owners, which means that speculative rig owners are going to find it hard throughout the credit crunch," says Strachan.

Globally there are currently 18 newbuild jack-ups slated, and with the liquidity situation where it is today, a reduction looks likely.

"However, that's not to say the bottom is going to fall out of the rig market, we'll probably see something like 10% come off that figure," he clarifies.

Price correction

Aside from global banking woes, the other problem is the oil price. At the time of going to press, crude prices had dived 55% since striking record highs in July, as the global economic slowdown cuts into demand. On October 16th the price of Brent North Sea crude dived to a 17-month low point of US $65.45 a barrel, which compares starkly with a record high of US $147.50, set just four months previously.

"The looming issue of a reduction in the market price of oil is that it may have a negative impact on the budgets of oil companies in 2009. Oil majors may be working on a budget price of around US $70. Budgets run from January to December, and the budgets are being set for 2009 right now. If the price remains low between now and the start of December, the boards of the big oil companies are going to say ‘let's be cautious about spend forecasts'. It won't mean a reduction in demand for the offshore oil and gas industry, but it could remove some investment slack for new projects," says Strachan.

The oil price spike in 2008 meant that oil company budgets were revised. A budget price set in November is flexible, and most majors reacted and increased project prices and spend accordingly. "There is the capacity to react, and oil companies have proved quite flexible," he adds.

However, that flexibility is likely to have a downward pressure on spend forecasts looking to 2009, unless OPEC's extra-ordinary meeting generates a u-turn on the oil markets.

Strong fundamentals

A correction in project prices will have a significant impact on expensive start-ups where the profit margin is borderline. However, Strachan is confident that factors beyond commodity exchange floors will buoy the jack-up market through a difficult period.

"This diminution of demand will be over a matter of months, not years, because the fundamentals of this business remain utterly fantastic in the longer term," enthuses Strachan.

There is no denying that globally, the requirement for ever more oil and gas continues.

Demand increases may begin to dip, and indeed OPEC and the EIA have revised their estimates for next year down already, thanks to the looming threat of recession. However, while demand growth is slowing, producing fields are depleting too.

The indications are that the world needs an extra 700 000 barrels per year, excluding the drop associated with fields that have come to the end of their production life.

Current estimates are that the industry is witnessing around 3.7 million barrels per year reduction in reservoir capacity. If reserves are going down, and growth continues, the upstream industry must generate a net amount of 4.5 million barrels each year.

"Even if the world goes into recession, because we've got so little spare production capacity on line, (currently around 4% excess capacity), as an industry we simply need to go out there, find oil and produce it, just to meet world demand."

Most regions world-wide are seeing rig utilisation of close to 100%, and project prices for jack-up rigs are typically quite far below that price threshold, so a minor shock to the market is more likely than a total project meltdown.

Market consolidation

With coffers full at the world's biggest oil companies, the drying up of credit coupled with a potentially revised project figure, could precipitate an international period of consolidation, says Strachan.

"Sovereign wealth funds are going to be very important actors now. If I were them I would be looking at acquisitions very seriously. Given the presence and prevalence of the players here, I don't think the Middle East will be adversely affected by this more global synopsis."

Forced sales of shares by stakeholders struggling to raise liquidity means that market prices are down, even across blue chip companies with strong fundamentals.

"Such a situation presents a fantastic opportunity to companies with access to capital, because share prices are depressed," he adds.

Middle East

The jack-up market is inherently global in its nature, with movable assets and international bidding. The Middle East is of course not isolated from that global web, but regional fundamentals do mean that the localised jack-up sector is somewhat insulated from the effects outlined above.

"The recovery cost of oil is so low here, that the region is sheltered," says Strachan. Rather, the projects which will suffer are those with high production costs. One such example is Total's Alberta oil sands.

This project is viable, they claim, at about US $100 a barrel, so suddenly, with the advent of the crunch, projects with high recovery costs go out of the window.

"The Middle East's offshore business typically does not fall into the same category, so in fact looks like the safest region in the world, for fabricators, owners and operators alike," he says.

During the boom period, demand for the equipment and technology on board the jack-up rigs was at full capacity, with order books chock full for months and years ahead.

"What the current situation may do is free up some of this equipment scheduled for speculative new builds or retrofits elsewhere," says Strachan.

"Manufacturers of furnished equipment, such as main engines, mud pumps, derricks, have been flat-out. When you're building a new rig, a yard's biggest problem is actually sourcing this equipment during the boom cycle."

This means yards in the Middle East may get faster access to equipment because items may become available on the back of lower than projected demand elsewhere in the world.

With regards to the region's major producers, if anything the global uncertainty is unlikely to have a dramatic effect, indeed it may even produce favourable circumstances for the Middle East's key upstream companies.

"Players like Saudi Aramco and Adma-Opco will carry on doing what they are doing. These cast-iron companies will push on regardless, but what happens on the global stage will have an influence. Short-term it could mean cheaper day rates for drilling rigs and all sorts of associated equipment."

Final word

The offshore industry in the Middle East is part of a global jigsaw puzzle, but it finds itself in a very strong position thanks to favourable production costs, and its position at the top of the hierarchy of producing regions.

Regional yards in Sharjah have expertly capitalised on their position by winning lucrative contracts throughout the year, and are edging close to some regional firsts.

Lamprell scooped two major contracts earlier this year, one in excess of US $200 million for BassDrill, and another US $186 million contract for the construction of a LeTourneau Super 116E jack-up drilling rig for RigInvest, slated for delivery in June 2010.

MIS is also nearing completion on two SeaWolf jack up rigs, with final commissioning of the rig systems scheduled for the end of October. Although the delivery date has slipped a little, the yard says that the delay was due to the fact that this was a first of class design.

The SeaWolf rigs will be not only the first offshore jack-up drilling rig to be built in the Middle East. The particular design - the F&G Super M2 - is the first to be built ever.

The yard is aiming for Hull 105 completion to be around end of December and MIS says it is seeing the benefits of the learning curve quite clearly on Hull 107 which is currently ahead of schedule.

The yard now has an impressive backlog of seven offshore jack-up drilling rigs on order, the newest order from MENAdrill - Hull 109 and 110 scheduled for delivery Q3 and Q4 2010. This last order has taken MIS' back-log to the US $1 billion mark.

"We are in an interesting era," says Strachan. "And the position for the Middle East remains to look favourable."

For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.