Workboat Magazine May '08
Cover Story
Deep Route
Outlook stays rosy for the deepwater market.
By Jerry Greenberg, Correspondent
The U.S. Gulf offshore sector continues to be a tale of two markets — the Outer Continental Shelf and the deepwater/ultradeepwater area.
The latter continues to be extremely active and offers a bright future for operators with modern deepwater vessels as new semisubmersibles and drillships are set to enter the Gulf under long-term contracts. Reportedly, several existing deepwater rigs will mobilize to the Gulf during the next couple of years, all with long-term contracts.
The OCS, however, continues to struggle. While there are some signs that the Gulf jackup rig market could strengthen a bit in the near term, drilling contractors continue to seek more lucrative work outside the Gulf for their jackups. Vessel operators that can move vessels to international markets are following the rigs.
Offshore service vessel operators continue to build new boats that can service deepwater and ultradeepwater rigs and platforms as well as be economically competitive on the shelf. For these diversified vessel owners, the future is just as bright as deepwater rig activity.
But standard 180' supply vessels may finally be nearing the end of the line, at least as far as operating in the Gulf is concerned.
Demand remains high for rigs able to work in the deepwater market. While several semisubmersibles are scheduled to mobilize out of the Gulf this summer, three newbuild deepwater rigs should replace those rigs in the Gulf by the end of the year. Two are scheduled to arrive in the Gulf this summer, and the third in November. There are another half dozen or so semisubmersibles and drillships scheduled to enter the U.S. Gulf this year from other areas — at least temporarily. Some deepwater rigs will move into the area to drill several wells, then will mobilize to another market to drill for other wells.
Next year, an additional 10 deepwater rigs are expected to enter the Gulf, followed by at least two more in 2010. There are also several ultradeepwater drillships under construction for delivery in 2011 and 2012 with long-term drilling contracts for work in the U.S. Gulf.
Flat Gulf Jackup Market
The Gulf jackup rig market is expected to be essentially flat for the remainder of 2008, according to Tom Marsh, publisher USA for ODS-Petrodata, Houston. Drilling contractors are still seeking more lucrative markets in international areas, including offshore Mexico, which continues to be one of the most active and easily accessible markets for U.S. Gulf-based jackups as well as semisubmersibles. Additional rigs are expected to move to Mexico from the U.S. and international areas. Other strong areas are the Middle East, West Africa and Southeast Asia.
For example, Hercules Offshore purchased three jackup rigs from Transocean last February, two rated for 250' of water and one capable of working in up to 350' of water, the water depths most in demand globally. Hercules immediately began negotiating long-term contracts for two of the rigs, and the company was expected to market the third jackup internationally soon after the sale closed in mid-March. Additionally, one other jackup relocated from the Gulf to the Middle East in April. These rigs are in addition to the dozen or so rigs that exited the Gulf during 2007.
Marsh and others pin the hopes of the U.S. Gulf jackup market partly on the price of natural gas, which has increased by about 50 percent since last October when the Henry Hub price was $6.69 per MMBtu. At the beginning of this year, the price had risen to $7.84 and by mid-March had increased to $9.69. Futures prices through the summer indicate gas prices could reach more than $10 per MMBtu and remain above that level for several months.
However, Marsh said, it’s expected that the U.S. jackup market will “only see a very modest increase over the next few months. We are forecasting a net demand increase of four rigs through most of the next 12 months. Demand could fluctuate between 44 and 55 jackups throughout 2008.”
Perhaps the best news is that Marsh doesn’t expect to see a decline in jackup rig activity. Still, he’s not very bullish on the shelf’s near-term prospects. “Based on rig demand and the level of anticipated construction activity, [this year] it is not going to be a good market for service and supply contractors on the shelf.”
Boat companies that can move their vessels out of the Gulf are doing just that, following the rigs to areas of higher activity. For example, Trico Marine Services has reduced the number of its Gulf of Mexico vessels by over 50 percent since 2004. Trico moved six vessels to overseas markets during the fourth quarter alone. This brought the total number of Trico vessels that left the Gulf during 2007 to 13. Most of the vessels were moved to Mexico and West Africa. Trico currently operates about 41 supply vessels, with just 12 of them in the U.S. Gulf.
As a result, the company’s international operations accounted for 90 percent of its total earnings last year.
The Houston-based company said that average day rates for its Gulf fleet decreased 22 percent last year. It’s likely that the company will continue to market its vessels internationally and move what it can of the remaining Gulf fleet out of the region when opportunities arise. Trico also has two supply vessels under construction at Bender Shipbuilding & Repair set for delivery this summer. They were still available for contract in mid-March, which raises the possibility that they will also find work outside the Gulf.
There are only a few large boat operators in the Gulf with global operations that give them the flexibility of moving equipment to international regions. In other cases, smaller vessel operators may have to partner with larger operators that already have an international infrastructure established.
“All of my crewboats under construction will be SOLAS ready and capable of working anywhere in the world,” said Ed Schreiber with Southern States Offshore. “If I found something internationally more than likely I would have to join up with one of the [larger companies] already established in the region. But you go where the work is.”
Southern States is having a pair of 168', 7,200-hp crewboats built at Island Boats in Jeanerette, La. The first crewboat is scheduled for delivery in January 2009. (See related story in April WorkBoat, page 42.) Southern States also plans on taking delivery of a 240' supply vessel in 2010 from another builder.
John Belsome with Laborde Marine LLC, New Orleans, is also looking at moving OSVs out of the Gulf. “We are looking at international areas,” he said. “We have operations in Brazil so we are looking there as well as in the Gulf.”
Too Many Boats?
Overall, deepwater will be the place to be for drilling contractors. This is good news for vessel operators that have deepwater units and are building new boats aimed at this market. Among them are Hornbeck Offshore Services, Southern States, Rigdon Marine and Abdon Callais.
Hornbeck recently ordered two additional proprietary 240 ED class supply vessels to be built at Atlantic Marine, which is also building four identical vessels for the Covington, La.-based operator. The two new boats will be delivered in 2010. With these orders, the company’s newbuild program now consists of contracts with three U.S. yards to build 16 DP-2 vessels, made up of six 240 ED vessels, nine 250 ED units and one 285' boat.
Abdon Callais took delivery of a new 205' DP-2 vessel earlier this year from Master Boat Builders. The Golden Meadow, La., vessel operator is scheduled to take delivery of six additional boats in 2008 and also holds shipyard options to build similar boats.
Laborde recently took delivery of a 162' crewboat with another to be delivered in September. The company also has two 265' DP-2 supply vessels under construction and is considering ordering two more identical supply vessels.
In mid-March, Rigdon Marine had four of its 4000-class supply vessels still to be delivered as well as seven aluminum vessels. The latter comprises four 181' fast supply vessels scheduled for delivery over the next 12 months, two 165' crewboats and one 176' DP-1 jet-powered crewboat. “We are also looking at other designs,” said Billy Guice, a vice president with Rigdon Marine.
There were reports earlier this year that several vessel operators were worried about overbuilding and had not exercised their options. At the same time, there have also been reports that several boat companies are still seeking slots for new vessels at U.S. yards. The bottom line, however, is that vessels ordered now likely won’t be delivered until 2010 or 2011. Some of this is attributable to tight shipyard capacity, but it is primarily a result of extremely long lead times for equipment.
“If a vessel owner does all of their due diligence and talks with the right shipyards they should be able to identify some capacity,” said Guice. “But delivery won’t necessarily be as soon as they hoped. It isn’t necessarily the shipyard that is the major clog in the artery. It is the key components, winches, engines, Z-drives and DP systems.”
However, deliveries of some of the new vessels should coincide with the arrival of several large state-of-the-art rigs to the Gulf. These rigs will be under multiyear contracts to operators with portfolios bursting with newly leased deepwater tracts.
Strong Gulf lease sales
A sign of just how strong the deepwater and ultradeepwater markets are was evident in the two latest Central Gulf of Mexico OCS Lease sales — #205 held in October and #206 held in March.
The central Gulf offshore Louisiana is still the prime area of the Gulf despite over 60 years of exploration and production since the first well was drilled in 1947.
In sale #205, a total of 84 companies submitted 1,428 bids on 723 tracts. High bids totaled $2.9 billion, at that time the second highest total of high bids in U.S. leasing history. It was thought that this amount would be tough to top, but that’s just what happened six months later when a whopping $3.7 billion in 1,057 bids for 615 tracts in Central sale #206 were submitted. Before the March Central Gulf lease sale, you have to go all the way back to the 1983 sale to find a larger total dollar amount of high bids.
Operators set their sights on deepwater acreage in both sales, with about two-thirds of the blocks receiving bids in sale #205 located in deepwater and ultradeepwater. About one-third of sale #206’s blocks are in ultradeepwater of 5,249 feet or greater. In sale #205, operators submitted bids on 477 deep and ultradeepwater blocks compared with 246 bids on shallower water tracts. Operators in sale #205 also submitted high bids of $2.6 billion just for the deepwater blocks, illustrating how determined the companies were to garner certain areas thought to hold large reserves, or surrounding blocks where large reserves were already discovered.
In Sale #205, Shell Offshore submitted the highest bid, a $90.5 million offer for a block in 6,562' of water in the Walker Ridge area. Competition for certain blocks was intense, with Shell’s Walker block attracting 13 bids.
In Sale #206, Anadarko Petroleum and its partners offered the highest bid of the sale, over $105 million for Green Canyon Block 432 in deepwater. The second highest bid was higher than the highest bid in Sale #205: Marathon Oil Co.’s $93,024,910 bid. The deepest block receiving a bid was in Lloyd Ridge Block 286 in more than 10,000' of water.
Of course, the more operators spend for a block, the more likely they are to drill on it. That’s good news for the future of drilling contractors and boat operators with deepwater-capable equipment.
— J. Greenberg
