The oil industry’s lure of the deep (waters)

If you thought 2008 was a heyday for deepwater drilling, you ain’t seen nothin’ yet. At least that’s the message suggested by the first two drillers, Noble Corporation and Diamond Offshore, that reported second-quarter earnings this week. While earnings were healthy, it was the commentary by the drillers’ managers that made Wall Street sit up and take notice. Both companies say they expect the global ultra-deepwater segment to carry the ball for them going forward. And that “forward” looks pretty darn good.

Between bidding rounds this year in places as diverse as Tanzania, New Zealand and Colombia, planned marine seismic surveys and new discoveries in places both familiar (such as the US Gulf of Mexico and West Africa), and not so familiar (such as Kenya and Liberia), a lot of drilling is going to need doing in the next few years.

An already tight rig market that has driven up demand due to continued exploration successes worldwide over the last couple of years has pushed up typical rig dayrates near the $600,000 mark. While that isn’t a record–some time back, ExxonMobil inked a deal for $703,000/d for an expensive state-of-the-art ultra-deepwater floater–today’s rates in the high-fives are an average. Recently at least one deal was inked for well over $600,000. And earlier this year, Morgan Stanley analyst Ole Storer predicted that later in the year, rig rates could climb to $714,000/d.

But oil and gas finds really tell the story. So far this year, upstream operators have made 22 announcements of oil and natural gas discoveries in water depths of 4,000 feet and greater, compared to 37 such discoveries in all of 2010, Simon Johnson, vice president of marketing and contracts for Noble, said during the company’s earnings call July 19. The average water depth of the finds is 6,400 feet, although the deepest this year so far is offshore Mozambique in 7,400 feet of water.

Those finds will all need to be appraised and developed, meaning more drilling. And then produced. And after that, they will need more drilling to keep up production, necessitating more drilling still. It adds up to a whole lotta rig-years. And each new discovery adds to the need for rigs.

The newest ultra-deepwater rigs coming into the market these days are equipped to drill in 10,000 feet of water, and can gear up for waters 12,000 feet deep with some added equipment. The most state-of-the-art rigs can also drill 40,000 feet below the mud line. That is well past current needs; the deepest well ever drilled so far in the US Gulf, for example, lies in about 10,000 feet of water and the deepest total depth has been about 35,000 feet. And so far, 10,000 feet is about the water depth limit of US areas now open to leasing.

But ultra-deepwater–loosely definfed as water depths of 7,000 feet and greater–isn’t the only market segment doing well. Deepwater–again, loosely defined as water depths around 4,000 to 7,000 feet–also is doing well. Michael Acuff, senior vice president of contracts and marketing for driller Diamond, said rigs for that class are fetching dayrates in the high $400,000s to low $500,000s.

And even the midwater market for rigs that can drill in no more than 1,000-4,000 feet of water is performing well, and dayrates there also continue to increase, he said.

For example, Diamond revealed this week that the midwater Ocean Vanguard, confined to work in waters no deeper than 1,500 feet in Norway, was signed to a 20-month extension with Statoil for $450,000/d. That is “higher than our forecast of $300,000/d and its prior dayrate of $352,000/d,” UBS analyst Angie Sedita said.

But that relatively high rate may not be all that surprising, given that the number of such rigs is limited. Most were built during the mid-1970s to the early 1980s when 1,500 or 2,000 feet was considered the ne plus ultra in water depths. But drillers today aren’t building rigs that can only navigate 2,000 or 3,000 feet of water; they are chasing customers that are chasing what ultra-deepwater Gulf operator Anadarko Petroleum called the “big boys” in complex subsalt reservoirs which are found in 6,000-plus feet of water, not to mention five or six miles under the sea.

Even while ultra-deepwater garners all the recent attention, midwater depths do continue to lure operators to areas of the North Sea and Gulf of Mexico where infrastructure is abundant, well costs reasonable and smaller independents can get a leg up on offshore expertise. In fact, even ultra-deep players such as Anadarko at one time were major midwater operators; Anadarko still has producing fields there, for example, the Nansen-Boomvang fields, in the US Gulf’s East Breaks area in 3,600 feet of water.

One thing is certain: be it mid-, deep- or ultradeep waters, offshore looks set to be a bright star in a universe with room for a lot of ingenuity and success.

 Platts