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Oil’s Biggest Rigs Head to the Junkyard

Transocean Ltd. is finally sending Pathfinder to its grave, after two years in a Caribbean purgatory that cost about $15,000 a day.

The move by the world’s biggest offshore-rig operator signals just how bleak the future looks for deepwater drilling. Pathfinder is the most famous of six floating rigs the company is scrapping in burials that will add up to a bruising $1.4 billion write-off. Competitors are going the same route, jettisoning more rigs in the third quarter than have ever been trashed in a 90-day stretch, according to Heikkinen Energy Advisors analyst David Smith.

That’s how bad it is, with predictions crude prices won’t go much higher than $60 a barrel in the next year compared with around $50 recently. “Deepwater is going to be playing a much-reduced role on the global oil-supply stage relative to what the industry expected as recently as three years ago,” said Thomas Curran, an analyst at FBR Capital Markets in New York.

For all that, it could have been worse, in one way, for Transocean. It has been the most aggressive in an unprecedented experiment with what’s called cold-stacking for big drillships. After oil prices cratered in 2014, the company didn’t send all of its unwanted rigs out to sea in the time-honored temporary holding pattern where engines keep running and a crew remains on board — something know as warm stacking, naturally, that runs up a daily bill of some $40,000. Instead, Transocean dropped anchor on nine high-tech ships 12 miles off the coast of Trinidad & Tobago and simply shut the motors off. So far the savings are in the neighborhood of $90 million.

New Generation

This hadn’t been tried before with the new generation of finely tuned, computer-driven giants never intended for long-term parking. Equipped with derricks towering 220 feet above the platform and able to drill in 10,000 feet of water, the vessels had been in demand since birth. The big question was whether one could be shut down so solidly and later switched back on at a reliable cost. (Rival Ensco Plc brought its DS-4 drillship back from cold stack, but it wasn’t mothballed as long as Transocean’s rigs and was tied to a dock, allowing it access to more auxiliary power while parked.)

With Pathfinder, and a cousin called the GSF Jack Ryan that’s also being scrapped after its Caribbean cold stacking, Transocean will never know for sure. The Vernier, Switzerland-based company declined to comment for this story.

For Transocean and the others that went the cold-stacking route, “this has been a very painful process,” said Greg Lewis, an analyst at Credit Suisse in New York. He doesn’t disagree with the company’s decision. Cold-stacking Pathfinder was only a $5 million-a-year expense, and with that “you’re basically paying for a call option on a recovery in the market.”

Older Rigs

At the moment, seven other Transocean offshore rigs continue to bob in the Caribbean. Most if not all of them may never drill again, according to analysts at Heikkinen and Sanford C. Bernstein & Co. The older the rig, and the longer it’s parked, the more likely it will get passed up by customers for more capable competitors.

The offshore-drilling business enjoyed the highest of highs when oil topped $100 a barrel a few years ago. Companies including BP Plc and Anadarko Petroleum Corp. could lease out an advanced ship for more than $600,000 a day. An army of boats and helicopters took workers and supplies out to these rigs, where meals often included steak and shrimp, and carved ice sculptures adorned lunch rooms.

Now it’s one of the most beaten-up sectors. Exploration and production companies are focusing on lower-cost shale-oil drilling on land, in places such as Texas and New Mexico. There’s a glut of offshore equipment. Only about half the global supply of deepwater rigs is working today; back in 2013 almost every single one was running at full speed. The latest projections call for a modest offshore recovery around 2019, or maybe 2020, according to Wells Fargo Securities LLC.

In the meantime, what to do with these crazy-expensive rigs ordered years ago?

Sunk Cost

“It’s very hard to ignore the sunk cost, but you have to,” said Chris Beckett, the former chief executive officer of Pacific Drilling SA, which kept the engines on a pair of drillships running for a couple of years off the coast of Aruba, waiting for contracts that so far haven’t come. “Compared to the cost of having to buy or build a new one, the option cost of keeping it in a condition that you can reactivate it for a sensible price is relatively inexpensive.”

That’s what Curran of FBR Capital Markets expects will happen: Once oil prices rise and explorers get back to some bit of offshore work, it will be just enough to keep hope alive. The problem, Curran said, is this will leave an overhang, keeping rig rents from rising.

Transocean announced late on Tuesday a new two-year contract for one of its most sophisticated working drillships. James West, an analyst at Evercore ISI, called the estimated dayrate of $145,000 disappointing in a note to investors. Shares fell 4 percent to $10.36 at 12:32 p.m. in New York.

“The normal reaction will be to cling dearly to whatever you have and kick off a new game of chicken when it comes to retirements,” he said. “Ideally, you want to emerge when the music starts to play again as the offshore driller who sacrificed the least. That’s the game they’re all trying to play.”


14 Comments on "Oil’s Biggest Rigs Head to the Junkyard"

  1. Shortend on Wed, 18th Oct 2017 7:20 pm 

    Hope they will recycle the metal or make artificial reefs from them…its all good!

  2. rockman on Wed, 18th Oct 2017 10:40 pm 

    Just BAU: boom, bust, boom, bust….

  3. Anonymouse1 on Wed, 18th Oct 2017 11:41 pm 

    Why don’t you oilymen turn those floating money sinks into floating theme-hotel-amusement parks narrativeman? Guests can drop nets into the ocean below and scoop up all the dead marine life your oily buddies kill, no effort or dynamite required(just BAU). Visitors will be amazed by the daily pyrotechnics show, in stunning 3D. The kids will have no end of fun on the waterslides. (Kids float on oil, so no danger of any of them drowning). Submarine excursions can thrill land-lubbers as they sail through the fabulous BP suspended oil columns of the Atlantic Ocean, far beneath the surface, out-of-sight, out-of-mind. OR when those attractions get old and stale, spend hours spraying the ocean surface with the corexit(tm) cannon, fun for kids of ALL ages.

    Now, even if such a park only brought in say, 10k a day, that is STILL better than 15k a right narrativeman? Who knows, if marketed correctly, the platforms might even break even. Who can say? What I can say is, you oilymen are not very good capitalists* if you can’t think of some way to offset BAU, I mean losses, sorry. It only took me a few mins or so to come up with a way to help the amerikan oil cartel produce what matters most, zeros and ones in privately held bank accounts.

    *Oh wait, I almost forgot, the uS oil cartel is a state-supported, and subsidized enterprise, communism at its finest. Not much actual capitalism going on with that group.

  4. Boat on Thu, 19th Oct 2017 12:12 am 

    drilled but uncompleted wells

  5. Cloggie on Thu, 19th Oct 2017 2:04 am 

    A large rig can weigh 17,000 ton.

    Weight 5 MW offshore wind tower = 2,900 ton

    There you go: 6 wind turbines or 30 MW

    And it takes 8 times less energy to create steel plate from scrap rather than iron ore.

    Small gold mine, these end-of-life oil-rigs.

  6. Go Speed Racer on Thu, 19th Oct 2017 2:19 am 

    Hi Clogster, hope your having a good Dutch kind of day,
    Well wait a minnit, these are floating oil rigs.
    Why not just stick the windmills onto the top of the oil rig. Could have it all up & running in 2 weeks.

    Then later on when the wind stops blowing, and we start running out of oil, we can repurpose the rigs back to drilling oil again.


  7. Cloggie on Thu, 19th Oct 2017 2:34 am 

    Why not just stick the windmills onto the top of the oil rig. Could have it all up & running in 2 weeks.

    An oil rig is not wide enough, these wind mills would be decapitating each other with a vengeance that would make an ISIS-warrior blush. There would only fit one turbine on top of that oil rig, which would look silly.

    Good day to you too!

  8. Cloggie on Thu, 19th Oct 2017 6:28 am 

    University of Delaware proposes offshore wind installation method that would cut cost and speed up the process:

    No monopiles but multiple “suction buckets” instead that require less force to install.

  9. twocats on Thu, 19th Oct 2017 9:05 am 

    BAUU – business as unusual. these rigs are a call option on industrial civlization itself. in the medium term: a losing bet.

  10. shortonoil on Thu, 19th Oct 2017 9:59 am 

    “Once oil prices rise and explorers get back to some bit of offshore work, it will be just enough to keep hope alive.”

    Prices have been going down for 3½ years, and there is no break in sight. Will anyone write an article on the last deep water drilling rig remaining on the planet?

  11. joe on Thu, 19th Oct 2017 10:17 am 

    It’s a tough call. Global economic growth is flattening. Global population growth curve is flattening too, global population is aging. There will be greater demand for incontinence pants and zimmerframes than oil rigs. Don’t let the global stock market bubble fool you, we are still in serious trouble.

  12. rockman on Thu, 19th Oct 2017 2:27 pm 

    “Prices have been going down for 3½ years, and there is no break in sight.” Just as there was no break in sight in 1998 when oil dropped below $20/bbl. And 1998 was the year after which most of these big floaters were built.

    As Yogi said: “Predictions are difficult… especially about the future”.

  13. bobinget on Fri, 20th Oct 2017 12:36 pm 

    If Texas produced Rockman, hoo-ray for Texas.

  14. Dredd on Sat, 21st Oct 2017 6:35 am 

    Good riddance.

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