Untapping the Potential of Deepwater Drillships

Post-Deepwater Horizon, there are signs of buoyancy in the market for deepwater drilling ships. To keep tabs on global demand, the deepwater and ultra-deepwater zones are fast becoming the last best hope for a big strike, but can heavy overheads be justified as markets tighten? Ian McInnes investigates.


Deepwater drilling is costly: running the rig alone can cost around $1m per day. New ultra-deepwater drillships are also a hefty budget item, coming in at around $630m. Nevertheless, if energy companies and drilling contractors want to reap the rewards of the deepwater sector there is little choice but to write the cheque and hope the investment against the price of the oil that is recovered or the drilling contract value makes for a viable project.

Signs of deepwater investment

There have been signs recently that the deepwater drilling ship market is ramping up. Hyundai Heavy Industries (HHI), one of the world's biggest shipbuilders, announced on 1 June 2011 that it had won an order worth $1.12bn to build two new drillships for a subsidiary of Rowan Companies.

The two 229m-long ships will be rated for operations in water depths of up to 3,657m and are set for delivery by the second half of 2013; under the terms of the agreement, Rowan has an option to order an additional drillship of the same class. The ships will be of the Gusto P10000 design, which has a cost-saving thruster canister to keep the ship in position during drilling.

The latest order brings HHI's total drillship orders to nine so far to approximately $5bn, with options to build three more. The company says that it has the most drillships on order than any other builder.

Ultra-deepwater drill contracts

"HHI has won an order worth $1.12bn to build two new drillships for Rowan."

For Rowan, the new drillships are the first step into the ultra-deepwater drilling sector. Rowan president and CEO Matt Ralls believes that the company's "long-stated strategy has been to focus on and diversify our offshore drilling business, and we are excited to take this first step into the ultra-deepwater sector".

"This investment will expand the breadth of Rowan's drilling services and enable us to address significant market and customer opportunities in the deepwater arena," he says.

The drillships will be financed through available cash, cash flow from operations and short-term borrowings. Ralls said that the drillships with their "innovative design and redundancies built into them should deliver significant efficiencies in well construction and field development for our customers. In addition, they will meet current country-required specifications and anticipated regulatory requirements".

New rigs

In May, 2011 Diamond Offshore Drilling said that it had exercised its option for a third ultra-deepwater drillship with HHI for $610m. Diamond Offshore's president and CEO Larry Dickerson said that "the addition of this third new drillship is part of our ongoing effort to provide multiple ultra-deepwater options to our customers".

"Including our acquisitions of Ocean Courage and Ocean Valor, we have over the past two years increased our ultra-deepwater fleet by five units," says Dickerson. "Coupled with Ocean Confidence, Ocean Endeavor and Ocean Monarch, Diamond Offshore will be able to provide eight rigs for the growing 10,000ft (3,048m) and deeper market."

Also deciding to exercise its option with HHI for an ultra-deepwater drillship in April 2011, Noble Corporation's orders for the class went to three for the year.

"With the addition of another high-specification drillship, Noble continues its strategy of adding rigs with the latest technology, equipment and capabilities," says David W Williams, chairman, president and CEO of Noble Corporation.

Another April order for an ultra-deepwater drillship from HHI came from a wholly owned subsidiary of Fred. Olsen Energy ASA. The $615m vessel is set for delivery for the third quarter of 2013 and there is an exercisable option for a second similar ship.

Transocean leads the pack

Transocean says it is the world's largest offshore drilling contractor and already has two ultra-deepwater drillships, Discoverer Clear Leader and Discoverer Enterprise in its fleet with three more purpose-built Enterprise-class vessels to follow. Transocean may reap the benefits of an upturn in the ultra-deepwater sector more quickly.

"Diamond Offshore Drilling has exercised its option for a third ultra-deepwater drillship with HHI for $610m."

"Driven primarily by Petrobras's urgency to fulfil their immediate needs, along with increased tendering activity globally, we are beginning to see the near-term availability of ultra-deepwater rigs diminish," says Transocean president and CEO Steven Newman at the firm's first quarter earning conference call. "It is also very encouraging to see that we are already discussing contracts that would commence in 2012 and beyond."

He added that there were signs of improving markets across the board.

"The deepwater and mid-water markets, which have been soft until recently, are beginning to show signs of a pick-up in the second half of this year,” he says.

While the deepwater market may be in the earlier stages of its ramp-up, mid-water tendering pace is noticeably accelerating.

Tight market

Terry Bonno, Transocean's vice president, marketing concurs.

"As the supply tightens in both the ultra-deepwater and midwater markets, we expect to see the deepwater market follow suit and tighten as well," he says. "This dynamic should lead to increasing day rates as we move into 2012. The sentiment in the worldwide ultra-deepwater market has further improved, with the expectation that Petrobras is close to finalising commitments on three ultra-deepwater units.

"With the other recent contracting activity in this market there is very little availability remaining for 2011, and we are barely into May. Reflecting this positive trend, we are very close to finalising an agreement on the Sedco Energy, our only available ultra-deepwater unit in 2011."

"Our outlook is optimistic for the ultra-deepwater market."

It certainly looks like there is significant movement in the ultra-deepwater sector again.

The major drilling players would not be ordering billions of dollars of deepwater vessels if this was not the case and it would not be a surprise to see more orders to come as energy companies perceive a tightening of supply in ultra-deepwater drilling vessels and with that, added costs.

It would appear that Transocean, by starting its ultra-deepwater drillship building programme earlier than some, could benefit substantially until its competitors catch up.

"Our outlook is optimistic for the ultra-deepwater market, and we are now in discussions for opportunity beyond 2011, further supporting our belief in the long-term ultra-deepwater market," says Bonno.