Asia Pacific jackup, tender markets on the mend: Activities picking up, but no boom yet

By Linda Hsieh, managing editor

Like most of the rest of the world, the Asia Pacific drilling market has had it rough since the global recession began. Discretionary expenditures at many oil companies were hammered, leading to the cancellation or delay of many projects and drilling programs. “The first half of last year, there was nothing out there. No bids, nothing to bid on. It was like the world came to an end,” said Doug Halkett, chief operating officer for Vantage Drilling.

By the second half of 2009, signs of a turnaround did begin to pop up. “There were a lot of bids toward the end of last year,” Mr Halkett said, and that trend has continued into 2010 at a steady pace.

Ian Shearer, Seadrill senior vice president, jackups, for the Asia Pacific and Middle East, described the regional market as gradually improving. “We are slowly seeing the early stages of recovery, albeit at a slow pace… In time, as operator confidence grows, we expect to see new campaigns that will impact positively on rig demand,” he said.

Although Asia Pacific is known as a large jackup market, demand for mid-water floating rigs is also picking up, though contracts are usually of shorter duration than before, according to Jim Long, area operations manager for Northern Offshore. “A lot of shorter-term jobs are coming around for medium-depth floaters, and there aren’t many rigs competing for that work. You might have two, three or four bids with some withdrawing due to obtaining other work before contract award,” he said.

“Some contractors have opted to coldstack their rigs as opposed to working them on a short-term basis, and wait for a market that yields some term. The start-up and wind-down costs, along with idle periods in between, make this a viable strategy in many cases. That leaves opportunities for direct continuation if your rigs are already working,” he said.

The fact that the majority of the industry’s newbuild program has been in deepwater and high-spec jackups also means there hasn’t been much expansion of the medium-depth floater niche, he added.

DC spoke with each of these three companies at their Singapore offices to gauge the health of the Asia Pacific drilling market and each contractor’s outlook and plans.

VANTAGE DRILLING

This relatively recently established company – or “a small drilling contractor with growth aspirations,” as Mr Halkett puts it – took delivery of four jackups in the one-year period from December 2008 to December 2009. All are Baker Marine units capable of drilling in up to 375 ft of water and drilling wells as deep as 30,000 ft.

Only one of these four jackups left the Asia Pacific region for the African market: The Sapphire Driller recently finished work for Foxtrot International in the Ivory Coast and took up post in Gabon for Vaalco Energy. Once that project wraps up in September 2010, the rig will return to Foxtrot and the Ivory Coast for another seven or eight months.

Of the other three newbuilds, two have stuck around in Asia Pacific and the third is returning to Asia from Pakistan.

The Emerald Driller is contracted to drill in the Gulf of Thailand into January 2011 at $171,000/day – a rate that Mr Halkett acknowledges was set before the big bust. The going rate now for the bigger jackup units ranges from $120,000 to $140,000, while the smaller 300-ft units can secure approximately $85,000, he said.

The Topaz Driller, just delivered in December 2009, spudded its first well offshore Vietnam for Phu Quy POC, a joint venture company of state-owned PetroVietnam. The contract is expected to run through November this year.

Finally, the Aquamarine Driller is en route from Pakistan following completion of its maiden well with ENI, to the Philippines to work for an independent Australian company, Nido Petroleum.

“They have two discovery wells that were drilled two years ago. Now they need to go in and do extended well tests. Subject to how those wells flow, this contract could last from two months to two years, but we are hopeful of the latter,” Mr Halkett said.

Now that Vantage has established a record with operating these four jackups, Mr Halkett said, his company is in full gear to prep for the 2010-2011 deliveries of two semisubmersibles and two drillships, one of which is partially owned and three of which are managed assets for Vantage.

The Platinum Explorer drillship, under construction at DSME in South Korea, already has a five-year contract lined up with ONGC. It is equipped to drill in up to 10,000 ft of water, and exploration operations are scheduled to begin on the east coast of India at the end of 2010.

The DragonQuest drillship, also under construction at DSME, is designed to operate in 12,000 ft of water but will be equipped to drill in up to 10,000 ft of water initially. Petrobras has signed it up for eight years and currently plans to deploy it in the Gulf of Mexico.

The Sea Dragon I and II semis are both under construction at Jurong Shipyard. The first will go to work for Pemex for five years starting in March/April 2011. The second is currently uncontracted.

On the jackup side, Mr Halkett pointed to operators’ growing preference for newer and bigger jackups as an encouraging trend for his fleet of modern jackups.

“I think operators are waking up to the fact that the newer premium jackups can drill wells more efficiently and quicker than the 300-ft jackups built mainly 25 to 30 years ago. As a result, there is a growing bifurcation (in dayrates) between the rig classes, but the operators are evaluating that it is a price worth paying,” he said.

“A lot of people in this area will use big, modern jackups when they don’t need them, water depth-wise, well depth-wise or pressure-wise, to drill their wells. They’re using them because it allows them to drill their wells more efficiently.”

Looking at Vantage’s jackups and where they’re working, he said, most are being used to drill standard wells that could be drilled with 300-ft units. Especially with exploration drilling, a bigger rig that can move efficiently and carry more equipment can make a big difference in time savings, he believes. For example, the Emerald Driller moved 17 times drilling 23 wells in its first year of operations in Thailand last year – with a TRIR of zero and 0.5% downtime, according to Mr Halkett.

“It was bang, bang, bang, bang. I think people have been used to drilling fast wells on the developments in Thailand, but when you’re doing exploration,  you’re moving around… Once a company has used one of these rigs and it’s worked very well, they get used to all these efficiencies. They find it difficult to go back to the older rigs,” he said.

There is certainly a difference in rates between the high-spec jackups and the older ones – approximately $30,000/day to $40,000/day, Mr Halkett estimates. But more operators appear willing to pay that difference.

Unlike this downturn, during the 2000-2001 downturn there hadn’t yet been a significant building of new jackups. “Last cycle, there were no alternatives. This cycle, there is. You don’t have to take the old jackup. You can take the new one, and you’re getting it for almost the same price. Why wouldn’t you? That’s why the big jackup market didn’t go below $100,000 while the small jackups went considerably lower than that.”

Around the Asia Pacific region, Vietnam and Thailand will continue to be high-growth areas for jackups, he believes. Indonesia will, too, although regulatory problems are holding that market back.

“There are a lot of requirements in Indonesia, specifically for big rigs. But there are issues with the local content rules that make it very difficult for operators to actually award contracts. It’s a moving target of what you need to do to get a rig in to operate in Indonesia. That has backed up a lot of work,” he said.

“Indonesia is an improving market and a good market going forward for the bigger rigs. It’s just difficult to get to the finishing line with the operator.”

On the deepwater front, Mr Halkett noted that there appears to be potential activity in countries such as Indonesia, Australia, China and the Philippines. But because there haven’t really been any major discoveries, he said, “it’s always going to be second fiddle to the Golden Triangle.”

He added: “Asia Pacific is an increasingly important part of the world. It will continue to be a very good jackup market, but it would be good if there were some big deepwater discoveries. We could add a fourth leg to that chair, as opposed to three. That would be a game changer.”

Article continues below

Rig construction: Turnkey is the only way to go

By Linda Hsieh, managing editor

With some of the world’s biggest rig construction yards located in Singapore and South Korea, Asia Pacific has been the birthplace of the bulk of new drilling rigs in this build cycle.

For Seadrill, which has taken on an enormous US$5.5-billion newbuilding program over the past five years, many valuable lessons have been learned in this part of the world.

“The biggest challenge for us has been, we were the first in this boom. Our turnkey projects were No. 1 and 2 for Samsung, Jurong and Daewoo. They’re new-design rigs, and the yards hadn’t built anything significant for 10 years. It’s their first turnkey contracts (for drilling rigs),” said Alex Monsen, Seadrill vice president of deepwater projects. From October 2009 to February 2010, he was at the helm of a team that delivered five deepwater rigs in a span of five months.

His team previously delivered eight deepwater rigs over a span of 10 months earlier in this build cycle, and there was an average delay of about three months. But every rig came out on budget, he stressed.

“Turnkey is the only way of doing it because interfaces are so complex now that you need the yard to do it. They have the big engineering organization. Samsung has close to 2,000 engineers; we have maybe 20,” Mr Monsen said.

“It’s the only way to get the yard to take responsibility, even though we’re involved as much as we used to be. But they have to work with the subcontractors and make sure the interfaces are proper,” he continued.

The challenge was that, because these shipyards hadn’t done turnkey projects on drilling rigs before, there was a significant learning curve at the beginning. “We took the brunt of that learning curve,” Mr Monsen said.

Despite early challenges with the shipyards, Mr Monsen acknowledges that the yards have done good jobs overall. In particular, he praised the efficiency he’s seen at the Korean shipyards. “They have the big modern shipyards and infrastructure that you don’t have here (in Singapore)… Here it will take you anywhere between 9 and 10 million manhours to build a sixth-generation semisubmersible. Koreans do it in three. And the West Gemini we’re building now is 1.5 million manhours,” he said.

Another key lesson has been the importance of discipline, Mr Monsen stressed. “We haven’t allowed any significant changes (to rig design). That’s the only way you can deliver these on time… A lot of people are struggling, and my belief is they’re struggling just because of that. You need discipline. You decide what you’re going to build, then you build it.”

SEADRILL

The Norway-based company currently has four jackups working in the Asia Pacific, including in Vietnam and Malaysia. Two more units are set to join this fleet mid-2010, according Mr Shearer, senior VP jackups for Asia Pacific and the Middle East.

“2010 is about recovery from a dramatic downturn in rig utilization. We believe that there will be an underlying improvement in utilization through the year, with bursts of tender activity related to seasonal weather patterns and the annual budget cycle of our clients,” he said. “It will be about linking together work programs of shorter durations than we have enjoyed in recent years, rather than improving dayrates.”

“In the longer term, we see the elasticity of energy demand in developing economies in our region, energy security issues and basic reserves replacement issues as providing a positive outlook for drilling contractors working in the Asia Pacific.”

Overall, he believes that Malaysia, Vietnam and Indonesia will be the region’s high-volume markets, with new opportunities emerging in Australia, Timor Leste and Thailand. “We are watching the development of new or dormant markets such as Cambodia, the Philippines and Papua New Guinea with much interest,” he added.

Mr Shearer also points out that, following the worldwide trend, wells in the Asia Pacific are becoming longer and deeper, influencing factors such as drill pipe specifications and mud system considerations (volume and treatment equipment). “Logistical support is generally more of an issue due to distance to and from point of supply, and increased deck space and variable deck load are valuable features,” he added.

Particularly in the Gulf of Thailand, where total well construction times can be impressively short, there is a special focus on offline capability and increased accommodation manning levels. “We have noticed that with our newbuilds, once operators have experienced the performance advantages, they have a hard time going back to the dependable but ultimately less capable older rigs,” Mr Shearer said.

Despite a trend toward more difficult wells and higher-capacity rigs, however, Mr Shearer said he doesn’t see much action for the much-discussed techniques of managed pressure drilling. “There is a lot of talk about the potential benefit of MPD in terms of overall drilling performance… but we haven’t seen substantive commitment from operators at this time,” he said. Most approaches for MPD here appear to employ “bolt-on” self-contained solutions from specialist vendors, but they have implications for deck areas and payload of units.

“The key issues for jackup rigs seem to revolve around the space and height underneath the cantilever and ease of hookup to existing conventional equipment. In some applications, gas-tight drillstring connections are important,” he said.

Seadrill also has a substantial fleet of tender rigs in Asia Pacific, the world’s biggest tender-rig market. And like the jackup market, this segment took a substantial hit during the last downturn.

“It has been very slow. The last two and a half years, there has been only one new contract signed for tender rigs,” said Alf Ragnar Løvdal, Seadrill senior vice president, tender rigs. That contract was signed by PTTEP of Thailand for one of Seadrill’s newbuild semi-tenders for a one-year term.

Things are picking up, however, with a definite increase in tendering activity by operators, although with shorter contract commitments.

With 16 tender rigs in its fleet, Seadrill accounts for about 60% of the world’s approximately 28 tender units. The company is now building No. 17, the West Jaya, at the Keppel FELS yard in Singapore. It is due for delivery in Q1 2011. As far as activity levels, the two hubs of Thailand and Malaysia take up roughly 10 of Seadrill’s 16 tender units. Brunei and Indonesia each account for one more, and the remainder are located in Africa.

One challenge that the tender market will have to face in the upcoming few years, Mr Løvdal believes, is the number of newbuild jackups coming out. “(Tender rigs) compete against jackups. We feel we offer a cost-effective solution for development drilling compared with jackups, but it’s still competition,” he said.

Oil companies do tend to think longer-term when it comes to development drilling, and that works to the advantage of tender rigs.

“If they have decided to build out the field and have already invested so much money, they continue and complete that. Everybody’s waiting for the oil to be produced,” Mr Løvdal said. “And if they already have the installation up, they want to maintain what they have so they can get as much oil as possible to surface.”

NORTHERN OFFSHORE

Rather than not having enough work to do, as some contractors are experiencing, Northern Offshore’s problem in the Asia Pacific is the opposite: not enough rigs. “One thing that hurts us with getting this work is availability – if we had more assets. Most of the work that comes up, we can’t get it because our rigs are not available,” said Jim Long, the company’s area operations manager.

He’s referring to shorter-term projects for medium-depth floating rigs like his company’s Energy Searcher drillship and Energy Driller semisubmersible. Since some drilling contractors have coldstacked rigs instead of picking up short-term contracts, not many companies are bidding for this type of work, he said.

The Energy Driller is still under a three-year contract with ONGC that will take it through mid-2011. The rig has been carrying out exploration drilling on both the east and west coasts of India. “We just upgraded the rig to be able to work in 1,000 ft of water, and now we’re getting ready to go on a well in that water depth,” Mr Long said. The upgrade primarily involved the mooring system and risers.

The Energy Searcher is working in Vietnam for VietGazprom, contracted to September/October 2010. It’s doing appraisal drilling on a discovered gas condensate field.

“(Vietnam) is an efficient area to operate in. There is a reasonable infrastructure in place, and start-up scheduling is generally driven by well equipment delivery and not a cumbersome bidding process,” he said. “There are a number of exploration programs coming up for jackups and floaters. The area is going to be fairly busy in the next year or so.”

Although the industry is generally still dealing with a downturn, drilling contractors’ operating costs have not fallen much at all, Mr Long commented. “I think it’s because there’s been a lot of consolidation in the oil service and rig equipment sectors. There’s not a lot of competition.” In fact, for some equipment, there’s only a single vendor, unless you look to the non-OEM market.

“The other thing that keeps us from reducing our costs considerably is how we’re going about our business,” he continued.

“We are taking Northern Offshore up to the next level in terms of standards. That means implementing companywide management systems on quality, safety, the environment and operational efficiency. We are doing it in a way that brings value to everyone, to our shareholders, employees, clients and the industry. Maintaining these standards comes at a price, but it is the expectation of our customer, and it will bring returns in a very short time frame.”