Deeper waters, LNG prospects gain momentum

Asia Pacific shifts to more complex operations as dayrates increase in tight market

By Katie Mazerov, contributing editor

Asia Pacific is stepping out of its comfort zone. Long a region with plenty of shallow, easy-to-tap conventional resources, the market has begun a transition, shifting focus to more complex and risky ventures such as deepwater, high-pressure, high-temperature (HPHT) reservoirs and unconventional gas plays in Australia. However, while the prospect of new hydrocarbon sources to replace the diminishing “low-hanging fruit” is heralding exciting long-term growth potential, it also poses challenges of increased costs, lack of infrastructure and a tight labor force. In a survey conducted last year by GL Noble Denton, more than half of industry respondents from the Asia Pacific region cited rising operating costs as their biggest barrier to growth.

High operating costs are already evident in far-flung Australia, where rig availability and mobilization expenses are problematic for operators, said Derek Cardno, vice president, global drilling and completions for BHP Billiton Petroleum. The company will likely have two moored semisubmersibles operating on Australia’s North West Shelf, the country’s primary offshore hub, in 2013.

“It’s an expensive proposition to bring in a rig because we’re transporting it such a long distance,” he said. “That and the work that has to be done to make the rigs acceptable from a safety case standpoint mean operators need to have long-term programs to make those costs worthwhile, or must work with the availability of what is already there.”

Such concerns are not, however, putting a damper on an otherwise healthy and stable outlook for the region, which remains a major gas province that is seeing an increase in liquefied natural gas (LNG) demand from Japan following the tsunami and concerns around radiation effects from the Fukushimi Daiichi nuclear disaster. Malaysia is the area’s most prolific oil producer.

Particularly upbeat about near-term activity are drilling contractors, who are ringing in 2013 with strong and rising dayrates, near-100% rig utilization and longer-term contracts. The rig count, particularly in the jackup space, is moving up, and newbuild activity at Asian shipyards is booming.

“Asia Pacific is a diverse and interesting place to operate and a very healthy region right now, with internal energy consumption and gross domestic product (GDP) rates rising in many countries,” said Carey Lowe, senior vice president, Eastern Hemisphere for Ensco, one of the largest and most established drilling contractors in the Asia Pacific market. “A good number of enticing prospects, including deepwater exploration and LNG developments, are expected to materialize in the next few years.” The company has 11 jackups currently working in the region – four in Malaysia, two in Indonesia, two in Thailand, two in Australia and one in Vietnam – and a semisubmersible, ENSCO 8504, operating in Brunei.

Ensco also has three premium harsh-environment jackups from its new ENSCO 120 series under construction at Singapore’s Keppel FELS shipyard. “These rigs are ideal for the deep, heavy-duty LNG gas drilling projects that are either starting up or planned in the region, including Australia’s North West Shelf,” Mr Lowe said. “They are fully automated, with features one would expect to find on a sixth-generation semisubmersible or drillship, including a 2.5 million-lb quad derrick and automated offline pipe-handling systems. We think of the rig as a deepwater equipment package on a jackup.”

The rigs will be capable of operating in 400 ft of water and are being designed for multiwell platforms, ultra-deep gas drilling and extended-reach wells up to 40,000-ft total drilling depth. One rig has already been contracted for work in the UK upon delivery in Q2 this year; the others will be ready in Q4 this year and Q3 2014.

“Operators in this region want high-quality rigs, and we feel we have a good track record for meeting the needs of our customers,” Mr Lowe said.

Dayrates on the rise

Ensco also has seen a meaningful improvement in dayrates in the region over the past 12 months, along with higher rig utilization and longer-term contracts. “It is clear from the fourth quarter of 2011 to the last three months of 2012, there has been a fairly significant increase on average for both jackups and deepwater rig rates,” Mr Lowe said. Jackup rates are highest in Australia, averaging in the low $190,000s because of higher operating costs. In other countries, jackup rates range from the mid-$130,000s in Indonesia and Thailand to the high $140,000s in Vietnam to the low $150,000s in Malaysia.

“Rig demand is strong, and 100% of our rigs in the region are contracted,” Mr Lowe continued. “Tendering activity is fairly robust for jackups, and we’ve received a number of inquiries for rigs for deepwater exploration as well.” Key deepwater markets are Australia, Malaysia and Indonesia.

While labor and infrastructure issues pose challenges, Ensco has a long history of employing workers in the countries where they operate. “Employing local workers is something we think we’re good at, and we don’t find it difficult to meet nationalization requirements in the region,” Mr Lowe said.

Vantage Drilling also is expecting regional jackup dayrates to increase due to the extremely tight market. Rates for premium jackups are currently around $160,000 and expected to range as high as $180,000 to $198,000 to match recent Middle East jackup rates for the new premium rigs coming into the market, said marketing manager Ian Craven. “The region’s jackup fleet has recently gone from 48 to 64, but there are a lot of newbuilds coming into the market in the next two years,” he said.

“Some are concerned that these jackups will flood the Southeast Asia market and drive rates down, but in reality, most are likely to find work in other regions. We feel most of the new rigs that remain will find work in the Asia Pacific market, which is looking healthier every day.

“Demand for experienced personnel, however, has stretched local resources with the influx of new-generation rigs and a recent influx of rigs from outside the region brought in to meet high demand,” he continued. “There has been oil and gas activity in the region since the 1970s, and we have a lot of nationals very well trained. But, like the rest of the industry, we are dealing with the big crew change, and contractors are concerned that there aren’t enough skilled workers to service all the rigs coming into the market.”

Vantage is also seeing a trend among operators to venture into deeper and more challenging reservoirs where drilling takes much longer. “Malaysia normally drilled 30-day wells for years, but production there is becoming more complicated, and the country is starting to experiment with HPHT wells,” Mr Craven said. Vantage recently completed a year-long HPHT drilling project in Malaysia for a major independent operator.

Drilling is more straightforward and conventional in Thailand, where wells can be drilled in four to five days. However, reservoirs are relatively small, and wells tend to deplete quickly, so operators have to drill a lot of wells to maintain production, he added.

A trend of national oil companies gaining traction in the region also has emerged, with companies like Petronas in Malaysia, Pertamina in Indonesia, PetroVietnam in Vietnam and PTT Exploration and Production in Thailand undertaking more development on their own and taking over business from independents rather than engaging in joint venture operations. “This is mirrored by the emergence of new, regionally owned drilling contractors in the jackup market, challenging the traditional US and European contractors,” Mr Craven said.

In Indonesia, home to some 40 operating companies and one of the region’s biggest onshore markets, the tendering system is particularly complex and can take up to a year from tender release to award, Mr Craven noted. Recently, BPMIGAS, the governing body for oil and gas exploration and production in Indonesia, was declared unconstitutional by the Indonesian Parliament, creating further uncertainty.

Vantage has three premium jackups in Southeast Asia – one each in Thailand, Malaysia and Indonesia. All are only two to four years old and capable of operating in water depths of 375 ft with a cantilever reach of 75 ft and modern drawworks and top drive, but are not automated. “Unlike the North Sea, operators in the region prefer jackups that are not fully automated, which they consider slower,” Mr Craven explained. The company has a fully automated rig, the Platinum Explorer, a 12,000-ft capable ultra-deepwater drillship operating in India under a five-year contract for ONGC.

“India has a healthy jackup market and a strong deepwater market, but the jackup market is either ONGC-owned or dominated by Indian drilling companies with relatively new fleets, which makes it difficult for outside companies to compete,” Mr Craven said. Foreign contractors are used for all the country’s deepwater drilling.

KCA DEUTAG has a self-erecting tender (SET) barge in Malaysia, a land rig operating in Brunei and a warm-stacked SET in Singapore that the company is bidding for work in Southeast Asia, said Tony Rodnight, business development manager. “We’re seeing dayrates certainly rising over last year, a trend that is supporting discussions regarding a number of newbuild projects,” he said.

The company’s T-201, a 1,500-hp land rig featuring a skidding system, 700,000-lb hookload and a 14,000-ft drill depth capability, has received the Land Rig of the Year award from Shell for three of the past four years.

Among the challenges in the region is a trend by national oil companies to require local investment. “Operators and contractors want to come into these countries with financial support and technical know-how, but we are being told we need to start working with local companies as potential investors and shareholders,” Mr Rodnight said.

KCA DEUTAG is also targeting Australia’s LNG market as a key growth area. Specifically, the company is eyeing the LNG market off the North West Shelf and is looking ahead to shale gas opportunities in Australia’s western province. “The coal seam gas market in Queensland requires light-duty rigs, and we don’t see ourselves having any key differentiators there,” he noted.

The biggest challenges in Australia center on infrastructure and labor. The long distances (2,000 miles or more) that rigs must be transported is especially difficult. “In Australia, we’re also competing with the mining industry for labor and equipment needs,” Mr Rodnight explained. “This is the first country where oil and gas is not the No. 1 energy business. That may change in the next five to seven years, but for now, mining and coal development are the primary energy sources.”

Last year, KCA DEUTAG was selected by Woodside Energy, Australia’s largest offshore operator, as one of two drilling contractors to complete a front end engineering design contract for a 3,000-hp modular platform drilling rig for the Browse LNG development project off the North West Shelf. The project, being developed for the Asian LNG export market, is a joint venture of Woodside, BHP Billiton, BP, Chevron and Shell, and is also attracting Japanese investment in the wake of the 2011 nuclear plant disaster.

“All of the major operators have an ongoing or new interest in the continued development of assets on the North West Shelf,” said Keith Jones, recruitment team leader for NES Global Talent, which provides engineering services and specialist staff support for the global energy industry. Last summer, Chevron announced a natural gas discovery by its Australian subsidiary, Chevron Asia Pacific Exploration and Production Company, in the Greater Gorgon area of the region’s Carnarvon Basin. More recently, the company announced the discovery of another well off the North West Shelf, an asset also owned by Shell Development Australia and Mobil Australia Resources.

“There is still an ongoing appetite for renewable energy in the region, but that will be a huge undertaking, so for now LNG is the cleanest and most accessible alternative,” said Marcus Ward, associate director at NES Global Talent.

Shale prospects in Australia

Huge shale and tight gas reserves in eastern Australia’s Cooper Basin and in Western Australia also have generated interest. Last year, Santos, one of the largest and oldest Australian operators, began commercial natural gas production from a shale well in the Cooper Basin, which has produced conventional oil and gas since the mid-1960s.

“Following suit with the shale boom in the United States, Australia is beginning to find its own path for shale gas, with projects on the east and west coasts of Australia,” Mr Jones said. “Shale gas is still in the early stages, and as with all exploration in Australia, operators are finding that the cost of hiring a rig is 20% to 30% higher than elsewhere in the world with the additional inflated labor costs. With an increase in drilling throughout the country, rig availability will continue to be an issue. In light of this, we are seeing more rig operators moving into the region with a long-term growth strategy to stay.”

With labor also hard to procure in Australia, most companies have traditionally imported personnel from other regions. But that practice may be changing, due to a push by the government for local content laws that may restrict importation of workers. “Looking ahead, the focus will be on where else in the market we can find these skills. This is where our discipline-specific consultants come into their own by searching the global talent pool but also offering solutions to our clients, such as preparing local college graduates for oil and gas careers,” Mr Jones noted. “It has been important for companies to bring in quality people, but the country also needs a base of trained local people for both the economy and the future of the industry.”

To that end, companies are looking at other industries with the idea of bringing workers into the oil and gas sector and training them with the appropriate skills. Australia’s robust mining industry, for example, offers transferrable skill sets but is also unionized. Offshore operations are more complex, and clients are willing to pay for a fully qualified workforce. “Every major find requires procuring, training and bringing a team on board,” Mr Ward emphasized. “It is essential for operators that they have the A team on projects to ensure they deliver on schedule and on budget.”

With increased operating costs in Australia, it is also critical that the timing for rig deployment be 100% correct, a mandate that has been a focus for NES Global Talent. “We find the best possible team for our clients, make sure they complete every stage of the job on time and then, once the client is satisfied and the work is complete, we work with client and candidate to ensure a smooth transition to the next job,” he said.

Atwood Oceanics has three semisubmersibles operating in Australia – the Atwood Eagle, which is splitting time between Woodside and Apache through mid-2014; the Atwood Falcon, working for Apache through late 2014; and the Atwood Osprey, contracted by Chevron through 2017, said Geoffrey Wagner, vice president, marketing and business development. “We are seeing a trend toward much more difficult drilling for harder-to-access resources,” he said.

“It’s not so much about deeper drilling as it is about ensuring our crews have the training and experience to bring our clients success no matter what they are encountering downhole. Our clients entrust us with their work, and we work diligently to maintain this confidence each day.”

Atwood also has deployed two new 400-ft jackups to Thailand, the Atwood Mako, delivered in August under a contract with Salamander Energy, and the Atwood Manta, working for Coastal Energy Company (CEC). The rigs feature 15,000-psi blowout preventers, offline pipe-handling capabilities, larger free deck areas, 150-person accommodations, 75-ft cantilever reach and can rack back large amounts of pipe, making them ideal for delivering the efficiency needed for drilling quick wells in Thailand.

“These rigs were targeted for the fast-paced work we see in Thailand, where there is an art to drilling safely and efficiently,” Mr Wagner said. “With the right upfront design and pre-job planning, our clients see the true benefits of these great rigs.” The new rigs join the Vicksburg, a 300-ft jackup that has been working for CEC in Thailand since 2009.

Atwood also sees opportunities for two of its three heavy-duty and highly automated drillships in the region – the Atwood Achiever, due for delivery in June 2014, and the Atwood Admiral in March 2015. Both are under construction at the DSME shipyard in South Korea. The rigs, capable of operating in 12,000 ft of water and drilling to 40,000 ft, can be deployed in remote locations and include numerous features that add to the efficiency of drilling and completing complex wells, Mr Wagner noted.

“Post-Macondo, we’re seeing a push toward heavier casing designs, which in turn result in heavier hookloads and other increased stresses to the existing drilling rig fleet,” he continued. “As all of these stresses are interconnected, we are focusing on the design of the entire ship to ensure that we can have an efficient tool for our customers. We have the benefit of being a small company with a great history. Since we have grown organically, we have standardized our equipment, and now benefit from common spares and increased equipment familiarity within our crews.”

Looking ahead, Mr Wagner agrees the industry will be faced with increased challenges in training, new equipment coming online and, especially, maintaining the appropriate level of vigilance with regard to safety and environmental stewardship as Asia Pacific embarks on more challenging fields.

“We will continue to scrutinize our personnel in terms of their training and familiarity with specific equipment and situations,” he said. “We’re going to be bringing out new rigs and putting teams of people together to go into these programs, which are critical to our customer, the host country and the environment, and we want to make sure that we make every operation a success.”

To that end, Atwood has a strong competency assurance program that includes the use of third-party firms to test employees’ knowledge and use of equipment. The program has made a difference in reducing both safety incidents and downtime. “Last year, we had one of our best years ever, a 0.68 total reportable incident rate, and downtime across the entire fleet of about 3.4%,” Mr Wagner said. “As we encounter more and more opportunities in the region and elsewhere that test the technical requirements of our rigs and people, it is our obligation to make sure we do so in a safe and prudent manner.”