THERE MAY BE some mixed signalsemanating from the US Gulf of MexicoE&P and drilling market lately, but over-all the region appears to be at itsstrongest ever in terms of rig demandand dayrates as a result of manmade andnatural events. In mid-October, the Gulfrig count was at its lowest in nearly ayear, while at the same time dayrateswere increasing significantly, resultingfrom a rig supply that had dwindled byabout 10 units due to storms and 4 to 5more that would be exiting the Gulf toother regions. Additionally, a rig-sharingconsortium agreed to charter a newlyconstructed ultra-deepwater semisub-mersible for four years. The new rigwon’t be delivered until 2007.

Meantime, the US Gulf is still reeling andtrying to recover from two back-to-backCategory 5 hurricanes that sweptthrough the middle of the Gulf’s denselypopulated oil and gas producing areas.As a result, the Gulf’s entire productionof oil and natural gas was shut in, and inmid-October, more than a month afterthe first storm, Hurricane Katrina, and

several weeks after Hurricane Rita,nearly 65% of oil production and 52% ofnatural gas production remained shut in,primarily as a result of damaged refiningcapacity, although several major offshoreproducing facilities were severely dam-aged or destroyed during the hurricanes,as well as several offshore pipelines.

T H E G U L F M A R K E T

The Gulf of Mexico is the largest drillingand production activity area offshorethe US and one of the world’s major rigmarkets. In 1995, the Gulf’s total oil pro-duction was just under 1 million b/d.That figure rose to more than 1.5 millionb/d by 2004, where it stands presently.The US Minerals Management Service(MMS) predicts that by 2011, the Gulfwill provide more than 2.2 million b/d ofoil. Deepwater (1,000 ft and greater isMMS’ criteria for deepwater) oil produc-tion increased to a high of 348 millionbarrels per year during 2002 and 2003,but that figure decreased to 337 millionbarrels annually in 2004. Deepwaternatural gas production in 2002 was1,320 bcf per year in 2002, rose to 1,420

bcf annually in 2003 and remained atthat level in 2004. MMS said that totalGulf of Mexico gas production in 2002was 12.44 bcf/d and is expected toincrease to 13.24 bcf/d by 2011.

MMS estimates that in 2005 deepwaterproduction will account for 26% of theGulf’s total gas production while oil fromdeepwater will account for 51% of totalGulf production.

G U L F R I G A C T I V I T Y

ODS-Petrodata reported in mid-Octoberthat the Gulf of Mexico rig demand wasat its lowest level since December 2004,with 125 of the Gulf’s 158 rigs contractedfor a utilization rate of just above 79%.However, the company also reported thatrigs under contract in mid-October 2004totaled only 122 units for a utilizationrate of just over 78%.

One possible reason for decreasing rigactivity is that operators are just notready to go back to work yet after thestorms, as many are still assessing andrepairing damage to their facilities. The

26 D R I L L I N G C O N T R A C T O R November/December 2005

Hurricanes impact US Gulf drilling activity,but market conditions are strengthening

GLOBAL DRILLING OUTLOOK

Swath of destruction: Hurricanes Katrina and Rita moved through the most densely populated areas of the US Gulf of Mexico. While both storms weredowngraded to Category 3 by landfall, during their life offshore they were Category 5, hence many platforms were damaged by high winds and waves.

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MMS reported as of 19 Oct that 211platforms and four rigs still remainedevacuated. That translates to morethan 25% of the manned platforms and3% of the rigs currently operating inthe Gulf.

It should not be read into these figuresthat the region is in a decline. In fact,the present and future Gulf rig marketcannot be assessed without includingthe impact of the two storms. Theregion will be affected by the hurri-canes for some time to come.

More than 30 fixed structures andmobile drilling rigs were reported lost,and that was only from Hurricane Kat-rina, which formed into a Category 5hurricane during its voyage throughthe central Gulf. Three weeks later,Hurricane Rita wreaked havoc in thewestern area of the Gulf, also as a Cat-egory 5 storm, with even more mobilerigs reported damaged or lost. Morethan a month after Hurricane Rita,some drilling contractors have yet tolocate rigs that had been blown off oftheir original locations.

So, as a result of the storms, operatorsare still regrouping to a degree,assessing the damage, determiningwhat should be repaired and thenassembling the materials and equip-ment to make those repairs before theyget back into the job of hiring rigsagain to continue with their explo-ration program.

On a similar note, both hurricanescombined in a one-two punch thateither destroyed or severely damagedsupport base facilities essentiallyalong the entire Louisiana coast aswell as offshore support areas in Mis-sissippi and Alabama, making it evenmore difficult and troublesome foroperators, drilling contractors andconstruction companies to transportmaterials, supplies and equipment towhere they are required in order tomake necessary repairs.

J A C K U P A C T I V I T Y

The bottom line is that the decrease inrig contracting activity is only tempo-rary and is expected to increase again.When that occurs, drilling contractorsare expected to see significantly higherdayrates for their jackup rigs due to thefewer number of rigs available as aresult of the storms. Additionally, rigsare continuing to mobilize from the USGulf to other regions in search of better

contract terms and higher dayrates.Most of the equipment leaving the Gulfare jackups.

However, drilling contractors may nothave to go through that exercise toomuch longer.

While deepwater and ultra-deepwaterrigs have been enjoying record highdayrates and drilling contracts withterm durations not seen for 15 years,drilling contractors with jackups arenow beginning to get a piece of thataction. Longer term contracts havebeen offered for jackups recently, like-ly a result of the scarcity of the rigsresulting from the hurricanes, as wellas mobilizations out of the area. Highdayrates, not typically seen to accom-pany term contracts, are also beingoffered in conjunction with the charter.

Now both term and high dayrates arebeing offered in an effort to keep therigs where they are and make it lesslucrative for drilling contractors tomobilize to other market areas.Rowan Companies’ announcementearlier this year that it was mobiliz-ing five jackups from the US Gulf toSaudi Arabia against long-term con-tracts (three years) and dayrates inthe $100s certainly had an effect onthe operators’ mentality in this case.

A result is a jackup market that isstretched extremely tight due not onlyto rigs destroyed in the storms but rigsleaving the Gulf. Additionally, two ofRowan’s rigs that were contracted inSaudi Arabia were damaged, meaningthe contractor may replace those unitswith others in the Gulf, resulting in aneven tighter jackup market.

In some cases more recently, opera-tors reportedly are offering similarrates and term contracts for rigs in theUS Gulf. ODS-Petrodata reported thatsome operators are increasing the sizeof the carrot to $120,000 per day forthe premium jackups. The companyalso said that there is speculation thatthis particular rate could soon beapplied to standard jackups, with pre-mium rigs going for $140,000 daily.These types of dayrates have onlybeen seen for deepwater rigs in theGulf previously. Some mid-water depthsemisubmersibles aren’t being paidthese rates.

With jackup dayrates and terms likethese, who needs to move to the MiddleEast, or any other region, for that mat-

GLOBAL DRILLING OUTLOOK

November/December 2005 D R I L L I N G C O N T R A C T O R 27

Katrina/Rita GOM Snapshot

Relevant statistics on the storms’impact on OCS E&P operations

25,000-30,000Number of personnel employed indrilling and production activities in theUS Gulf of Mexico (NOIA)

90 Number of MODUs and platformsevacuated due to Hurricanes Katrinaand Rita as of 9/23/05. (MMS)

0Number of storm-related injuries andfatalities to OCS personnel (MMS)

101Number of MODUs in the path of Katri-na/Rita (MMS)

18Number of MODUs losing station as aresult of the storms (MMS)

2 (Plus 3 missing)Number of MODUs permanently lost(MMS)

1.5 MMBOPD Oil3.65 Tcf GasVolume of pre-storm production in theUS Gulf of Mexico (MMS)

1.5 MM b/d Oil (100%)7.856 Bcf/d Gas (78.6%)Volume and percent of OCS productionshut in due to the storms (MMS)

0 (no significant amount)Volume of OCS oil spilled from GOMwells due to the storms (MMS)

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ter? And that’s just what some operatorsare willing to pay for.

Some drilling contractors are alreadyseeing their dayrates approach those lev-els. ENSCO International, for example,operates several jackups that arepresently being paid rates in the low$80s but will turn over to new contracts

in the low $100s. The contractor’sENSCO 105, a premium jackup, ispresently working in the mid $80s, thengoes to a contract in the low $100s andthen to another contract beginning in2006 in the low $140s.

There are some jackups moving into theGulf of Mexico, but not many, and notsoon, and they are already contracted.Shell contracted with Noble Drilling fortwo new jackup rigs to be built in Chinafor work in the US Gulf upon delivery inthe fourth quarter of 2007 and first quar-ter 2008. Shell contracted the rigs for twofirm years plus five one-year options.

Presently, other than these two new Noblejackups, TODCO is essentially the onlycompany that has cold-stacked jackups topossibly be reactivated. Those rigs, how-ever, are mainly shallow water units, andwhile TODCO has reactivated a couple ofthem recently, they were mobilized forcontracts outside the US Gulf.

D E E P W A T E R R I G S

Just how tight is the deepwater andultra-deepwater Gulf of Mexico rig mar-

ket? A consortium of Anadarko, Domin-ion E&P and Kerr-McGee signed a four-year rig-sharing agreement with ENSCOInternational calling for a new ultra-deepwater semisubmersible to be builtwith a delivery date in mid-2008. Thatbrings the contract term to 2012. If thecontract’s four one-year options areexercised, the contract could run

through 2016. Anadarko committed to50% of the rig time at a cost of about $200million over the four-year term.

Anadarko also committed to a three-yearcontract for the deepwater drillshipBelford Dolphin for use in the Gulf. Thecontract is valued at $459 million, and itis anticipated that the rig will begin itscontract with the operator in mid-2007.

Other drilling contractors with deepwa-ter and ultra-deepwater semisub-mersibles and drillships are seeingrates at around $200,000 per day.Transocean is contracting its drillshipDiscoverer Spirit to Shell beginning inDecember at a rate of $270,000. The rigis presently drilling for Chevron at arate of $204,000 daily. The Shell con-tract runs until June 2007.

Transocean’s drillship Deepwater Mil-lennium is contracted to Anadarko at arate of $286,500 to June 2007. This con-tract began last June. The rig’s previ-ous rate was $200,000. In another highrate Transocean contract, the compa-ny’s semisubmersible Transocean Mar-

ianas begins a one-year contract withBP in February 2006 at a rate of$250,000. The previous rate, also undera BP contract, was $180,000.

Not all of the contractor’s semisub-mersibles are commanding such highdayrates. The contractor’s mid-waterdepth semisubmersibles, rated for2,500-3,500 ft of water, are seeing ratesthat range from the low $100s to$135,000 for its Transocean Amirantesemisubmersible rated for 3,500 ft ofwater, to as high as $180,000 for the Fal-con 100, a semisubmersible rated for2,400 ft of water. The $180,000 dayrateis for a contract that begins in Decem-ber 2005 and runs through March 2007with Petrobras in the US Gulf. The rigwill also drill a well scheduled for nextFebruary and March at a rate of$140,000 per day, then returns to Petro-bras at the higher rate until March 2007.Prior to the Petrobras contract, the rigwas being paid $105,000 per day.

I M P A C T O F H U R R I C A N E S

Since Hurricane Ivan had such a disas-trous affect on the Gulf’s oil and gasindustry, numerous studies have beenundertaken to study the hurricane’simpact on structures and mobile rigs.

Hurricane Ivan moved through the Gulfas a Category 4 storm in September2004, carrying high winds and largewaves that matched or exceeded the 100-year design criteria for oil and gas facili-ties in its path. Of the 4,000 oil and gasstructures and 33,000 miles of pipelinesin the Gulf’s Federal waters, approxi-mately 150 facilities and 10,000 miles ofpipelines were in Hurricane Ivan’s directpath. Despite the 140 mph winds, therewas no loss of life and no significant pol-lution reported, a testament to the toppriority of personal and environmentalsafety of the industry.

As a result of Hurricane Ivan, more than10% of the Gulf’s production was inter-rupted for at least four months, accord-ing to the MMS. That almost seems like aminor nuisance compared with Hurri-canes Katrina and Rita.

As a result of Hurricane Ivan, however,the MMS awarded six contracts valuedat more than $600,000 to study the hur-ricane’s impact on the Gulf’s oil andgas structures. These studies willassess the actual wind, wave and cur-rent forces that were present duringthe hurricane; analyze and assess theconsequential damage to structures

28 D R I L L I N G C O N T R A C T O R November/December 2005

GLOBAL DRILLING OUTLOOK

100

110

120

130

140

150

160

170

180

190

200

Jan-

02

Apr

-02

Jul-0

2

Oct

-02

Jan-

03

Apr

-03

Jul-0

3

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Total Supply Marketed Supply Demand

Source: ODS-Petrodata Offshore Rig Locator

US Gulf of MexicoCompetitive Mobile Rig Fleet Supply & Demand

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and pipelines; determine the effective-ness of current design standards andpollution-prevention systems; anddevelop recommendations for changesto industry standards and MMS regula-tions, if necessary.

These studies are ongoing and coversuch topics as Assessment of Drillingand Workover Rig Storm Sea Fasten-ings on Offshore Floating PlatformsDuring Hurricane Ivan and Exami-nation and Review MODU Loss of

Stationkeeping Ability During Hur-ricane Ivan and Assess MooringStandards and Criteria to PreventSimilar Failures.

Unfortunately, this latter study was notyet completed when Hurricanes Katrinaand Rita struck the Gulf.

At a 2005 Offshore Hurricane Readi-ness and Recovery Conference lastJuly, Chris Oynes, MMS RegionalDirector for the Gulf of Mexico Region,brought up numerous questions during

his presentation that the oil and gasindustry and drilling conractorsshould consider when assessing hurri-cane preparedness.

Emphasizing that rigs adrift are unac-ceptable, he asked if API RP 2SK moor-ing design standards were adequate andwhat assumptions were used in perform-ing risk analysis for mooring near aninfrastructure. Are current standardsfor anchor and synthetic mooring sys-tems adequate? Are current storm

preparation and evacuation proce-dures adequate and are operatorsallowing enough time to properlysecure facilities and equipment andprepare the facility for evacuation?

Regarding platforms, Mr Oynes askedif platforms should be installed in mud-slide areas and should MODUs beremoved from the vicinity of high vol-ume facilities prior to a storm. Heagain brought up the question of syn-thetic mooring systems, asking if theyare adequate for floating facilities.

About pipelines, he brought up for con-sideration whether current designstandards are adequate, shouldpipelines be laid in mudslide areas,and should all pipelines be buried.

These are all good questions, andtheir answers could significantlychange the way the oil and gas indus-try and drilling contractors operatein the future. Whether the answers tothese questions would have made adifference on the impact to the indus-try by Hurricanes Katrina and Rita isanyone’s guess.

H U R R I C A N E D A M A G E

Major damage was reported to Shell’sMars platform during Hurricane Katri-na. During Hurricane Rita, Chevron’sTyphoon tension-leg platform (TLP)was broken from its moorings and cap-sized in about 2,000 ft of water.

By mid-September following HurricaneKatrina, MMS reported that 56% of oilproduction and 34% of natural gas pro-duction was still shut in. A week later,on September 23, Hurricane Rita head-ed for the Texas/Louisiana border, and100% of the Gulf’s oil production and75% of its natural gas production wasshut in.

A week after Rita, shut in oil produc-tion was at 98%, but natural gas pro-duction shut in rose to approximately80%. �

GLOBAL DRILLING OUTLOOK

30 D R I L L I N G C O N T R A C T O R November/December 2005

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