Rig Report: Atwood Oceanics' CEO analyzes offshore rig trends

By Phaedra Friend Troy

Focusing on both jackups and floaters, Atwood Oceanics (NYSE: ATW) CEO Rob Saltiel offers PennEnergy readers insight into emerging trends in the offshore drilling rig market.

With nine existing rigs – four shallow-water, two midwater and three deepwater – Atwood Oceanics is growing both on the ultra-deepwater front and in the shallow-water arena with four rigs currently under construction.

Diversified Growth

Atwood currently has two ultra-deepwater semisubmersibles under construction: the Atwood Osprey and the Atwood Condor.

“We are definitely excited about our growth prospects in ultra-deepwater floaters, and we expect this segment will resume its steady worldwide growth once the issues borne out of the Macondo incident are resolved,” Rob Saltiel, President and CEO of Atwood Oceanics, said.

Furthermore, the company has contracted PPL Shipyard for two high-specification jackups rated for waters measuring up to 400 feet deep – with an option for another three.

“Scheduled for delivery in the second half of 2012, these rigs combine an excellent drilling package, large storage capacities, expansive accommodations and efficient off-line handling features,” Saltiel added.

While Atwood has been forced to idle its three lowest-specification drilling rigs, the company’s higher-specification rigs remain fully utilized.

“Since October, we have idled three of our lowest-specification rigs – the Atwood Southern Cross, the Richmond and the Seahawk – due to a combination of near-term market weakness and/or competition from rigs that were displaced from the Gulf of Mexico by the Macondo incident. These three rigs are not being actively marketed at this time,” Saltiel explained. “Atwood’s remaining six active rigs are all fully contracted through at least the next six months.”

Looking forward, Saltiel sees strong utilization for both the ultra-deepwater rigs and the jackups.

Geographical Hot Spots

Despite setbacks due to the Macondo tragedy, the experienced executive foresees a strong future for offshore drilling worldwide.

“I believe that offshore drilling will enjoy a very long and bright future,” Saltiel explained. “The world’s demand for oil and gas continues to expand, fueled by the fast-growing economies of China, India, and Brazil, among others. Offshore drilling provides access to significant hydrocarbon resources that can meet this growing demand.”

Fueling a demand for deepwater rigs, Saltiel points to recent major offshore discoveries in the pre-salt play in Brazil, the Lower Tertiary in the US Gulf of Mexico and the extensive deepwater finds in West Africa.

“The so-called Golden Triangle of the Gulf of Mexico, West Africa and Brazil is still the major area for global deepwater drilling,” he expounds. “Many of the world’s largest oil discoveries have been made in these regions, and significant reserves remain undiscovered. West Africa has seen significant deepwater activity expand outside Nigeria and Angola to Ghana, Equatorial Guinea, Congo and other nations. In the Gulf of Mexico and Brazil, new deepwater plays with highly prolific reservoirs have increased operator interest. It is no surprise that the majority of the world’s deepwater rigs operate in these areas.”

In addition to these deepwater hot spots, he anticipates strong deepwater drilling demand from emerging regions, as well.

“The Mediterranean Sea, Southeast Asia and India are examples of deepwater theaters that developed in the last 10 years and which maintain consistent deepwater drilling activity,” Saltiel revealed. “Emerging deepwater regions, including the East African nations, remain highly prospective for tomorrow’s discoveries.”

Just this month, US independent Anadarko announced its second major natural gas discovery offshore Mozambique, and India’s NELP IX is being well received from operators worldwide.

The burgeoning natural gas and LNG-centric developments offshore Western Australia have also taken a bite of the ultra-deepwater rig fleet. In fact, when construction is complete, Atwood’s newbuild Atwood Osprey is contracted to Chevron for work on the massive Greater Gorgon development.

Shallow-Water Developments

With the price per barrel of oil increasing again to above $80, the jackup market is coming to life again. While utilization rates dropped with the price of oil, high-specification jackups have been experiencing ever-growing utilization for the past year.

“Worldwide jackup utilization and day rates have rebounded nicely from the trough levels experienced during the financial crisis,” explained Saltiel. “Specifically, high-specification jackups that are capable of drilling in 350-plus-foot water depths are experiencing higher than 95 percent utilization rates and day rates that are typically north of $120,000.”

Lower-spec rigs, on the other hand, are seeing lower utilization rates with approximately 70 percent contracted and day rates ranging from $30,000 to $90,000. Spurring Atwood to build a firm two and up to five more high-spec jackups, Saltiel expects these rigs to replace lower-spec jackups as time moves on.

“We expect that this fleet replacement effect will continue throughout this decade, as 80 percent of the installed jackup base is still considered low-specification,” Saltiel said. “The opportunity to develop existing finds or extend proven fields in shallow waters will increasingly fall to the high specification fleet.”

Because these shallow-water rigs are used primarily for development of already discovered reserves or to extend existing reservoirs, the demand for jackups is shifting. While jackup utilization in the US Gulf of Mexico may be waning, other regions of the world are snapping up high-spec jackups for exploration and development.

“We have seen a steady decline of jackup drilling in the Gulf of Mexico in favor of expanded drilling in the Middle East, West Africa, India and Southeast Asia markets,” Saltiel revealed. “Operators there favor the capability and efficiency of newer rigs, and we are seeing a clear preference for high-specification jackups worldwide as a result.”

Nonetheless, Saltiel forecasts a resurgence in EOR and IOR methods in regions with established oil and gas developments as commodity prices increase.

“The continuing development of drilling and subsurface technologies provides opportunities for re-development of marginal fields,” Saltiel explained. “We have seen producing fields change ownership in the Gulf of Mexico and North Sea as new owners apply the latest technologies to wring more oil out of known formations. Going forward, I expect that increasing recovery rates will represent a greater focus for operators due to the improved economics of enhanced recovery that a rising oil price provides.”

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