India’s hunt for new energy sources has hit an unforeseen obstacle: dearth of operational rigs. Poor rig supply and soaring charter rates have led to long delays developing new energy deposits, and most oil majors have had to pay a penalty or even relinquish blocks for not fulfilling the minimum work programme. Rig shortage has even forced the government to postpone the next round of bidding through New Exploration and Licensing Policy (NELP) by four months.
Faced with little option, exploration majors such as Reliance Industries (RIL), ONGC, Cairn India and Essar Group are planning to invest in constructing or buying rigs.
RIL may have to further delay KG gas production due to late deliveries of deepwater drilling rigs by its service contractor Transocean Inc. KG gas production was scheduled to start by June 2008. In order to de-risk its exploration business from relying on its service contractors, RIL is actively pursuing plans to own a deepwater rig. The company is said to be in talks with leading rig manufacturers and the investment could be around Rs 4,000 crore.
According to RIL’s petroleum business president PMS Prasad, global contract drilling backlog has ballooned to $70 billion. “Transocean alone has a backlog of $20 billion. Since 2002, seismic costs have risen over 200%, drilling and services 100-200% and field development equipment and services 100-200%. There has been overall cost escalation by 100-200% across the supply chain leading to an 18-month delay KG basin production,†says Prasad.
Cairn India has ordered two on-shore rigs for its Rajasthan block, which are likely to arrive from Houston by year-end. On-shore rigs are easier to secure when compared to the off-shore. “Given the demand for rigs, Cairn India is pleased that it has been able to secure equipment to meet its drilling commitmentsâ€Â, says a Cairn India spokesperson. “The company is primarily focused on both onshore and shallow-water operations in its search for hydrocarbons in India.â€Â
India’s largest exploration firm ONGC will be spending around $2 billion to purchase oil rigs and another $2 billion for hiring and upgrading its existing rigs. An ONGC spokesperson told ET that the company would be buying four jack-up rigs for shallow waters at Rs 4,400 crore. “These are likely to arrive by 2012. ONGC also plans to buy a floater for deepwater costing Rs 3,000 crore. Besides, another 10 rigs are likely to join ONGC in 2-3 years,†said the spokesperson.
Charter rates of rigs have gone through the roof, forcing many to invest heavily into buying such rigs. In January 2007, Essar Oilfields Services (EOSL) acquired a semi-submersible rig — ‘Essar Wildcat’ at a cost of $220 million, marking Ruias’ re-entry into rigs business. Subsequently, they won a drilling contract from Gujarat State Petroleum Corporation (GSPC) for drilling in the KG Basin. And the contract value: a cool $250 million for a 2-year period. In 5 years, EOSL will earn over half-a-billion dollars from this rig, according to rough calculations.
Chennai-based Aban Offshore owns four jack-ups and one drill ship. Jindal has inchartered two rigs and ordered two more. Great Offshore owns a jack-up and a drill ship. Mercator Lines has placed an order for one rig and is planning to buy another one from the second-hand market. Industry officials said there are 27 jack-ups and eight drill ships that are currently in operation in India.
Industry analysts attribute the high charter rate to the growing deficit in supply of rigs globally, poor fleet addition in the 1990s and attrition from the recent hurricanes. The new E&P markets such as Indian sub-continent have pushed up the demand of rigs.
“Rig charter rates are heading north with the exploration and production sector witnessing fast growth,†says HK Mittal, chairman and managing director, Mercator Lines, who recently placed an order for a Rs 810-crore jack-up rig. “For last three months, rig rates have been almost flat, but it’s healthy. Actually, there is no limit for rig rates, it can go up to any level, depending on demand. The market is so buoyant that contracts for rigs are being signed in advance. At prevailing rates, the rig can earn anything between $200,000 and $230,000 a day,†says Mittal.
High day rate of rigs has shot up by 40% in the past one year globally. The day rates have climbed by $3,000 every month in 2006. In January 2006, the world-wide average was at $99,382 per day while it has shot up to $1,37,509 in December 2006. In January 2007, the highest day rate being earned was $3,25,000 by ‘Noble Paul Romano’, a 4th-generation semi-submersible. But the new peak day rate was set when Transocean’s 4th-generation semi-submersible ‘Jack Bates’ earned $477,000 a day in August.
“The day rates still trail the surging oil and this fast growth will help day rates stay on a firm foot in the coming years. Once the block awards under the sixth round of the NELP is completed, the rig shortage will grow. But if oil prices comes down to $50 per barrel, then the rig rates may fall,†says Jigar Shah of KR Choksey Securities.
During 2006, a total of nine new jack-ups, three platform rigs, and two inland barges joined the fleet world over. In addition to the rigs delivered this year, another 27 jack-ups, 27 semi-submersibles, 10 drill ships, two tenders, one inland barge, and one platform rig are currently being built at various shipyards across the globe. Most of them will be delivered in 2008 and 2009. Another vital issue faced by the E&P players is the acute shortage of manpower. NK Mitra, director-offshore of ONGC, said his company is facing a major crunch. “Over 150 drillers left ONGC in the last one year for greener pastures,†he adds.
The ministry of petroleum has proposed forming a rig pool for state-run oil companies to avoid exploration delays. The plan is to consider an adequate number of rigs for purchase, and that the government-owned companies would pool in money for them. The petroleum ministry has worked out the proposal on the basis of recommendations of the Parliamentary Standing Committee attached to the ministry. Source: EconomicTimes
