From the March 1998 issue
THIS GULF UPTURN HAS LEGS
Solid underlying demand and production trends are driving the recovery
by Whit Smith
"We're still fighting the last war," says John G. Ryan, president and COO of drilling giant Global Marine. He wants the world to understand that the meteoric revival of everything offshore-from stock prices to newbuild contracts-is not a return to the early 1980s. The enormous inflation and disastrous collapse of the offshore oil industry then is still fresh in many minds. To Ryan, though, today's surge in activity out in the Gulf of Mexico and around the world is more than necessary-it's an emergency and maybe the recovery is too late to stave off future hydrocarbon shortages.
His concern is shared by many oilfield service companies which have seen their revenues and earnings soar over 130% in an 18 month period, even while the price of a barrel of oil has skidded precipitously. Ryan's company is no exception. Global Marine has become the first drilling company in history to reach the billion dollar annual revenue mark.
Charts from annual SCORE report from Global Marine show that excess of oil production is at a low, energy demand has been rising ....
... and E&P expenditure has historically energy demand rather than oil price
Delegates at this year's MARINE LOG Gulf Offshore conference in New Orleans (April 7, 8) will be in a buoyant mood, thanks to soaring day rates and full shipyard orderbooks. But they will be looking for reassurance that current prosperity can be sustained during a period of low oil prices and will be discussing ways to deliver the drill rig and workboat capacity needed to exploit new offshore resources.
SOARING DAY RATES
Day rates for existing equipment from boats to rigs everywhere are at eye-popping levels-$8,500 to $15,000 for OSVs, deepwater semisubmersibles going for $165,000 to $200,000. Revenues like that have sparked orders for shipyards along the Gulf. One example: Ingalls Shipbuilding division of Litton Industries in Pascagoula, Miss., says it will be turning out a supply boat per month for almost three years to come, all for the same customer, Edison Chouest.
"Everything that is being drilled, everything that is being produced, is being immediately consumed. There just isn't enough infrastructure out there to materially increase what we need," says Ryan.
Because the overwhelming majority of today's newbuilds of every type have a contract and a job eagerly waiting for them, the industry is experiencing a tightening of the supply vs. demand lines that mimics the 1960s and 1970s. The multi-vessel orders seen today aren't an extravagance or wishful thinking. Those boats are under firm contracts, and will be working at utilization rates unheard of a decade ago. And if you haven't locked up an existing drillship or a semi by now for deep water, forget it. They're all drilling for someone else, 24 hours, 365 days, for a long time.
The equipment squeeze extends to marine construction and pipelaying. Shell has booked two of J. Ray McDermott's biggest derrick barges for its exclusive use in 1999 and 2000. As for employees, there are urgent help wanted signs plastered all over the Gulf Coast as yards and operators plead for experienced and inexperienced workers.
"Today's industry is more accurately characterized by events of 1971 than the events surrounding 1981," says oilfield service analyst Marshall Adkins of Raymond James &Associates. "We are still very early in a long term recovery cycle, and nowhere near the peak earnings."
Record numbers of initial public offerings for offshore-related Gulf area concerns have hit Wall Street, along with them coming an army of analysts and other professional forecasters. Who would have thought 10 years ago that investment bankers in New York would be discussing the earnings per share of a fab yard like Gulf Island Fabrication in Houma, La.? Undoubtedly, a 300% increase in fourth quarter earnings over last year has gotten their attention.
But there could be some speed bumps down the road. While the equipment supply vs. demand equation appears to be coming back into balance, some analysts are predicting that demand could exceed supply in the near term.
"There could be a slight, temporary imbalance," says Allen Brooks at Oppenheimer in Houston.
"But you would have to assume no boat attrition over the next two or three years," adds Matt Simmons of Simmons &Co., Houston.
Both agree that a lot of aging equipment in the Gulf simply has to go because it is costing too much to keep it in service and customers are beginning to complain about too-frequent breakdowns.
Drilling companies are thrilled with rig day rates and utilization percentages now being had, but are reluctant to build new rigs until the economics get even better. Boats can be built relatively quickly compared to the three-year wait for a deepwater semi, but the boats' contracts are increasingly tied to the rigs' delivery dates.
About oil prices, analysts point out several considerations for rig and boat fleet operators. One is that oil production worldwide is running flat out, with estimates that over 97% of all crude that can be produced is, with the Saudis being the only possible, and minor, candidate for shut-in production. Another is that worldwide hydrocarbon consumption (excluding the former Soviet Union) rose 30% over the past ten years and is expected to continue on that track -to some 120 million BOE (barrels of oil equivalent) per day-in the next 10 years. Add in other factors such as depletion rates of existing wells and demand looks quite good for the foreseeable future
Analysts, as a caveat, also address some current events such as the Asian economic turmoil and the situation in Iraq. To both they apply the "This Too Shall Pass" rule, pointing out that if Asian oil consumption growth is cut in half it is still going to grow, and the return of Iraqi oil to worldwide markets has already been built into every analysts' model. "This was not a surprise and should not have been a surprise to anyone who has watched this Iraqi soap opera over the past several years," says Raymond James' Adkins. Global Marine's Ryan makes the point that short-term outlooks based on the crisis du jour aren't going to change long-term fundamentals. "Oil companies have to have a long-term outlook on per barrel prices. From discovery to recovery is a five-year horizon at minimum. My reaction to what happens over any six to eight month period is 'Who cares?'" he said.
FIRM ORDERS FOR 96 OSV'S
Perhaps the most evident manifestation of the upturn in the oil patch is offshore supply vessel construction. In a December 1997 survey of its members, the Offshore Marine Service Association (OMSA) determined that there are 96 firm new vessel commitments for AHTS's and supply vessels, with options for another 40 vessels.
Edison Chouest Offshore, Galliano, La., the most prolific of OSV newbuilders with 41 vessels under construction, is a case in point. Laney Chouest, vice president, said only two of his company's new boats will compete in the spot market. The rest are committed on delivery.
PRESSING NEED FOR RIGS
There are currently 59 rigs of all types under construction worldwide, according to Offshore Data Service in Houston. Other industry sources put the number at 45 for semisubmersibles, jackups and drillships. Either way, the total represents about 7% of the existing worldwide fleet. By contrast, in the early 1980s 239 rigs were being built, or about 50% of the fleet. Worldwide, newbuilding is doing little more than replacing units lost to attrition.
Of 45 rigs, 32 are under contract to the majors, being built for payout in four to five years. As they have been built for specific uses, they are not going to compete with the existing fleet. And 37 units are being built for 4,000 ft and deeper, a new market, and will not compete with equipment designed to work shallower waters.
The situation is even more pressing for the shallow-water market. Three-quarters of the world rig fleet are jackups, about 350 units, yet there are only eight jackups currently under construction-four with contracts, four on spec. Given the age of some units, plus damage and ultimate attrition, there will likely be fewer jackups in three to four years than exist today.
Operators recognize the need for more jackups, but will not start newbuilding until they've got a long-term contract in hand. There's an assumption by the majors that the equipment will be there when they need it to work non-deep assets because the jackup market is currently not as tight as the semi or drillship market. The wait for equipment today is typically 3 to 6 months. But contracts for jackups are getting longer. A year and a half ago, typical jackup contracts were for 90 days. Recent contracts have been double that.
LABOR SHORTAGE PLAGUES INDUSTRY
When the rug was yanked out from underneath thousands of qualified workers in the mid 80s, massive unemployment plagued states in the Gulf area. Qualified tradespeople and mariners had little choice other than to pack up their families and head off in search of other work. Over the next 10 years, little attention was paid to training a workforce in specialized construction areas such as pipefitting and exotic welding, or recruiting and training crews for boats and rigs.
Data compiled by OMSA indicate that the offshore service vessel industry will have to recruit and train about 4,400 people each year to operate the existing vessels in the fleet. That number is based on a turnover rate of 50% for ordinary seamen and deckhands and a 15% rate for licensed personnel. Looking down the road two years, OMSA calculates that an additional 2,200 jobs will have to be filled to man new vessels slated to be put into operation. Add the new hires to the turnover rate, and the cumulative effect is that somehow somebody has to find and train some 11,000 people over the next two years. .
"Without question, this is a formidable task, one that requires the highest level of cooperation from industry and (government) to resolve," said Robert Alario, OMSA president.
Harvey Walpert, senior VP of corporate affairs at Halter Marine Group in Gulfport, Miss., agrees. "It varies from area to area. South Louisiana seems to have the biggest problems because of the OSV building, but the situation towards Mobile and over to Texas is not as tight." Halter, one of the largest employers on the Mississippi Gulf Coast, broke ground on an 11,500 ft2 training facility at Moss Point, Miss., last February. And the politician-studded groundbreaking ceremony for Friede Goldman International Inc.'s new Pascagoula rig building yard included the ribbon cutting for an adjacent training center. David Freeman, manager of human resources for HAM Marine, the FGII subsidiary which will operate it, says he wouldn't call it a crisis yet but notes that the skilled labor market is "very competitive." The company is also casting a wide recruiting net. ML
SCORE, the Summary of Current Offshore Rig
Economics, compiled by Global Marine on a monthly basis, mirrored
the cork-popping performance of the offshore oil and gas industry,
rising almost 18 % last year. The statistical series reflects
current rig day rates as a percent of the estimated rate required
to justify newbuilding. The 1997 SCORE of 71.3 is more than double
that of five years ago."During the (last) year, day rates
rose 42%, outpacing the increase in rates required to justify
new rig construction, which rose 21%" said John G. Ryan,
Global Marine CEO. "Despite financial market concerns about
near-term oil and gas prices, most of the world's premium rigs
are committed well into 1998, which gives us confidence that 1998
will be another strong year."To put the 71% SCORE in perspective,
at 40% the offshore drilling industry is just breaking even with
existing equipment. At 100%, the level reached in 1980-81, the
industry has reached peak market rates with new rigs being built
on speculation, according to the SCORE-keepers. At the moment,
45 rig newbuilds and conversions are on order by Ryan's calculation,
37 of them designed for deepwater work. Three-quarters of the
total are contracted for work on delivery, he said. The SCORE
varies from market to market and by rig type. Jackups, for example,
were at 81% while vastly more costly semis stood at 63% at the
end of last year. The North Sea SCORE was 82% while the Gulf of
Mexico trailed at 62%.Historically, the SCORE index has proven
a reliable barometer not only of day rates but also of shipyard
costs for rig building. In 1982-83, for example, when new rig
deliveries hit an average rate of 14 per month, the SCORE dipped
to 39% because backlogs of rig orders kept building costs high.With
rig building slots in yards virtually all filled at the moment,
builders like AMFELS, Halter-TDI, Friede Goldman International,
Ingalls Shipbuilding and First Wave Marine are rushing to add
capacity.If last year's 42% increase in rig day rates is approximated
in 1998 and added capacity mitigates building cost increases,
the SCORE could soar to levels not seen for two decades.
