Searching for better times
20/12/2007 Analyses by the NPD show that the amount spent by the oil industry to drill 23 exploration wells on the Norwegian continental shelf in 2006 bought 50 such operations a decade earlier, in 1997.
text: Terje Sørenes and Anders Toft, Photo: Seadrill
The semi-submersible West Venture. Availability of drilling rigs on the NCS is improving rapidly.
Developments in the rig market have provided the most important reason for this cost increase, with rig hire accounting for an estimated 50-60 per cent of the price of an exploration well.
The level of day rates is primarily a function of supply and demand in the global market, with the gap between availability and need currently small and capacity utilisation high.
These conditions make it financially interesting to construct more rigs, and rates will thereby be determined in the longer term by the construction cost of newbuildings.
Rates were low around 2000, and failed to cover operating expenses and full maintenance. Then the market went into reverse, and has been characterised in recent years by high capacity utilisation and very good rates.
Rising oil consumption, particularly in China and India, has boosted rig demand, leading to an ordering boom for new drilling units of all kinds. Some are backed by long-term contracts, but many represent a purely speculative investment.
This development is being strengthened by a growing oil company focus on deep waters off west Africa, Brazil and the Gulf of Mexico. That has led to a big increase in demand for rigs which can operate in great depths and tough weather.
The NCS has been affected by the increased competition for drilling units, particularly where exploration is concerned. Such activity takes second place to production and injection wells on the many subsea developments planned and in progress.
For a variety of reasons, companies operating on the NCS have for some years been reluctant to offer long-term contracts for drilling rigs.
The reasons can be found in the rules governing decision- making in production licences, which make it hard for an operator to award long-term contracts if the other licensees disagree.
Criteria for tendering rounds have also been framed in such a way that long-term cooperation between rig contractors and production licences is discouraged.
A distinctively Norwegian cost level relating to bringing in rigs from other parts of the world has also played a role.
The period around 2001 was moreover affected by a focus on short-term returns and little optimism in the oil companies, with six rigs leaving the NCS in 2001-03.
If these units had remained to drill nothing except exploration wells on the NCS, they would probably have been able to complete around 24 per year.
The supply of rigs on the NCS has now improved. Construction of drilling units is welcome from a government perspective. Eight newbuildings have been ordered for the NCS, with the first due to arrive next spring.
In addition, a jack-up unit has been brought from the UK continental shelf. New contract awards mean that even more rigs could arrive.
With one exception, the rigs due to be deployed on the NCS from 2008 have been built back-to-back with long-term contracts. The question is why this has happened.
A number of factors have laid the basis for adopting long-term contracts in Norway as well. High oil prices have created optimism, for instance, and terms in oil provinces which compete with Norway have worsened.
At the same time, the Norwegian government has facilitated exploration by new players through changes to the tax regime and the award of much new offshore acreage.
Operators on the NCS have also been forced to accept demands from the rig contractors, who can find long-term employment elsewhere in the world.
The upshot is that the players have joined forces in rig pool schemes which make lengthy contracts feasible, while the new operators have accepted responsibility for bringing in more rigs.
These newcomers are particularly vulnerable to rig shortages because they naturally have fewer wells to drill, and contractors generally prefer to deal with customers who place big orders.
By securing production licence interests and accepting work programmes, the new players have undertaken to fulfil official requirements on drilling exploration wells. That is obviously reinforced by impatient shareholders.
The solution has been for companies to collaborate on a joint portfolio of wells big enough for chartering a rig. Several new companies have been formed to act as facilitators in this process.
Roughly 35 exploration wells are due to be spudded in 2007, an increase of 12 from last year. Given the positive trend in the rig market, 2008 could be even better.
Piaf in brief :
- The idea behind performance indicator analysis for fields (Piaf) is a new approach to systematising large volumes of data from producing fields off Norway.
- This information is collected every year by the NPD and the Ministry of Petroleum and Energy, and actively used to analyse the condition of these fields.
- The Piaf model is based on existing reporting from the operator companies for the government’s revised national planning budget and annual status reports.
- The data are used by the NPD to rank fields in accordance with a set of criteria which comprise more than 100 different indicators. The latter embrace both historical information and plans in the short and long term.
- Results from Piaf are presented to the offshore operators.
This method helps the government to identify fields which face special challenges so that necessary measures can be instituted. It also provides good understanding of challenges faced at Norwegian continental shelf level.
- Piaf accordingly yields an overview of the field portfolio and the challenges facing the industry. Collating data from all the fields identifies worrying trends – project postponements, drilling delays, less injection than planned and lower production than expected.
Read more about some of these challenges and how they could be overcome: