The Offshore Drilling Industry Synopsis The Industry from inception through present: The commercial production of oil

l started in the year 1950 in the Gulf of Mexico. Oil drilling and Rig building technology improved dramatically in the initial years of the industry enabling a boom in the offshore rigs. This industry became highly volatile with the energy crises of the year 1970, the OPEC induced a surge in oil prices in 1973 and hence many governments around the world promoted programs to undertake offshore exploration and development in order to reduce the dependency on OPEC production. Technological advances in 1970s enabled the rigs to drill in 2000-3000 feet of water. In 1975, the US government abandoned its plans to expand offshore acreage. As the end of the first oil crisis brought lower prices and exploration looked less attractive. As many as 25% of the world rig fleet remained idle through 1977. The second oil crisis sent oil prices surging thereby strengthening offshore exploration, the capacity utilization and rental paid for offshore rigs doubled. Many new contractors and private investment groups entered the industry due to attractive tax benefits offered by U.S. In 1986, oil prices fell dramatically, and rig utilization rates plummeted below 60%. The period in between 1985-1987 became known as the thousand days of darkness. Throughout the early 1990s, oil prices were steady at $20 per barrel; the oversupply of rigs was corrected with the demand for rigs and the utilization rates were again approaching 95%. The third phase of technological advancement had increased feasible water depths of 10,000 feet and many new rigs were being constructed in anticipation of boom in the industry. By the middle of 1998 a number of forces had converged to send oil prices sharply down. The Asian economic slowdown began to take its toll on demand. By the end of 1998, oil prices were $12 per barrel, rig utilization has fallen and dayrates for rigs fell as much as 75% from their late 1997 highs. A decade long secular increase in oil prices from 1998-2008, drove the prices to all-time highs above $140 per barrel at their peak in 2008. The boom in energy prices, as well as advancement in technological capabilities of rigs, drove global rig utilization rates higher and pushed dayrates to all-time highs, with rates tripling over the decade in many regions. Strong demand for drilling rigs and high dayrates encouraged significant newbuild activity through the industry. Oil prices collapsed during the 2009 global recession to below $40 per barrel and caused utilization rates, dayrates, and newbuild activity to decline sharply. As the recovery gathered strength the oil prices rose to $90 per barrel by the late 2010 and there were visible improvement in the offshore industry. Oil and Gas Exploration & Production: The supply of oil and gas was constrained by the availability of reserves known oil and gas reservoirs yet to be depleted. The Organization of Petroleum Exporting Countries (OPEC) an association of 11 oil rich member nations controlling 40% of the worlds oil production and 75% of its reserves influenced the quantity of oil brought to world markets through collective production agreements. Since most economies continued to be overwhelmingly driven by carbon-based energy sources, oil and gas demand were inextricably linked with GDP growth. GDP growth rarely occurred without additional energy consumption and a decline in GDP figures nearly always resulted in a reduction in hydrocarbon demand. Despite a decline in world consumption in due to recession, analysts projected long term growth in consumption and production due to the strengthening economic recovery. The activities of oil & gas companies were divided into two main categories. 1. Exploration & Production a. Due Diligence & Exploration (0-10 years per tract) i. Conduct geological & seismological research ii. Purchase of lease tracts b. Drilling (30-120 days per well) i. Drill well to the desired depth ii. Line well with casing

2.

Completion (15-30 days per well) i. Install production equipment d. Production (2-10 years per well) i. Extraction of oil from well Refining & Marketing a. Refining (Ongoing) i. Refine crude into end product b. Marketing (Ongoing) i. Distribute end product to retail outlets

c.

Drilling Technology: Drilling a well involved a similar process regardless of whether the well was on land or at sea and regardless of whether it sought oil or natural gas. Following are the main components of drilling technology. Derrick The core of drilling rig, a tower of steel beams standing over 150 feet tall. Bit - drilling bit ranging from 6 to 26 inches in diameter. Bottom hole assembly Drill collars Heavy water drillpipe Drillstring Drilling mud Casing

The Offshore Rig Fleet: Submersibles Type Share Make Oldest Small Platform mounted vertical columns attached pontoons Jackups Most common Two thirds (402 rigs) The drilling platform is mounted on three/four legs that rested on the ocean floor Semisubmersibles New One fourths (202 rigs) The drilling platform is mounted on columns attached to pontoons; however these pontoons did not rest on the ocean floor 7000-10000 feet Drillships New One tenths (64 rigs) The derrick mounted in the centre of the ship Barges Old Low inland fleet rig

on

to

Depth of drilling

100 feet

250-350 feet (Max 400 feet)

Upto feet

10000

8 20 feet

Rig refurbishment and conversions: Newer drillships and semis increased their rated water depths by incorporating more sophisticated dynamic positioning systems and increasing their size and load bearing capability. With proper maintenance and regular refurbishment, a rig could remain in operation for more than 30 years before simply wearing out structurally. Some rigs were upgraded as they aged, meaning that they were not just refurbished, but that their capabilities were significantly enhanced. Upgrading a rig to compete in Norway, by far the most heavily regulated market in the world cost substantially more than other regions due to required compliance and necessary upgrades.

Offshore Drilling Operations: E&P operators contracted with independent oil drilling contractors for fully quipped and staffed rigs. They paid a dayrate a perday price for the rigs services to these contractors which varied dramatically. The contracting process begins when the E&P operator puts forth the basic specifications on the well. Operators keep a careful track of the status of contractors rigs and make a point of seeking bids from contractors known to have available rigs or rigs working in the area. Each operator employed its own rig selection process that generally consisted of evaluating the commercial (price and availability of the rig) and technical aspects (capability, expertise, past performance, safety record, and experience of crew) of each rig. Company reputation, rather than individual reputations, had become more important as the drilling process had become more systematized. The operators role: Drilling a well using a hired rig required the E&P operator to have a staff of petroleum engineers to make decisions about the drilling process, as well as the management infrastructure to coordinate supplies purchases and delivery and contracting for speciality services. The cost of relocating a rig was substantial and would generally lead to a negotiation between the operator and contractor. E&P operators were responsible for providing the fuel for rigs generators. As well as the materials used in drilling, this included mud, cement, and casing. The contractors role: In return for the dayrates, drilling contractors provided a fully staffed rig and paid all the costs directly related to the crew wages, food, onshore transportation to the heliport, and medical care and to the repair and maintenance of the rig. Many skilled workers were employed on rig; the industry dark days of the 1980s had led many of these workers to seek other employment. As the market rebounded, contractors found such workers in short supply and worked to establish effective training programs. Drilling contractors were responsible for the upkeep and maintenance of the rig and its equipment and for ensuring that the rigs met safety and environmental standards imposed by various national and international regulations. Operating a rig in Norway was substantially more expensive than similar environments elsewhere in the world due to compliance requirements and higher labor cost, due in large part to additional crew members required to accommodate the offshore leave schedule imposed in Norway. Rig Construction: In early 2011, there were 36 jackups, 18 semis, and 23 drillships under construction worldwide. Building a rig was complicated and time consuming endeavour; the bidding process could take 6 months, the final design year, and construction an additional 18 months. Drilling contractors or independent financiers contracted with independent rig-design firms and shipyards to build relatively standardized shallow water or early generation deep-water rigs. In recent years, new rig construction focused on high-spec jackups, ultradeepwaterdrillships and semisubmersibles. In order to attract the interest of contractors and in order to fulfil their exploration program, contractors offered relatively long contracts. The operators deepwater exploration strategy determined its basic needs in an ultradeepwater drilling contract, including the water depths and environments the vessel needed to be capable of drilling in, and the start date, length of contract, and geography for the drilling operations. The contracts covered not only construction and delivery of a ready to drill rig, but the operation of a fully staffed and operational rig for a period of between two and five years. There were two types of contract 1) Conventional drilling contracts 2) Hell or high water contracts. In recent years companies had begun to experiment with new contract terms. Most notably, variable rate contracts begun to emerge whereby dayrate pricing would vary during the life of the contract dependent on market conditions.