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The Gulf Oil Spill


Impact on Drilling Market
Becomes Clearer
Decision Brief

CERA

About the Author


Candida Scott, IHS CERA Senior Director, Cost and Technology Group, is responsible for the IHS
CERA research forums that cover capital and operating cost analysis as well as the application of digital
technologies in upstream exploration and production. Ms. Scott has over 30 years of international
consulting experience and has tracked, monitored, and analyzed trends in offshore, onshore, liquefied
natural gas, and downstream construction projects worldwide. She has been instrumental in developing
the IHS CERA Upstream Capital Costs Index, the Downstream Capital Costs Index, and the Power
Capital Costs Index. Prior to joining IHS CERA she most recently focused on cost engineering, field
development planning, and conceptual design as well as development of the IHS cost engineering
software QUE$TOR. Previously she was with Halliburton, where she focused on equity participation
projects and on Brown and Roots FIELDPLAN cost estimating software, and also helped set the
strategic direction for Landmark/Halliburtons real-time drilling in the earth model. A chartered mechanical
engineer, Ms. Scott is a member of the IMechE and the Society of Petroleum Engineers. She holds a
Bachelor of Science degree from Leicester University.

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provided to a client. 2010, All rights reserved, IHS CERA Inc., 55 Cambridge Parkway, Cambridge, Massachusetts 02142. No portion of this
report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

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THE Gulf Oil Spill: Impact on Drilling Market


Becomes Clearer
Key Implications
The May 28 moratorium on new well permits in the Gulf of Mexico (GOM) offshore and the
recommended new safety regulations following the April 20 MC252 oil well blowout have short- and
long-term consequences for drilling and well services costs in the GOM and internationally.
The cost of drilling in the GOM will increase, raising the barrier to entry. The proposal
to increase liability for economic damages from $75 million to billions of US dollars will
reduce the number of companies able to finance activity in the GOM. The cost of drilling
will increase owing to the need for additional certification, increased blowout preventer costs,
and higher insurance premiums.
Twenty-six semisubmersible rigs drilling in over 500 feet in the GOM are affected.
These are primarily fifth generation and drill ships that have now plugged and abandoned
their current drilling operations. With rigs idle, operators will either invoke force majeure or
seek alternative work for those rigs, mostly outside of the GOM. The size of the operator will
determine whether new locations are found or companies walk away from their investments
in the GOM. Additional rigs internationally will depress day rates.
Shallow-water activity is slow to recover. Operators are choosing to wait for clarity on
the new safety requirements before proceeding with drilling permits. Operators may choose
to place more emphasis on lower-risk operations such as workovers and completions in the
immediate future. Jackup rates will be pushed lower.
June 2010

2010, All rights reserved, IHS CERA Inc.


55 Cambridge Parkway, Cambridge, Massachusetts 02142.
No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

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IHS CERA Decision Brief

THE Gulf Oil Spill: Impact on Drilling Market


Becomes Clearer
by Candida Scott
The April 20 MC252 oil well blowout in the US Gulf of Mexico (GOM) resulted in a
moratorium on all new well permits in the GOM offshore, including both exploration
and production new wells along with sidetracks and wellbore bypasses on current drilling
operations that use surface and subsurface blowout preventers (BOPs). The Department of the
Interior has recommended that implementation of new safety regulations and requirements
be carried out for BOPs and well control procedures. This moratorium and its consequences
have the potential to be disruptive to the rigs and well services market in the GOM and to
delay both oil and gas production. Rigs removed from the GOM are unlikely to be relocated
back within a year. As drill rigs become stacked or leave the GOM, there are impacts on
all the support services of drilling activity, including oil country tubular goods (OCTG);
BOPs; well services; helicopter operations; supply vessels; and mud, cement, and chemical
suppliers.
The longer the rigs are out of service, the greater the impact across the upstream offshore
construction markets. If the moratorium is in effect for six months, the requirements for
new procedures and testing of BOPs and kill systems may take longer to implement. This
suggests a slow resumption of activity following the moratorium, with a further six months
before drilling resumes in deep water. Limited drilling activity for 12 months would be a
significant motivator for rigs to be relocated. The impact of the blowout will have long-term
consequences. The GOM is unlikely to return to what was considered normal activity in
2010 in the near term. Some companies may choose to leave the GOM permanently because
of the increased insurance and liabilities costs.
Market Impacts
The following is a summary of the impact that the moratorium will have on IHS CERAs
Capital Costs Analysis Forum and Operating Costs Analysis Forum markets.
Jackup Rigs
Thirty-seven jackup rigs were actively drilling in the GOM at the time of the blowout. With
stacked rigs already in the GOM this is a fleet size of 81 rigs. The water depth operational
limit of jackups means that they are the prime category of rig used in less than 500 feet
of water, and many are drilling for gas. Rig activity was initially affected by the 30-day
moratorium on April 28 which stopped all new drilling permits and left rigs without new
work once free from their current job. This aspect of the moratorium has subsequently been
lifted, but permits have not yet returned to pre-accident levels, as the Minerals Management
Service continues to conduct additional safety reviews before release. Since May 5 the
following permits have been issued:
A total of 26 permits have been issued, of which two are the BP relief wells.

June 2010

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IHS CERA Decision Brief

Of the remaining 24, 6 permits are for new wells; none have yet been spudded.
The remaining 18 are for sidetracks; only 4 have been spudded.
As operators start to review and respond to the new safety requirements, they may choose
to avoid risk and take longer to return to drilling activities. Operators tend to have fairly
short-term contracts for jackup rigs owing to the shorter drilling times for a shallow-water
well. This market reacts more quickly to market adjustments than the semisubmersibles
market does. With the current low gas prices many operators may choose to delay contracting
of new jackup rigs. This could put additional downward pressure on jackup day rates of
around 10 to 20 percent.
Semisubmersibles
Prior to the blowout the active semisubmersible drilling fleet in the GOM comprised 28
rigs. All these rigs have now stopped operations except for the two rigs drilling the MC252
relief wells and the drill ship required for oil processing and storage from the leak, reducing
the active fleet to 25 rigs. Only 7 of these were due to come off contract in 2010; the rest
have longer-term contracts. Adding to these the rigs already stacked or waiting to move on
station, there are now 37 rigs in the GOM looking for activity. What happens to those rigs
depends somewhat on the size of the company that has contracted them and the diversity
of its international operations. These rigs can be grouped into the following categories:
Six fifth-plus generation rigs and one third generation rig contracted by large
oil companies with significant operations in the GOM or abroad. These rigs are
expected to remain on their contracts and be utilized either for workover operations
or relocated to other international areas. If they are relocated, mobilization will take
six to eight weeks, and they will likely remain out of the GOM for a minimum of 12
months, the typical time to drill a deepwater well.
Nine fifth-plus generation rigs contracted to larger independent oil companies that
have overseas operations and some GOM activity. So far the rig owners have not
agreed to any requests for applying the force majeure provision when called by these
operators. The question now is whether these companies will try to utilize these rigs
elsewhere or stack them, pending resumption of operations.
Nine fifth-plus generation rigs, one second generation rig, and one fourth generation
rig currently contracted to smaller GOM operators. These companies have limited
use abroad for the rigs and also limited production operations where rigs can be used
in workover activities. The rigs are likely to be stacked, pending reopening of the
drilling in GOM. However, the operators will likely also question the economics and
their willingness to drill again in the GOM once the moratorium is lifted.
Oil Country Tubular Goods
Demand for the higher-grade OCTG required for deepwater wells will decline. With high
inventories and imports still coming from China despite the increased import taxes, suppliers
are looking to cut orders for new OCGT to the GOM. A deepwater well averages five times
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June 2010
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IHS CERA Decision Brief

the weight of casing that a shallow-water well requires. In the GOM in 2009, 90 wells were
drilled in deep water and 121 wells in shallow water. Total casing demand in 2009 therefore
for shallow water was only 20 percent of the overall quantity required. The deepwater
moratorium will reduce the GOM casing demand to a quarter. This relies on shallow water
continuing at 2009 levels; any further delays to shallow water drilling will reduce demand
further. Even with rising steel prices IHS CERA has revised our short-term outlook; our
analysis indicates that excess supply will push down prices 510 percent internationally and
up to 20 percent in GOM.
Blowout Preventers
BOP costs are set to increase in the GOM. The additional set of shear rams now required for
each stack increases the overall BOP cost. Also additional procedures and testing are required
owing to the new certification process. The overhaul of testing inspection and reporting
requirements will add to costs, but more importantly it will take time for each vendor to
qualify for recertification. Lead times for new BOPs, which were around 14 weeks prior to
the blowout, will likely get longer given the additional requirements. To cover these costs,
premiums of 10 percent for BOPs in the GOM are likely. Internationally little movement
is anticipated unless safety reviews raise standards in other locations.
Well Services
Well services companies, mainly the smaller ones that have a large proportion of their
activities in the GOM, will be the hardest hit. The larger companies such as Schlumberger,
Halliburton, and Baker Hughes will relocate their personnel and services to other locations to
support rigs as they move internationally and to assist in shallow-water operations. Smaller
companies in the GOM will look to compete for all shallow-water operations, putting
downward pressure on well services prices. In the shallow-water GOM well services rates
may decline up to 10 percent. Internationally as the larger companies move their capabilities
abroad, well services market rates could drop more modestly, by 5 percent.
As it returns, shallow-water drilling could initially benefit from cost advantages as more
companies chase fewer activities. Conversely rig operators now saddled with long-term rig
contracts may turn increasingly to workover activities on their producing platforms, pushing
up the amount of well services work (see the box Department of the Interior Increased
Safety Measures for Energy Development on the Outer Shelf, May 27, 2010).
Summary
The consequences of the moratorium and additional safety reviews and adjustments to
procedures will have long-term effects on drilling activity in the GOM. Some operators
will choose to exit the GOM permanently owing to the higher cost of doing business there.
Other operators will move their rigs abroad, and given the deepwater well drilling period
of over 365 days, it will take one to two years for these rigs to return once the moratorium
has been lifted.

June 2010

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IHS CERA Decision Brief

Department of the Interior


Increased Safety Measures for Energy Development on the Outer Shelf, May 27, 2010
The new safety measures for existing deepwater oil and gas operations will be implemented,
as described in the May 27 Department of Interior (DOI) report Increased Safety Measures for
Energy Development on the Outer Continental Shelf. These include (the following descriptions
are quoted from the report)

Mandatory inspections of BOPs to be used on floating drilling operations to ensure


that each BOP meets manufacturer design specifications, taking into account any
modifications that have been made; is compatible with the specific drilling equipment on
the rig on which it is to be used, including that the shear ram is compatible with the drill
pipe; has not been compromised or damaged from previous service; and is designed to
operate at the planned operating depth. Certification of these requirements will be made
publicly available.

Requirement of new safety features on BOPs and related backup and safety
equipment, including; a requirement that BOPs have two sets of blind shear rams spaced
at least four feet apart to prevent BOP failure if a drill pipe or tool is across on set of
rams during an emergency; requirements for emergency back up control systems; and
requirements for remote operating vehicle capabilities. The department will develop new
surface and subsea testing requirements to verify reliability of these capacities.

Overhaul of the testing, inspection, and reporting requirements for BOPs and related
backup and safety equipment to ensure proper functioning, including new means of
improving transparency and providing public access to the results of inspections and
routine reporting.

Key recommendations on well control systems include;


Development of enhanced deepwater well-control procedures

Verification of a set of new safeguards that must be in place prior to displacement of kill
weight drilling fluid from the wellbore.

New design, installation, testing, operations and training requirements relating to casing,
cement or other elements that comprise and exploratory well

A comprehensive study of methods for more rapid and effective response to deepwater
blowouts.

Key recommendations on a systems based approach to safety;


Immediate, enhanced enforcement of current regulations through verification within 30


days of compliance with the April 30th, 2010 National Safety Alert.

Enhanced requirements to improve organizational and safety management for companies


operating offshore drilling rigs

New rules requiring that offshore operators have in place a comprehensive, systemsbased approach to safety and environmental management.

Source: Department of the Interior, Increased Safety Measures for Energy Development on the Outer Shelf, May 27,
2010.

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June 2010
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IHS CERA Decision Brief

In the GOM over the short term there will be job losses, and some service providers will
be tested financially. Shallow-water rig rates will benefit as more companies compete for
this type of work.
Longer term, under the best case, it could take two to three years for activity to recover to
2010 levelsand the consequences could be worse, as the number of oil and gas operators
undertaking drilling operations in the GOM declines from pre-blowout levels. n

June 2010

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