Oil drilling faces constraints

Monday, June 30

With oil prices breaking new records, US presidential candidate John McCain on June 25 called for removal of the moratorium on offshore drilling.  Yet oil and gas companies face delays to projects because of the lack of available drilling rigs, despite a boom in new building.

The shortage of rigs reflects the long investment cycle in a heavily capital intensive industry and its relationship to the price of oil.   In the last four years, yards in countries such as China, United States, United Kingdom, United Arab Emirates and India have been entering or re-entering the building market, helping to increase capacity.  Yet despite more competition and increased capacity, building costs remain high and delivery times have lengthened from 18 months to two years.

The successes in deepwater West Africa and other areas, including the giant subsalt discoveries off Brazil in the past year, have boosted the deepwater segment of the industry and will assure demand for deepwater rigs. 

Yet the availability of new deepwater rigs is highly constrained, with newbuild units contracted significantly ahead of completion.  That demand is high can be seen in the rise in day rates for deepwater rigs and lengthening of contract times from months to multi-year contracts lasting five or six years.

Of the 21 drillships -- mobile rigs which can drill in water up to 12,500 ft deep -- under construction, all but three have already been contracted for an average of about five years to drill on existing leases, predominantly in the Gulf of Mexico, Brazil, India and Angola.

Offshore drilling is becoming increasingly popular among policymakers on the back of soaring oil prices.  At the same time interest in existing deepwater exploration and production, due to recent high profile successes, is likely to keep the deepwater rig segment strong.  However, oil and gas companies face delays to projects, owing to a shortage of offshore drilling rigs, and are being forced to lock in high long-term costs in a bid to secure capacity.  As such, oil supplies from offshore sources probably will continue to remain tight in the short to medium term.