20 December 2006

Rig shortage slows exploration

A global shortage of semisubmersible rigs capable of drilling in deep water is affecting exploration and development, according to bloomberg.com.

Rental fees are increasing and order books for new rigs are already backlogged as demand outstrips the ability of the handful of shipyards able to build the behemoths to keep pace. Two new rigs will enter the global fleet in 2007 with another 13 due in 2008. Currently, there are just 18 rigs like Cajun Express [right] capable of drilling more than four miles below the seabed.

All this is a reminder of the highly competitive global marketplace that will likely keep exploration offshore Newfoundland and Labrador at a meagre level for the better part of the next decade. Optimism that the area might become home to renewed global interest were dashed in early 2006 with collapse of the Hebron talks, political grandstanding by Premier Danny Williams and a failure by the Williams government to deliver an energy plan focused on creating a globally competitive environment.

One element to note from Bloomberg is the development of Chevron's Tahiti field. Discovered in 2002, the field contains an estimated $33 billion in oil and will begin production in 2008.

By contrast, the Hebron field was discovered in the early 1980s but was considered commercially non-viable for almost two decades. Engineering studies began in 1999, spurred by a new provincial government royalty regime. A unitization agreement was achieved among the four-company consortium ine arly 2005 followed by talks with the provincial government on royalties and local benefits. Talks with the province collapsed in April 2006 based on demands from the provincial government for super-royalties and an equity position in the development for the Crown-owned hydroelectric company. The latter contained a significant problem since the company had no prior experience in oil and gas work. In addition, the company does not function like Statoil or Norsk Hydro but is controlled very closely by the Premier's Office.

Premier Danny Williams claimed he rejected the companies' proposal for $500 million in tax concessions during the construction phase of the project. Published reportsd estimated Hebron's 500 million-plus barrels of oil was worth between CDN$8 to CDN$10 billion in royalties to the provincial government over the production lifespan. An additional 250 million barrels were not included in the Hebron proposal but were available for subsequent exploitation.

Any new talks on the Hebron field are not likely to begin before Danny Williams quits the premier's office, presumably in 2009/2010.

Squeezing the Hibernia field by rejecting an application to develop 300 million barrels in Hibernia South would be folly that would only deplete provincial government coffers. The oil industry has plenty of opportunities to make plenty of cash somewhere else.