7 th Annual Latin America Ship & Offshore Finance Forum Rio de Janeiro - September 16, 2010 Drilling Market Outlook Tom Kellock
Today s agenda 1. Impact on Brazil of Macondo Incident 2. Operating Costs 3. Petrobras Contract Renewals 4. Industry Consolidation 5. The Future of the Offshore Drilling Market Page 2 of 31
The Impact of Macondo on the Brazil market: A mass exodus of deepwater rigs from the US Gulf? No only 4 so far A dramatic decline in day rates? No no obvious change An opportunity for Petrobras and others to charter more rigs at bargain prices? Possibly but it hasn t happened yet Higher costs for operators and/or contractors? Almost inevitably Page 3 of 31
Even in the US Gulf the effects of the moratorium may be short-lived Supply and Demand Forecast US Gulf of Mexico Floaters Possible Consequences of Drilling Moratorium 60 50 Base case Scenario 1: Moratorium Scenario 2: Moratorium with 25% longer time per well Historical Activity 40 Rigs 30 20 10 0 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17 Page 4 of 31
Operating costs (OPEX) are hard to pin down but are definitely on the rise OPEX are important because they - set a floor for day rates - impact cash flow but often appear to get too little attention Recent figures show moderate increases But this could be misleading Upper limits may be surprising Page 5 of 31
Latest figures not too scary Page 6 of 31
But last quarter showed a very different picture $140,000 $120,000 +10.5 % pa Daily Cash Operating Expenses (Large Fleet) Daily OPEX (USD) $100,000 $80,000 $60,000 $40,000 +15% pa +12% pa $20,000 $0 Source: Transocean Deepwater Rigs Midwater Floaters Jackups Q1 2007 Q1 2008 Q1 2009 Q1 2010 Page 7 of 31
Some recent reported rates may surprise you and these are for non-harsh environment areas 5 th gen. ultra-deepwater semi: >$165,000 per day 5,000 4 th gen semi: > $140,000 per day Midwater semis: > $100,000 per day Premium Jackups: > $65,000 per day Page 8 of 31
Petrobras rig philosophy Contracts tend to be renewed But several are coming to an end Will 28 additional rigs be needed? Page 9 of 31
Petrobras tends to keep its rigs Page 10 of 31
Several contracts will expire in the next few years Page 11 of 31
Will the 28 rigs represent incremental demand? Page 12 of 31
Will we see more consolidation among contractors? Some already in the jackup market - Seadrill/Scorpion (7 rigs) - Seadrill/Petroprod (1 rig) - Rowan/Skeie (3 rigs) And in the floater market - Noble/Frontier (6 rigs) - Diamond/Petrorig (2 rigs) - Grupo R/Petrorig (1 rig) - Songa/Larsen (1 rig) But both markets remain extremely fragmented Page 13 of 31
More than 70 companies manage jackups Worldwide Jackup Managers September 2010 (includes rigs under construction) Transocean, 65 59 Others, 156 Ensco, 41 Noble, 40 Kito Enterprises, 11 Hercules Offshore, 32 Maersk Drilling, 12 National Drilling, 13 Diamond Offshore, 13 Aban Offshore, 15 Nabors, 16 Seadrill, 17 Rowan, 31 COSL, 26 Seahawk Drilling, 20 Page 14 of 31
Even Transocean will have less than 25% of the floater fleet Page 15 of 31
There are many possibilities Seadrill has stated that it is looking at more consolidation - There are great opportunities in the rig market John Fredriksen at Pareto Oil & Offshore Conference - It already owns a piece of Pride - It is rumoured to be eyeing Transocean Smaller companies without contracts may be targets - Ocean Rig (4 of 6 w/o contracts) - Pacific Drilling (3 of 6* w/o contracts) - Metrostar (2 of 2* w/o contracts) - SeaDragon (1 of 2 w/o contract) - Prospector Offshore (2 of 2 w/o contracts) While Brazilian contractors have contracts for their rigs none has more than six owned and managed floaters * Pacific Drilling and Metrostar each have two joint venture rigs Page 16 of 31
So what s to come 1. The building boom is by no means over 2. Limited upside for jackups 3. Midwater fleet now stable 4. Deepwater fleet has short-term issues Page 17 of 31
We re only half way through the building boom Offshore Fleet Size Delivered units* 1000 +15% 919 900 800 700 755-14% 652 +6% 688 +16% 797 600 500 400 300 200 100 0 1985 1995 2005 2010 (Aug) 2013** *Jackups, semisubmersibles, drillships, arctic rigs, drill barges, tender-assists and submersibles ** Assumes no attrition Page 18 of 31
Drilling is no longer a US dominated business Ownership of Jackups, Semis and Drillships 100% 90% 68 72 83 114 80% 169 136 148 70% Share of Fleet 60% 50% 40% 30% 405 350 423 519 20% 10% 194 0% 1985 1995 2005 2013* * Assumes all rigs are built as planned and no attrition National Owned/Owner Operator Non-US Owned US Owned Page 19 of 31
Premium jackups finding a home internationally.. International* Jackup Utilization 100 Contracted Utilization (%) 90 80 70 60 Premium Jackups (301'+) Non-Premium Jackups(<301') 50 Jan 2000 Jan 2001 Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 * Worldwide except the US Gulf of Mexico Page 20 of 31
but no sign yet of a real uptick in day rates $200,000 Jackup Day Rates New Fixture day Rates (USD/day) $150,000 $100,000 $50,000 Premium Jackups (301'+) Standard Jackups(300') $0 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Page 21 of 31
and almost 120 jackups are idle today Worldwide Jackup Fleet August 2010 Hot stacked, 26 Warm stacked, 24 Cold stacked, 68 Drilling, 303 Yard, 23 Other, 20 Under construction, 39 On order, 13 Page 22 of 31
The midwater market seems to have stabilised Midwater Rigs* 100 $500,000 90 $450,000 80 $400,000 Rigs under contract 70 60 50 40 30 Rigs Under Contract $350,000 $300,000 $250,000 $200,000 $150,000 Day Rates (USD) 20 New Fixture Day Rates $100,000 10 $50,000 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 $0 *Rigs with rated water depths up to 3,000ft Page 23 of 31
Even before the Deepwater Horizon accident there were potential problems with the deepwater and even ultra-deepwater rig markets Backlog falling New uncontracted rigs arriving Rigs coming off contract Sublets available Page 24 of 31
Backlog was falling but slowly Deepwater Rig* Backlog Days of contracted backlog per competitive rig 1,200 1,000 Contracted Days Per Rig 800 600 400 200 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 * Rigs with rated water depths 3,001 feet and greater Under Construction, On Order and Planned rigs are counted Page 25 of 31
20 Uncontracted ultra-deepwater newbuilds are due for delivery in the next 2 years Page 26 of 31
and 19 more ultra-deepwater rigs may be available over these two years Page 27 of 31
There are a number of unfilled sublet slots Page 28 of 31
But there s plenty of uncontracted deepwater and ultra-deepwater work out there 69 identified projects with water depths wholly or partially in excess of 5,000 feet planned to start before the end of 2011 for which no rig has yet been contracted West Africa the leader but widely distributed around the world - West Africa - 29 - Asia/Pacific 18 - Mediterranean and Middle East - 8 - US Gulf 7 - South America - 6 - Others 1 These represent between 35 and 51 rig years of work Page 29 of 31
In summary: Without significant scrapping there s limited upside for jackup rates Midwater market will be pressured by deepwater rigs for some years Deepwater market has short-term issues but future still looks good One last observation: Page 30 of 31
The key is that the world needs more offshore oil 50,000 Worldwide Discoveries and Consumption Oil and Gas - 2005 to 2009 40,000 Million BOE 30,000 20,000 10,000 0 2005 2006 2007 2008 2009 Sources: Discoveries IHS, Consumption BP Onshore Shelf (0-600 ft) Deepwater (>600 ft) Consumption Page 31 of 31