3.2.1 Global drilling Industry
The markets for the drilling, work-over and related E&P services like offshore supply vessel business’ are significantly impacted by the level of spending on drilling by oil and natural gas companies for the exploration and development of oil and natural gas reserves. These drilling activities are affected by oil and natural gas companies’ expectations about oil and natural gas prices, anticipated production levels, demand for crude oil and natural gas products, government regulations and many other factors. Oil and natural gas prices are volatile, which have historically led to significant fluctuations in expenditures by customers for oil and natural gas drilling and related services. Variations in market conditions during the cycle impact the drilling company in different ways depending primarily on the length of drilling contracts in different regions and by different companies. The inter-relationship between oil price movements between 1997 and 2007 and the active US rotary rigs is given under:
3.2.2 Factors affecting the Global drilling industry While crude oil prices and drilling activity are inter-related, there are also several factors that affect the global drilling industry. Higher E&P investments: The extent of investment in offshore exploration and production activity is the key determinant of demand for offshore shipping services. Assuming the crude prices to remain at $90-100 per barrel over the next 2 years, E&P investments to the tune of $450 billion are expected to happen between 2011 and 2013, thus driving demand for offshore shipping services. Out of the total investments made in E&P activities, only 15-20 per cent will be channelled towards offshore shipping services. (Crisil Research). Region wise E&P activity: The offshore E&P activity varies across regions due to the geographical and environmental differences. Currently, a majority of the offshore E&P activity is centred in the Asia Pacific, North West Europe, West Africa and North and Latin America. Given the geographic differences within these regions, the demand for offshore shipping services for the E&P activity in these regions is also varied, making the offshore shipping industry largely localised in nature. A difference in demand-supply of rigs and consequently, utilisation, results in differences in charter rates of rigs and support vessels in that particular region. In January 2011, day charter rates for jack-up rigs in the North Sea were in the range of $80,000 while during the same period, the rates were around $33,000 in the US Gulf, given the difference in rig demand and supply.
Scenario of jack-up rigs in the North Sea Scenario of jack-up rigs in the US Gulf
Cabotage Law: Under the cabotage law, while bidding, a domestic vessel carrying the national flag will be given the 'Right of First Refusal'. This enables the national operator to match the price of the lowest foreign bidder (if the bid price is within 10 per cent of the lowest bidding price). This regulation exists in many countries such as India, Brazil, the US, etc. Such regulations make the offshore shipping industry more localised in nature. It is difficult for players to capitalise on opportunities in foreign countries. Increased focus on Deep-water drilling: The offshore oil and gas exploration has been taking place in shallow waters (typically defined as water depth of up to 500 feet), with most of the offshore exploration activity in Asia Pacific and North West Europe. In recent years, offshore exploration has been moving to greater depths with higher crude oil prices making it viable to do deep water drilling, especially in regions where there is low potential for shallow water drilling. Given the increase in offshore exploration in deeper waters, there has been a rise in demand for technologically advanced vessels capable of...