Bloomberg: Oil Rig Shortage Slows Chevron Bid to Tap Gulf of Mexico Fields

By Joe Carroll

Dec. 20 (Bloomberg) — Bill Thornburg, a senior drill-site manager for Chevron Corp., opens a steel door on a floating oil rig off the Louisiana coast and stops dead in his tracks.

Red plastic tape warns that crews are hauling pipe and wrenches the size of baseball bats across a deck slick with sea spray. If it were up to Thornburg, there’d be a dozen more $1- million-a-day rigs plying the Gulf of Mexico, full of roughnecks so busy their bosses would need to stay out of the way.

He’ll have to wait. A global shortage of deep-sea drilling rigs is costing Chevron precious time as it taps the Gulf, and the equipment deficit may keep oil prices high. A prime example is the $3 billion field dubbed Jack. Chevron and partner Devon Energy Corp. announced the deepest-ever well test there on Sept. 5.

Politicians backing energy independence exulted. Investors sent Devon shares up 12 percent and Chevron’s up 2.3 percent.

They didn’t know the drilling rig Cajun Express had already plugged the Jack well and moved to another urgent job. Drilling at Jack won’t resume until at least July, Thornburg says.

“There’s a lot of prospects out here we’d like to drill but can’t yet because there aren’t enough rigs,” says Thornburg, 58, who’s overseeing drilling at another site, called Tahiti, that needed the Cajun Express to meet a more pressing deadline.

The Cajun Express is one of just 18 rigs worldwide capable of tapping the deepest discoveries. For the test at Jack, the platform-shaped vessel, which motors from site to site, needed to drill 4 miles (6.4 kilometers) below the sea floor.

Postponements

The rig shortage is forcing oil companies to postpone new offshore wells in the Gulf of Mexico and elsewhere, says Peter Jackson, an analyst at Cambridge Energy Research Associates in Cambridge, Massachusetts. As a result, crude prices will remain high and U.S. reliance on imports from Africa and the Middle East will increase over the next decade, says David Foley, who manages $600 million at Grove Creek Asset Management in New York.

Crude oil prices have tripled in the past five years. The year’s low for benchmark oil futures on the New York Mercantile Exchange is about $55.

Jack will take about nine years to develop from discovery to first production, compared with six years for Tahiti, according to estimates by San Ramon, California-based Chevron, the second- biggest U.S. oil company. That’s because rigs are harder to come by and it takes longer to drill deeper wells, Thornburg says.

Rental Fees Double

The Cajun Express is owned by Houston-based Transocean Inc., the world’s biggest offshore driller. While record lease rates of as much as $520,000 a day are funding expansions by Transocean and other rig operators, shipyards from South Korea to Singapore to Scandinavia are backlogged with orders. Growth of the offshore drilling fleet will be gradual, says Kenneth Sill, a Houston- based analyst at Credit Suisse Securities USA LLC.

Daily rental fees on the most sophisticated and rugged drilling vessels are double 18 months ago, Sill says.

“Day rates have climbed aggressively because demand for these rigs far outweighs the ready supply,” says Clayton Ballard, the top-ranking Transocean employee aboard Discoverer Deep Seas, another rig at the Tahiti field.

Worldwide, there are 31 rigs on order that will be able to handle deepwater projects such as Jack, according to Houston- based Rigzone, which compiles data on the drilling industry. Two are scheduled to be finished next year and 13 are slated for delivery in 2008.

$1.5 Billion Order

The time required to map and develop oil fields means any discoveries made by rigs from the Class of 2009 won’t begin producing oil until 2015 or later, says Gene Pisasale, a former Exxon geologist who helps oversee $25 billion at Mercantile Bankshares Corp. in Baltimore.

Earlier this year, Chevron ordered two new rigs from Transocean at a cost of about $1.5 billion. They will be able to drill a mile deeper than the most sophisticated existing vessels. The first won’t be ready until 2010. Transocean will own the rigs and lease them to Chevron.

Even when available, the rigs are costly to operate. Chevron and its partners on the Tahiti field, Statoil ASA and Royal Dutch Shell Plc, are spending $1 million a day to rent, staff and supply the Cajun and Discoverer Deep Seas with fuel, food and hardware. The price tag will rise to $1.6 million a day by the end of this month as more cost-intensive phases of well preparation get under way, says Donald LeGros, Tahiti’s drill site manager and Thornburg’s No. 2.

“If people wonder where their money goes when they’re paying $2.50 a gallon for gasoline, this is it,” says LeGros, 45, who began working in oil fields the day after he finished high school in 1979.

Refitted in Singapore

Thornburg, who will also oversee drilling at Jack, says Chevron may borrow a rig being refurbished in Singapore for Oklahoma City-based Devon to resume work on Jack next year.

For now, the Cajun Express, built to drill almost 7 miles beneath the surface of the sea, is preparing to blast penny-sized holes in the sides of six wells at the northern end of Tahiti, a crucial step in preparing the field for startup, says LeGros.

The rig, which has a derrick tall enough to be seen from the Discoverer 3 miles away, houses engineers and workers known as roughnecks, who pull 12-hour shifts for two weeks followed by two weeks of shore leave. The rig is equipped to sail out of harm’s way when hurricanes threaten.

Popping Bolts

On the other end of the Tahiti field, the Discoverer uses satellite-positioning gear to remain stationary amid 20-foot (6- meter) swells. The floating work camp for 200 workers includes a movie theater, Internet cafe, exercise room and infirmary. When new employees board the rig, the mandatory safety video includes instructions for donning emergency wet suits to a soundtrack of AC/DC’s “Hell’s Bells.”

On a cloudy December day, Thornburg and LeGros are struggling with the unforeseen: The 34-degree Fahrenheit (1 degree Celsius) water temperature and massive pressure exerted at the sea floor are popping out bolts needed to secure equipment to the eight wells at the southern end of the field.

A team of engineers is experimenting with different types of insulation to overcome the cold and pressure and keep the bolts screwed down tight, Thornburg says.

Time is short because the Discoverer and Cajun Express must have all 14 wells at Tahiti ready by July, when a production platform is scheduled to arrive in two pieces from shipyards in Texas and Finland. Unlike the mobile floating rigs, production platforms are anchored to the sea floor.

Secrecy

Thornburg won’t say where the Discoverer and Cajun Express are headed after Tahiti. His gray-tiled office is off limits to most people on the ship because he is privy to data on new prospects that would be valuable to rivals.

A sign beside his door uses industry jargon to warn visitors of the need for secrecy: “This is a tight hole. Do not enter this office without permission.”

Escalating rig costs are contributing to a slowdown in profit growth at the world’s five biggest publicly traded oil companies — Exxon Mobil Corp., Royal Dutch Shell, BP Plc, Chevron and ConocoPhillips. Net income for those companies probably will rise by an average of 12 percent this year, according to a Bloomberg survey of analysts. That’s down from 35 percent growth in 2005.

Chevron says it plans to boost spending on exploration, refineries and chemical plants by 23 percent in 2007 to a record $19.6 billion as costs rise.

Drilling Curbs

Houston-based ConocoPhillips, Devon and Reliance Industries Ltd., which owns India’s biggest crude refinery, all say they plan to curb drilling next year because of rising costs and the scarcity of equipment.

“The rig situation is going to slow down the rate at which companies can appraise and develop these prospects,” says Jackson of Cambridge Energy Research.

Investors and politicians may have lost that point in the excitement over the deep Jack test, which showed for the first time that energy companies could exploit a layer of rocks that may hold as much as 15 billion barrels of oil.

Oil prices dropped 7.8 percent in six trading sessions after the Chevron and Devon statements Sept. 5. Chevron shares have climbed 15 percent since then.

“America needs America’s oil, and suddenly we’ve found a lot more of it,” Representative Joe Barton, a Texas Republican who chaired the House Energy and Commerce Committee, said in a statement.

Analyst Jackson says the Jack test prompted “an awful lot of froth.”

Sealed for Now

“But we have to bear in mind there’s no chance we’ll see any of that oil on-stream this side of 2010,” he says.

For now, the Jack well that was tested is sealed with a yellow fiberglass cap the size of car tire’s rim.

Chevron says it expects Tahiti, which holds an estimated $33 billion of crude at current prices, to begin pumping oil by the second or third quarter of 2008.

The company needs Tahiti, discovered in 2002, to start generating income as costs soar and the search for petroleum pushes into ever deeper waters, says Mickey Driver, a Houston- based spokesman for Chevron’s exploration and production business.

It costs about $120 million to drill a well in deep water, with no guarantee that oil or natural gas will be found. The diamond-crusted bits used to drill into the Earth’s crust cost $50,000 apiece. One well may chew up a dozen, LeGros says.

The first six exploratory wells Chevron drilled with the Discoverer in the Gulf were so-called dry holes, or wells with too little oil to turn a profit, Thornburg says. About 80 percent of the exploratory wells in the Gulf are failures.

“It’s lots of money, it’s lots of equipment and it’s a total crapshoot,” says Driver. “Of course, we don’t publicize the dry holes.”

To contact the reporter on this story: Joe Carroll in Chicago at [email protected]

Last Updated: December 20, 2006 00:03 EST

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