Transocean Delays Debut of First 20K Rigs Just as Deepwater Market Looking Up Again
Transocean has delayed the delivery of the first two drillships capable of drilling and completing wells requiting 20,000-psi pressure control and told investors they are arriving at a time when the demand for ultrahigh performance is coming back.
Transocean told investors the debut of the world’s first two 20,000-psi-ready (20K) rigs has been pushed into next year.
While the share price dropped on the news, the delay attributed to supply chain disruptions during the pandemic could be well timed to a rising tide of work with oil demand and prices up sharply.
Transocean’s message is that the market is recovering in time for the start of work by the Deepwater Atlas, which is set to begin drilling next year, and the Deepwater Titan, scheduled for early 2023.
They are the new high-specification rigs to be available for deepwater work at a time when demand is rising for the limited supply of high-end deepwater rigs.
Bobby Thigpen, chief executive officer for Transocean, predicted that by year’s end nearly every active rig in the deepwater Gulf of Mexico is likely to be on contract.
“A full-scale recovery is in progress; it is a tightening market,” he said. He predicted that the percentage of work for exploration will be rising from a depressed level, adding, “We are excited about the opportunities unfolding.”
Market observers say the state of the deepwater market depends on where one is looking. The Gulf of Mexico is one where rates are starting to recover, said Terry Childs, Head of RigLogix, part of Westwood Global Energy.
“If you look at some of the most recent drillship fixtures, especially in the US Gulf, the answer would be yes. In that market, there is essentially only 1 or 2 ships available the rest of the year and into early 2022,” Childs said.
Day rates range from $215,000-255,000 range—Transocean reported leasing Deepwater Asgard for $245,000 a day to Beacon -- well above the $175,000-200,000 or so that was in place last year, Childs said.
Thigpen pointed out that Transocean's rigs could also be hired for wells that do not require that level of pressure control, based on other unique design features, such as a lifting system that can handle 3 million tons plus.
But doing so would raise questions about why the company with “the only two assets capable of drilling and completing 20,000-psi wells” was not finding customers working on the sort of projects they were built for.
As of 7 June, Transocean had a firm contract—a 5-year deal with Chevron for the Titan valued at $830 million—and a likely deal with Beacon Offshore Energy. The latter agreement hinges on Beacon making a final investment decision to develop the Shenandoah field, which Thigpen said he expects will happen this month.
While Thigpen sounded confident, Transocean’s deal with shipbuilder, Sembcorp Marine, reduces the risk if things do not go as planned. It allows Transocean to pay $50 million on delivery of Atlas and defers the $370-million balance over 5 years at 4.5% interest.
“It offers greater financial flexibility in the unlikely event it will be delivered without a contract in place,” Thigpen said.
In exchange, Transocean waived its “termination rights,” which ensures the shipyard that these sales will not fall through and that Transocean will be the first driller to own 20K-equipped drillships.
The Wilcox Test
Beacon, which was formed in 2016, has staked its future on the Shenandoah, which is one of several investments it has made in the challenging deepwater Wilcox play.
“The Shenandoah project poses higher risks as it will require 20,000-psi-rated equipment to develop, but the deal could prove transformational and triple Beacon's current production by 2024,” according to a report summary from Wood Mackenzie.
The risk and payment schedule is flipped when the Titan is delivered, with $350 million paid on delivery and $90 million over 5 years, with drilling beginning at Chevron’s Anchor project, in which it is the operator in partnership with Total.
Chevron has been a prominent backer of the long-term effort needed to develop and certify 20K equipment, which it sees expanding its opportunities in deep water.
As for interest from other oil companies, Roddy Mackenzie, senior vice president, marketing for Transocean, said that “probably about five or six operators there today have a very realistic probability of moving into 20K in the next few years,” at the company’s earnings call in early May.
A chart from Transocean shows the number of wells needing 20K equipment jumps as wells go deeper than 20,000 ft, but Mackenzie said customers are reluctant to commit to using it until “after it is proven in Gulf of Mexico.”
He could narrow that down to the Wilcox play, which includes Shenandoah, Anchor, and seven other discoveries where 20K-pressure-control is needed to complete wells.
Those come with the extremely deep wells in plays like the Shenandoah, where the discovery well and appraisal holes were all around 30,000 ft deep.
The next-generation rig is required at the completion stage because, unlike drilling where the weight of mud is the primary barrier, cementing requires removing the mud so the blowout preventer needs to be able to stop a blowout without the benefit of that dense fluid.
Extreme lifting capacity is also needed to handle the heavy-duty steel casing used in those completions.
All this talk about challenging the limits of exploration and development may been disorienting to those who have been hit by a recent steady barrage of warnings that meeting carbon-reduction targets will require backing away from big exploration.
The conference call did offer words of encouragement for those with questions about the “E”—environmental—in ESG (environmental, social, and governance) with promises that more-efficient systems reduce emissions.
“Our biggest impact is delivering those wells with the lowest possible carbon footprint and emissions,” MacKenzie said.