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By Samuel R. Avro on Nov 24, 2008 with no responses

Oil Rig Rates Down by 10 Per Cent

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The current global credit crisis and an over 63 per cent fall in crude oil prices in the last four months have resulted in oil companies drilling fewer wells in offshore areas. This has increased the availability of rigs across the world and helped bring down rig rentals by up to 10 per cent in the recent past.

The rig rates have corrected primarily in the shallow water fields where there have been traditionally more rigs available.

Daily rentals of jack-up rigs — those used for drilling in shallow waters — have come down from around $200,000 to $180,000 currently. Rates are, however, still over three times higher than they were two years ago, analysts said.

“Rig rates have corrected with oil prices coming down. Exploration companies, which are due to renew their contracts or firm up new contracts in the coming months, stand to gain from the current slide,” said Dilip Khanna, partner, Ernst & Young’s Oil and Gas Practice.

The exploration activity in deep water fields, which has high cost of production, is also likely to get impacted as the current price of crude below $50 per barrel makes the exploration unviable.

“Exploration may slow down if the belief is that the price will remain at this level,” said Ravi K Sheth, executive director of Great Eastern Shipping and managing director of Greatship India. “Oil companies must be reviewing their budget to see how much can they set aside for exploration,” he said.

Rigs are primarily used for exploration. Once the oil is found, the field is developed for production. It is only the exploration activity which is likely to get impacted, mainly in the high cost deep sea fields where typically the cost of production is $40 to $50 per barrel.

“People who are merely prospecting will be more cautious at this price of crude,” said Satpal Singh, managing director of Dolphin Offshore. “Most people would look for a benchmark crude price of $65 a barrel,” he said.

Lower rig rentals will benefit companies such as Oil and Natural Gas Corporation (ONGC) and Reliance Industries which are likely to enter into new rig hiring contracts for drilling for oil and gas in the Indian waters.

Crude oil prices have tumbled to a 23-month low of $54 per barrel after hitting $147 a barrel in July this year as major oil consuming nations have slipped into an economic recession.

Analysts, however, predict that prices of rigs could see a further downturn.

“When crude oil prices were on an upswing, even small and mid-size players were thinking of entering into the exploration and production business. Now, the cycle has reversed and falling crude oil prices is a discouragement for the exploration industry,” said a Mumbai-based analyst.

Khanna of E&Y, however, believes that due to the current financial situation, supply of jack-up rigs that were ordered in the international market will increase.

While industry experts also say that a few rig construction contracts have been cancelled in the light of the current financial situation, V Ashok, director of Essar Shipping Ports and Logistics, said the current meltdown has not impacted the industry at all.

Business Standard