Published March 30, 2009

Major rig builders brace for a difficult year

Two quarters gone by without a big newbuild order as industry lull sets in

By VINCENT WEE

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AS the first quarter draws to a close, this will be the second quarter in a row that the major rig builders have gone without a single significant newbuild order, starkly bringing home the reality that an industry lull has definitely set in.

On track for now: Keppel has completed the second of seven ultra-deep-water semi-submersible rigs for Ensco International

Instead, the announcements have been mostly negative. Apart from Keppel Corp's regular string of completion announcements - the latest of which was last Saturday's completion announcement for the second of seven ultra-deepwater semi-submersible rigs for Ensco - Sembcorp Marine and Cosco Corp (Singapore)'s announcements have been mainly about order renegotiations or cancellations.

January saw the worst of these when both Keppel and SembMarine agreed to revised terms for their respective portions of a massive four-rig Seadrill order that is together worth nearly US$1 billion. Cosco also saw several order reschedulings and one cancellation in its order book of mainly bulk carrier newbuildings during the month.

Cosco may also be the next to be hit on the rig newbuilding side by the credit crunch spectre.

Earlier this month, Chinese yard Jiangsu Hantong ran into problems with Norwegian firm Sevan Marine on the withholding of US$7 million in payments for two floating production, storage and offloading (FPSO) vessels under construction there. Sevan cited the need to reduce capital costs as these two vessels do not have firm charter contracts yet.

Cosco may be the next rig builder to be hit by the credit crunch.

Sevan has ordered three drilling rigs from Cosco and the fear is that it may stall on these contracts as well. The US$590 million Sevan Driller I is almost completed and is due to start work for Petrobras in the second half. Sevan, however, is deferring delivery of the other two drilling rigs to gain more time to organise financing.

'Our concern is that Sevan may not be making payments on this contract as well. The contract, worth around US$202 million, is 65 per cent paid up to December. We have already seen warning signs - initially, this unit was to be completed in December, but, according to Cosco, this has been delayed due to variation requests from Sevan, and will now be delivered by June 2009,' said a Kim Eng Research report.

'We believe Cosco could announce more order cancellations and/or delays as the business climate remains dismal. With this latest development, Sevan could certainly be a high-profile candidate - we estimate that around US$70 million of the outstanding contract value could be at risk,' added Kim Eng's Rohan Suppiah, as he cut fair value to 57 cents.

'We expect Cosco to be profitable on its US$7.3 billion order book, but forecasts are at risk from more cancellations and provisions,' he concluded.

Meanwhile, Keppel's strong order book of about $10.8 billion extending through 2012 and Sembmarine's $9 billion in net orders extending out to the same period are still enough to keep them busy.

Keppel CEO Choo Chiau Beng said in the group's annual report that it has 14 rig deliveries scheduled this year and that FPSO conversions will also be active although the shiprepair side may be impacted by the slowdown in the global shipping industry.

Mr Choo acknowledged the slowdown. 'With the drastic drop in oil prices, new rig orders have temporarily stopped. We do not expect to see many new orders for drilling rigs in the near term, but we will continue to clinch some FPSO conversion projects and shipre- pair work.'

While the order and revenue flow looks fairly firm for this year and next, the concern is that this will start to drop off if new orders do not come in soon. These fears, however, may be unfounded.

Industry website Rigzone recently cited a new report by Cambridge Energy Research Associates as saying that the slowdown in investment in oil and gas production could lop off nearly eight million barrels a day of future oil supply growth, setting the stage for another big crude-oil price spike in the years to come. This could be good news for the three major rig builders as they capitalise on new orders to replenish their order books at good prices.

Cambridge predicted before the economic crisis set in that world oil production capacity would rise to 109 million barrels a day by 2014 from the current 94.5 million barrels a day. It now says 7.6 million barrels a day, or slightly more than half of that increase, is at risk due to project deferrals or cancellations.

The research company said it expects many new test drilling contracts in deepwater Brazil, Angola, Nigeria and the Gulf of Mexico to be postponed or cancelled due to the low oil price. Cambridge, noted however, that as industry costs fall this year, the oil price necessary to justify investment in such high-cost projects may also commensurately head lower.