BP Spill Is `Opportunity in Disguise' for Rig Makers Keppel, Samsung Heavy
An oil rig under construction
Jonathan Drake/Bloomberg
A Keppel Corp. employee stands on the helicopter deck of an oil rig under construction at the company's Keppel FELS facility in Singapore.
A Keppel Corp. employee stands on the helicopter deck of an oil rig under construction at the company's Keppel FELS facility in Singapore. Photographer: Jonathan Drake/Bloomberg
Heightened U.S. scrutiny of offshore drilling after the BP Plc spill, the worst in the nation’s history, may spur oil companies to replace aging rigs with new platforms made in South Korea and Singapore.
Rig-makers Samsung Heavy Industries Co. and Keppel Corp. stand to benefit from drillers buying $300 million-plus semi- submersible rigs, which operate in waters as deep as 10,000 feet. About 57 percent of current units are more than 20 years old, according to Merrill Lynch.
“The oil spill could be a good opportunity in disguise,” said Cho In Karp, head of research at Heungkuk Securities Co. in Seoul. “Tougher regulations on offshore units could bump up prices and spur demand to replace older ones.”
The U.S. has tightened inspections of so-called blowout preventers following the April 20 explosion at the Deepwater Horizon in the Gulf of Mexico that killed 11 people, and President Barack Obama has pledged stronger standards. Tougher rules after the 2002 sinking of the Prestige tanker off Spain forced operators to replace single-hull vessels with costlier double-hull ones, triggering a five-year boom in ship orders.
“The BP disaster is going to change the industry like the Spanish spill did,” said Choi Gwang Shik, a Seoul-based Kyobo Securities Co. analyst. “Oil majors will turn to suppliers with good standards of safety and technology to meet new rules.”
About 150 countries will ban single-hulled tankers by 2015. Of the 526 very-large crude carriers in service today, 57 are single-hulled, according to Lloyd’s Register-Fairplay data on Bloomberg. Prior to the Exxon Valdez spill in 1989, all supertankers were single-hulled.
Catalyze Rig Replacement
Stronger drilling safety rules could “catalyze the repair and replacement cycle for older rig fleets,” said Tong Chong Heong, the head of Singapore-based Keppel’s offshore arm. “In the U.S.A., drilling will resume after new safety regulations are adopted and this will also provide opportunities for yards to carry out the needed safety enhancement works.”
Keppel, the largest maker of shallow-water rigs, has lost 12 percent in Singapore trading since the Deepwater Horizon accident, while the benchmark Straits Times Index has fallen 5.5 percent. The company dropped 0.2 percent to S$8.47 today.
In Seoul, Samsung Heavy, the world’s biggest builder of deepwater rigs, used in seas more than 10,000 feet deep, has dropped 11 percent since April 20, compared with a 1.6 percent retreat for the Kospi Index. The company rose 0.4 percent today to 23,500 won, the highest price in a month.
Orders Pick-Up
Tighter drilling rules may support a revival in offshore orders, which began with the pickup in the global economy and a doubling of oil prices from last year’s low to more than $70 a barrel. About $167 billion may be spent in the deepwater sector through 2015, Douglas-Westwood Ltd., which advises energy companies, said before the BP spill.
Keppel has booked S$1.7 billion ($1.2 billion) of orders in 2010, compared with a S$2 billion full-year target, according to Merrill Lynch. Last year, the company had no orders for jack-up rigs, which are used in waters less than 500 feet deep and have retractable legs extending to the seafloor.
The worldwide fleet of jack-up rigs is an average of about 29 years old, according to Rigzone, a Houston-based company that compiles offshore-industry data. There are 514 jack-up rigs and 222 semi-submersibles worldwide, including ones under construction, according to its website.
Keppel Demand
Keppel may get orders of as much as S$6 billion a year from 2011 to 2014, helped by replacement demand and contracts in Brazil, Merrill analyst Wee Lee Chong said in a June 7 note. The Bank of America Corp. unit restarted coverage of the rig-maker with a “buy” rating.
Seoul-based Samsung Heavy may boost offshore orders almost seven-fold to $4 billion this year. Hyundai Heavy Industries Co., which built the nine-year-old Deepwater Horizon, plans to raise oil and gas orders 79 percent and may beat a $4.2 billion target, it said in March. Deepwater Horizon was owned by Transocean Ltd.
Hyundai Heavy, which is based in Ulsan, South Korea, and Samsung Heavy are targeting orders in the Gulf of Mexico, the North Sea and Africa. Samsung Heavy also is building floating production and storage facilities for liquefied natural gas projects in Australia and the Timor Sea.
A six-month U.S. ban on deepwater drilling in the Gulf and curbs on shallow-water operations while the BP spill is investigated may damp demand for platforms in the short term. BP, ConocoPhillips, Petroleo Brasileiro SA, Cobalt International Energy Inc. and Plains Exploration & Production Co. have all put projects in the region or off California on hold.
More than 30 deepwater rigs also stopped work because of the ban, and these units could be used in regions such as Brazil, delaying orders there, according to CIMB Group Holdings Bhd. analyst Lim Siew Khee. She downgraded Singapore-listed shipbuilders to “neutral” from “overweight” in a June 9 note.
Petrobras Demand
Rig-makers are targeting Brazil as state-owned Petrobras intends to invest $220 billion developing oilfields, including Franco and Tupi, the largest discovered in the Americas in more than 30 years. The plans include buying 28 locally built drill ships, which are due to enter service by the end of 2018.
Hyundai Heavy and Samsung Heavy have bought stakes in Brazilian shipyards because of demand from Petrobras, while Keppel and Singapore-based Sembcorp Marine Ltd., the No. 2 maker of shallow-water rigs, are adding capacity in the country.
Keppel’s Headstart
Keppel, which has delivered two floating production platforms to Petrobras and is building a third, may win orders for seven drill ships next quarter, according to Merrill Lynch.
“They have a headstart,” said Ashwin Sanketh, at CLSA Asia Pacific Markets analyst in Singapore. “There’s no point not leveraging on that.”
A spokesperson for Rio de Janeiro-based Petrobras declined to comment.
Oil companies are developing the Brazilian fields and exploring other sites because world demand may rise 2.3 percent by 2015 to 88.4 million barrels a day, according to the International Energy Agency in Paris.
“Oil companies still need to find and develop fields because reserves at existing ones are depleting,” said Lee Jae Won, an analyst at Tong Yang Securities Inc. in Seoul. “There’s no way the spill will halt offshore projects.”
To contact the reporter on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net.
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