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BP’s Gulf Spill to Drive Down Rig Rates, Create Oversupply

The BP Atlantis oil and gas platform, located in the Gulf of Mexico. Photographer: Marc Morrisson/BP via Bloomberg

BP Plc’s oil spill in the Gulf of Mexico will drive down rental prices for deep-sea drilling vessels by about 20 percent, analysts say, creating an oversupply of rigs as demand slows.

The Deepwater Horizon drilling rig that blew up and sank in April, causing the biggest oil spill in U.S. history, prompted President Barack Obama to ban deep-water drilling for six months. That halted 33 rigs in the Gulf of Mexico and led Statoil ASA, Anadarko Petroleum Corp. and Cobalt International Energy Inc. to declare force majeure, or suspend terms, on their rig hire contracts. Falling prices could pressure companies into making more deals.

Rental rates for deep-water rigs may drop about a fifth to $350,000 a day in the next six months, according to the average estimate from Citigroup Inc., ODS-Petrodata Inc. and Sanford Bernstein & Co.

“Some rigs are having force majeure declared on them, some could well be moved out, some could well sit,” said Gavin Strachan, an Aberdeen-based consultant at ODS-Petrodata, an energy analytics agency. “There’s potential oversupply.”

At the same time, a total of 64 rigs are under construction worldwide, the biggest expansion since the early 1980s, according to Bernstein. The combination of the drilling ban and excess capacity is spurring takeovers. Noble Corp., the world’s second-largest offshore oil driller based on fleet size after Transocean Ltd., this week agreed to buy FDR Holdings Ltd. for about $2.16 billion.

Takeover Candidates

Rig owners including Pride International Inc. and Rowan Cos. also “appear to be attractive acquisition candidates,” said Scott Gruber, an analyst at Bernstein in New York.

Pride, the Houston-based oil and natural-gas driller with rigs working from Brazil to India, owns or manages 27 offshore units operating mostly in deep water.

Rowan, which operates mostly in shallow water, yesterday agreed to buy control of Norway’s Skeie Drilling & Production ASA for $130.6 million in stock, gaining three rigs that are under construction.

Pride and Rowan are targets based on the combination of attractive assets, low stock prices, attractive geographic exposure and the tax benefits for certain international drillers who might buy them, said Gruber.

The global deep-water rig utilization rate may drop by as much as 10 percentage points to 70 percent, driving down hiring rates, according to Standard Chartered Plc estimates.

“Specialized deep-water rig rates are actually going down, because there are a lot of them on the market at the moment,” said Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh. “You can pick up rigs a lot cheaper now that you could do four or five months ago.”

Oil Companies Benefit

For Exxon Mobil Corp., Royal Dutch Shell Plc and other offshore explorers, costs are likely to fall, mitigating the expense of additional safety measures expected when a presidential commission investigating the BP disaster delivers a report this year on offshore oil operations.

A U.S. court ruled Obama’s six-month moratorium on drilling in waters deeper than 500 feet (152 meters) was illegal. U.S. Interior Secretary Kenneth Salazar has appealed the ruling.

Noble’s deal may help other drilling contractors to set prices on rigs that are up for sale, said Kurt Hallead, an analyst at RBC Capital Markets in Austin.

“In combination with what’s happening in the Gulf of Mexico, it could prove to take away some bottlenecks in the system,” said Hallead, who rates Noble shares “sector perform” and doesn’t own any.

Lost Drilling

The ban will have longer-term consequences for drilling operations in the Gulf of Mexico, said Magne Spillum, vice president in charge of drilling units at RS Platou ASA, a ship- and offshore broking company based in Oslo.

“A lot of deep-water units are coming off contract and new building being delivered into 2011, so this may have impact on the market in 2011,” he said in an interview.

Governments in the U.K., Brazil, Mexico, Azerbaijan and Russia have signaled they’re likely to tighten offshore drilling regulations in the aftermath of the spill. At the same time, Australia, Trinidad and Tobago, Tanzania and Norway are moving ahead with licensing plans to allow new deep-water exploration.

“Tougher regulations will mean higher costs to find, develop and produce oil in the Gulf of Mexico,” said Mike Wittner, the London-based head of oil market research at Societe Generale SA. “There could be an impact on supply from regions other than the Gulf of Mexico.”

U.S. Oil Needs

The U.S., which will import about 14 percent of the world’s oil this year, may need to shorten the deep-water drilling ban to maintain supplies and preserve jobs in the industry.

Oil output from the region may fall by as much as 300,000 barrels a day in the next five years, the International Energy Agency has forecast.

“The U.S needs its indigenous supply to be drilled and developed,” Kenney at ING said. “The U.S. has become more dependent on imported crude, on imported energy supplies and that has a cost for the U.S.”

Some offshore service contractors may see lower earnings following the drilling ban, according to Evolution Securities Ltd. Oceaneering International Inc. reduced its 2010 earnings guidance in June in anticipation of a slowdown in the Gulf.

“Deepwater rigs will be moved from the Gulf for the period of the moratorium and will look for work elsewhere,” Keith Morris and Richard Griffith, London-based analysts at Evolution, wrote in a report. “Competition for work is likely to put pressure on day rates.”

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