Global oil drilling rebounds, but companies still cautious

PUBLISHED : Friday, 24 September, 2010, 12:00am
UPDATED : Friday, 24 September, 2010, 12:00am

Global oil drilling activities have staged a strong recovery since hitting a bottom in the middle of last year, but demand for equipment has been lagging as oil and gas producers do not yet want to splash out on new purchases.

The drilling services market has fared slightly better especially in China and the natural gas segment, but the machinery and supplies segment of the industry is still suffering from the hangover of the boom two years ago, which left behind an oversupply that will take more time to correct. The situation was not helped by a deepwater drilling ban in the Gulf of Mexico after BP's well explosion and oil spill in April. It pared equipment and services demand as tougher industry standards are on the way.

According to United States oilfield services provider Baker Hughes, 3,151 drilling rigs were active globally last month, up 9.5 per cent from the first-quarter and 46.1 per cent higher than a year earlier.

It was just 11.4 per cent short of the 3,557 rigs engaged in drilling in September 2008 right before the full onset of the global financial crisis, and up sharply from the trough of 1,983 in May last year.

Still, global offshore drilling charges have stayed at levels near their lowest in more than four years, with the lower-end jack-up rigs' supply exceeding demand by about 17 per cent, according to data cited by China Oilfield Services management last month.

'Everybody is waiting to see what sort of policy the US government will have on the drilling ban [due to expire in November],' said Jiang Binghua, chairman of TSC Offshore Group. The company provides products and services to the drilling industry on the mainland and abroad.

'Sensitivities are high ahead of the mid-November midterm elections,' Jiang said. A fire early this month on a Mariner Energy oil and gas platform in the Gulf of Mexico just 1.5 kilometres from BP's ill-fated well had also raised concerns Washington may be under pressure to prolong the moratorium, he said.

Jiang said the lacklustre global economic recovery and the need to wait for guidelines on tougher safety standards have delayed orders for equipment and services.

TSC late last month reported a 36.7 per cent year-on-year decline in first-half net profit to US$3.7 million, as sales fell 13.9 per cent to US$60 million. It had US$91.4 million of uncompleted orders as of June 30.

The company mainly serves the offshore drilling market in Europe and the United States.

Despite weakened demand, Jiang said the BP incident would usher in a new period of growth of demand in the longer term, as tougher industry standards meant more equipment replacements or upgrades.

'Close to half of the worldwide drilling vessels are older than their designed life, so more stringent safety measures will mean more business for the equipment industry in the long run,' he said. 'This is so not just in the Gulf of Mexico, but globally.'

Undeterred by weaker short-term demand, TSC expanded its service offering early this month by announcing it would buy a 51 per cent stake in Junrun, a repair, rental and technical services provider specialising in a drilling rig part called top drive.

In the land drilling market, although not affected by the BP incident, equipment demand has also been weak.

Sichuan-based Honghua Group, one of the world's largest makers of land-based drilling rigs, last month posted an 89 million yuan (HK$102.8 million) net loss in the first half, compared with a profit of 58 million yuan a year earlier.

The export-reliant firm sold only nine rigs in the first half globally, down from 27 a year earlier as a key customer failed to obtain bank loans while others delayed orders.

However, Beijing-based drilling services provider Anton Oilfield Services Group fared better, posting an 87.4 per cent year-on-year jump in net profit to 40.3 million yuan.

Chairman Luo Lin said in an interview the company specialised in the booming natural gas drilling market, where demand for 'horizontal drilling' technology was particularly strong.

He said the company had increased its focus on the service market by reducing the proportion that sales in less lucrative drilling-related products had in total turnover to less than 10 per cent this year from 30 per cent in 2007.

One such service is drilling, where Anton last month won a 26 million yuan contract to drill wells and provide related technical services for one of the nation's largest coal producers, the Shenhua Group. Shenhua is researching ways to turn coal into liquid fuel, as part of the energy giant's carbon emission control efforts.