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Chances of Warm Stacking Increasing

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Ask an oilman anywhere in the world about drilling-rig rates and the answers are mixed. The oil price fall has caused some of the rig rates to fall as well, but only very slowly. But it’s all a matter of time. As new exploration and production projects are cancelled or delayed in the hope of an oil price rise, drilling companies have to find some way of storing (called ‘stacking’ in oil industry jargon) the drilling rigs they are unable to hire out.

How to Stack

It’s all a matter of guesswork. When a rig is taken off the market for just a short period of time, it is ‘warm-stacked’. This means that the rig and its crew can be quickly mobilised for a new contract. Warm-stacking can be a serious gamble, as the costs include keeping an expensive crew on stand-by.

A ‘cold-stacked’ rig is one that is moored on land or in a dock somewhere it the world and its entire crew is laid off. The world’s biggest drilling company, French-American Schlumberger, has already slashed its worldwide workforce by 9,000. In such a case, the drilling company is not expecting to be able to hire its rigs out for a long period of time – possibly some years.

Offshore Woes

Offshore drilling rigs are the ones that are being idled fastest. With high oil prices, work in the Gulf of Mexico meant that available rigs were working at some 95 per cent of capacity. In late January 2015, this usage had fallen to 78 per cent and was continuing to fall. On a worldwide basis, British consultancy group HIS has reported that offshore rig utilisation is at 88.9 per cent of capacity compared with 95 per cent this time last year.

Drilling rigs working in deep (over 2,000 metres) or ultra-deep (over 4,000 metres) water depths are the first rigs to be idled. Daily rates for hiring these rigs exceeded US $800,000 when oil prices were over US $100 per barrel. Now the prices have fallen to between US $350,000 and US $500,000. It’s still too expensive given the oil price fall, according to a lot of oilmen.

Guessing the Oil Price

Guessing world oil price trends has always been tricky, and oil industry professionals are no better at this guessing game than amateur observers. However, if oil prices remain weak for the next 12 to 18 months, drilling companies will be facing another dilemma: do they retire the rig completely and sell it off for scrap or do they continue to stack it?

So far, the outlook is poor, and the drilling market is expecting to face more difficult times until 2016. Some pessimists believe that up to 87 per cent of Gulf of Mexico rigs whose usage is up for renewal will remain idle this year.

Onshore Rig-Count Down

Drilling rig deployment onshore in the U.S. is also falling, as usage in North Dakota, the centre of the U.S. shale-oil boom, is at a two-year low. This is the region that has doubled its oil production over the past two years and contributed in a major way to the world’s oil price fall.

But this drop in rig usage has still to dent U.S. oil production, which was 9.19 million barrels per day in late January.

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