The full investigation into the catastrophic accident that resulted in the sinking of Deepwater Horizon on April 20 is not concluded, and a definitive cause has not yet been formally identified. However, even before this is done, the impact on the US Gulf and global deepwater drilling sector is huge. Perhaps most important is that we now know there is no way of capping a blowout in deepwater if a BOP fails. BP has tried numerous techniques to stem the flow of oil over the past six weeks, but the only method that now looks like achieving success is the drilling of relief wells. Another 10 million barrels of oil could yet spill into the Gulf before this is finished.

ODS-Petrodata is considering the impact of the six-month extension of the drilling ban, announced by President Obama on May 27, on the deepwater rig market. ODS-Petrodata classes "deepwater rigs" as those capable of working in water depths of more than 3,000ft (910m).

The US Department of the Interior (DOI) has ordered a moratorium on the drilling of new wells from floating rigs for six months. Permitted wells currently being drilled will be required to be halted at the first safe stopping point. The ban applies to wells from all floaters, not just those currently drilling in deepwater. There is no guarantee that the ban will be lifted after six months.

The initial DOI 30-Day Safety Report has also recommended: a recertification of all Blowout Preventers (BOPs) for floating drilling operations, and that floater BOPs should have two sets of blind shear rams at least 4ft apart; stronger well control practices, blowout prevention and intervention procedures; tougher inspections for deepwater drilling operations; and expanded safety and training programmes for rig workers.

Drilling outside the Gulf of Mexico will also be affected. Plans to drill offshore Alaska this summer will be suspended, and the August Western Gulf Lease Sale 215 and the proposed Virginia Lease Sale 220 have been cancelled.

However, some deepwater rig activity will be permitted in the Gulf. The moratorium does not apply to: intervention or relief wells for emergency purposes, including the ongoing wells on Macondo; operations necessary to sustain pressure for production; workovers; waterflood, gas injections or disposal wells; or abandonment and completion operations.

The ban will affect 24 semis and 10 drillships that have been drilling in the Gulf, or are considered part of the region's active fleet. All these units can be expected to stop drilling within the next few days or weeks. If their programmes have not yet started, the spud date will be delayed.

Two of these rigs, Ocean Voyager and Noble Paul Romano, will complete contracts in June and July 2010 respectively, and will be on the open market. Three are en route from other areas; newbuilds ENSCO 8502 and Deep Ocean Ascension were due to commence shakedown contracts in the third quarter, and Deepwater Pathfinder is being relocated from West Africa under an Eni charter.

Two further units will not start term contracts in the Gulf in the next six months due to the ban. Noble Jim Day was expected to commence a four-year Marathon charter in September, and Bully I was scheduled to commence a five years plus options Shell contract in October. Both units are in Singapore, so their operators may attempt to redeploy them internationally.

Both contractors and operators consider the ban somewhat draconian, and are likely to increase lobbying to the US Government to have its effects reduced or overturned. But after the latest efforts to shut down the leak from the Macondo well failed, and the spill became the worst environmental disaster in US history in terms of the volume of oil released, any lessening of the ban seems unlikely for the time being.

Transocean stands to be hit hardest, having 14 floaters currently contracted for work in the Gulf. Noble and Diamond Offshore have six each, and Ensco has three. Stena Drilling, Seadrill, Frontier Drilling, Pride, and Maersk Drilling have one each.

The consensus among drilling contractors seems to be that the long-term future of the US Gulf deepwater market is still secure. The increased costs of working in the sector resulting from new regulations for BOPs or increased insurance may force some operators to concentrate on international plays, but the Gulf remains a vitally important deepwater province. In terms of rig numbers, its population of 34 deepwater rigs is second only to South America's 45, out of the current world total of 144 units. In addition, 25 out of the 34 rigs are ultra-deepwater capable (>7500ft water depth), which equates to around 36 per cent of the world fleet.

The deepwater Gulf now accounts for around 70 per cent of US offshore production of oil and gas. If the country is serious about reducing imports of foreign oil, it is a resource that cannot be neglected for too long. In addition, the longer a ban continues, the more the economies of the Gulf states will be affected, and unemployment levels will rise, causing another political headache for the President.

However, outweighing this is the huge environmental impact of this incident, which means a repeat will not be tolerated. It may be more politically expedient for the US Government to keep the ban in place until developments in BOP technology make the risks absolutely minimal. No-one knows how long this will take.

Contractors with rigs coming off wells as a result of the ban will be faced with five scenarios:

(i) Operators could where possible redirect their rigs from drilling work to undertake some of the activities not covered in the moratorium.

(ii) Operators may decide to mobilise rigs to other markets, where they have work planned but no rig in place, until the ban is lifted.

(iii) Operators could mobilise rigs elsewhere to work on sublet.

(iv) Where possible, operators could declare force majeure on rig contracts. This will probably result in the rig going on to a reduced rate for a period of time, followed by the possibility that either party can cancel the contract.

(v) Operators and contractors could adopt a conciliatory approach and find an accommodation for the six-month period that could prove more beneficial for both parties in the longer term.

The sudden displacement of 34 deepwater units on to the market for a minimum period of six months is unprecedented. It comes at a time when seven units, predominantly older rigs with lesser water depth capability, are idle. In addition to this, two uncontracted newbuilds, Deepsea Stavanger and Pacific Bora, are due for completion in July and October 2010 respectively, and at least another eight sublet slots of varying durations and commencement dates are also available on deepwater rigs.

The immediate availability of 34 rigs means only those operators in the latter stages of well planning but without a rig selected will be able to take advantage of new capacity. Lead-times for deepwater wells are usually around three to six months, so unless operators are already prepared, the opening up of this mass availability window comes too late.

Those operators in the Gulf that have international deepwater acreage may be able to find work in their portfolios overseas for spare rigs, or will be able to sublet rigs to other operators with international requirements. However, given the immediacy of the enforced slots, there is no guarantee of finding work over the next six months.

The Brazilian and West African markets offer the best chance of replacement work over the next six months, but any outstanding requirements have been targeted for months by contractors offering newbuilds, and operators offering sublets. Petrobras remains the only operator globally capable of absorbing a significant number of rigs at short notice, via sublet or direct commitment. It has previously illustrated it is adept at responding to developments in the deepwater market quickly and to its own benefit.

In the end, the effect on the international market will be dictated by the individual response of those oil companies that are operating units in the Gulf. Some may take a "wait and see" attitude, and hope the moratorium is lifted at some point, whereas others have already indicated that they would like to move rigs elsewhere.

The environmental questions posed by the incident will apply in all countries where deepwater drilling takes place. Proposed Arctic drilling programmes are likely to take a hit. Here the weather window can sometimes allow the drilling of only one well a year, meaning that there is no time to drill a relief well unless a second rig is also on the location (a policy being used this year by Cairn Energy with its charters of Stena Don and Stena Forth off Greenland). Transocean's planned newbuild Arctic-class drillship is apparently already under a "near-term cloud." Licensing in other environmentally sensitive areas is also likely to suffer a temporary slowdown.

How will this wave of availability affect day rates? New ultra-deepwater rates have flattened out at around USD 445,000 per day at present, but newbuilds without work are understood to be marketed at around USD 400,000 per day. Rates could fall below these figures if operators are desperate to unload rig time and reduce some of their spread costs. Subsidies will have to be offered to compete with current availability, and this could drive market rates even lower. Therefore, perhaps the most serious aspect for contractors is that the influx of unexpected rig time could take many of the jobs being targeted by the 13 uncommitted newbuilds coming out of the yards in the second half of 2010 or in 2011, as well as exerting downward pressure on rates.

Another serious short-term impact to drilling contractors will be the loss of earnings through the implementation of force majeure. Applicable clauses will vary across all the rig contracts affected, but discussions are already underway. Cobalt International has become the first operator to invoke the clause, on its charter of Ocean Monarch.

Every contract is different in terms of the force majeure clause, so generalising as to what will happen is extremely difficult. If operators do have an opportunity to cancel, they could be able to charter rigs at lower day rates once the ban is lifted. Contractors will argue they are not responsible for the ban, and could vigorously contest any move by operators to cancel contracts.

Many other factors have also been raised by the Deepwater Horizon's sinking. Further consolidation between contractors is now likely, as less experienced deepwater contractors will be forced into the arms of larger companies in order secure a foothold in the market. Uncommitted newbuilds owned by smaller contractors or speculative builders could be snapped up by larger contractors, as less experienced contractors struggle to secure financing and operators stick with established drillers.

Due to increased regulations and state intervention in the US Gulf, it is likely that wells in the region will become more expensive and take longer to drill. This could make the US Gulf a less attractive region for oil companies unless incentives are offered. Until now, it has been seen as an easy place to work, and has been a preferred market because of this.

Whatever the findings of the investigation, this incident affects so many different areas of the deepwater drilling industry that its importance cannot be underestimated.

Further information:

For further information please contact:
Rod Hutton, Managing Editor - Rigs
rhutton@ods-petrodata.com