Outlook for the UKCS in 2007

Rig Market

The theme of increasing costs also applied to E&A activity in 2006 and expenditure rose to about £600 million, with high rig rates being a key factor. The average cost per well continued to rise to £10 million, translating into a finding cost of $3 per boe, somewhat higher than in recent years. If predicted drilling is realised in 2007-8, spending on exploration and appraisal of new volumes is likely to increase further. However, high charter rates may temper the demand for rigs. As illustrated in Figure 38, the average cost of contracting a semi-submersible drilling rig in the UKCS has risen nearly eightfold and tripled for a jack-up in the last three years.

Figure 38: |UKCS Rig Day Rates 2003-2007

Usage rates for both semi-submersibles and jack-ups have been at 100% since October 2006, a situation likely to continue into the medium-term. Indeed, high charter rates are likely to pose less of a threat to drilling aspirations than availability of rigs.

Figure 39: UKCS Rig Utilisation 2003-2007

Analysis of the rig market carried out at the beginning of 2007 showed that compared to drilling aspirations, there was a shortfall equivalent to 4.7 rig years in 2007 and 8.2 rig years in 2008. At the time of writing, monthly rig slots for the duration of 2008 were already three quarters full and there are signs that rigs may be attracted away from UK waters, which could worsen the situation. In addition, seismic vessel availability and processing of survey results are also emerging as significant constraints on activity.

Given the global tightness of the rig market, it is imperative that operators and rig contractors work together to use available resources as efficiently as possible; industry participants may well have to compromise on their natural desire to drill at particular times of the year and be more flexible in reacting to the availability of rigs at short notice. There are also differing regulatory requirements when moving rigs across international boundaries that prevent the most effective use of available capacity.