Oil Supply To Tighten After Research Reveals 5 Year Wait For Drilling Rigs

A five-year wait for drilling rigs will keep oil supply tight… and the Chinese have stolen a march on the US

The Chinese have made a very clever move to secure future oil supplies… and US presidential candidate John McCain should take note.

China Oilfield Services, which is the listed entity of the China National Offshore Oil Corporation (CNOOC), is to buy Norway's Awilco Offshore for around $2.49bn. This has brought the number of oil rigs effectively owned by the Chinese government to 22 from 15. The Chinese government owns 70% of CNOOC, so it has a controlling stake in the company. This was a very savvy move.

Easy oil is gone for good. There is a global shortage of rigs… a shortage which looks set to constrain the discovery of new reserves for years to come.

New oil discoveries are going to be difficult to access and will require technical feats that will push engineers to the limit. That’s why it’s good to have the technology on tap. The Chinese understand this – and they have made the right move to secure future supplies.

There have been some notable successes in deep-water exploration in West Africa and Brazil over the past year – and demand for deep-water rigs looks set to continue as oil majors increasingly look offshore for new reserves.

When the oil price slumped in the 1980s, construction of highly-specialised rigs was prohibitively expensive. As the oil price has risen and worries over future supplies have increased, the financials have improved and many players have re-entered the market.

However, rig building is capital intensive – and it takes a very long time to complete construction. This has led to a massive global shortage.

Hire rates have soared

A good indicator of the supply and demand for such rigs can be seen in daily hire rates. In 2003 it cost $40,000 a day to hire a standard specification deep-water rig. This has now risen to around $500,000, per day today.

Construction costs have also increased. The largest rig builders can be found in Asia – and they have raised prices since last year by as much as $100m a vessel to around $500m.

According to research at Oxford University, of the 21 drill ships that can drill in water up to 12,500 feet deep that are currently under construction, all but three have already been contracted for an average of about five years to drill on existing leases.

George Bush and John McCain reckon they can solve the thorny problem of high oil prices by lifting a moratorium of US offshore drilling… nice idea, but it won’t work. Where are the rigs going to come from? They are in desperately short supply… The world’s largest drilling company is called Transocean. Chief Executive Robert L. Long believes that the deepwater market will continue to be constrained until at least 2012.

The Chinese move makes sense. Undoubtedly these rigs are booked up for some considerable time to come, but once these contracts have expired, the Chinese will be able to use the rigs for their own strategic advantage.

In the US, there has been limited practical action such as this – just lots of rhetoric. John McCain wants more offshore drilling, but has not said where the rigs will come from. George Bush wants oil futures trading to be curbed, but he is just trying to find a scapegoat (commodities such as iron ore, which are not traded on an exchange, have also seen massive price rises – and no “speculator” can affect the price).

It is going to get harder and harder for oil companies to find new reserves – and it’s going to get much more expensive. By making this purchase, the Chinese have stolen a march on the Americans. Pragmatism rules over rhetoric every day.

My Smart Commodities UK readers are well placed to profit from this critical situation. If you’d like details on the stocks I recommend to profit from the global oil shortage, find out about a subscription here

Garry White
Editor
Smart Commodities UK

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Oil Supply To Tighten After Research Reveals 5 Year Wait For Drilling Rigs

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Oil Supply To Tighten After Research Reveals 5 Year Wait For Drilling Rigs