By Dan Molinski
Offshore drillers are bracing for a wave of contract
cancellations as energy companies try to cut their costs to cope
with low oil prices.
Big oil and gas companies lease drilling rigs and crews from
oil-field-services companies, often for years at a time and at a
cost of up to $400,000 a day. The industry has long considered
these leases basically unbreakable.
But now several drilling companies have reported that clients
including BP PLC and some government-owned energy companies are
trying to get out of leasing deals--and analysts say a flood may
follow.
"We expect additional contract cancellations," said Angie
Sedita, an analyst at the investment bank UBS. "Offshore rigs could
be offered for free and most oil companies would still not want to
drill."
Analysts are likely to be pressing offshore specialists on the
state of their contracts as they report first-quarter earnings,
beginning with Hercules Offshore Inc. on Wednesday.
In the past, energy companies' worries about their ability to
hire rigs in the future kept them from backing out of leases,
analysts said. But that has changed now that global oil prices have
dropped from over $100 a barrel last spring to about $65 a
barrel.
BP said Tuesday that it was paying $375 million to cancel
contracts for two deep-water rigs in the Gulf of Mexico. The
company, which previously announced it was terminating deals with
Ensco PLC and Seadrill Partners LLC, no longer needs the rigs after
cutting spending "in response to the new, lower oil price
environment," spokesman Brett Clanton said. Ensco has said that BP
was required to pay a lump sum of $160 million to end its lease a
year early; Seadrill didn't respond to requests for comment
regarding any early termination fee.
Earlier this year, Hercules, a Houston-based driller, said Saudi
Aramco terminated its drilling contract for a shallow water
rig.
Diamond Offshore Drilling Inc., also based in Houston, has been
preparing for the termination of six of its rig contracts--four
with Mexico's Petróleos Mexicanos, one with Brazil's Petróleo
Brasileiro SA and one with U.K.-based Dana Petroleum.
In many cases, drilling companies will try to accommodate their
cost-cutting customers rather than lose a lease, said Darren
Daugherty, director of investor relations at Diamond Offshore.
"We work with customers to try to find mutually agreeable
outcomes for both shareholders and customers," he said.
Jackson Sandeen, senior analyst for Wood Mackenzie, said the
cancellations were surprising. "This is something new," he said.
"It's abnormal, the idea of cutting these contracts."
Some big energy companies remain committed to offshore drilling
deals; Royal Dutch Shell PLC is going ahead with billion-dollar
efforts to drill for oil in the Arctic. Hercules recently announced
a 5-year contract with Italy's Eni SpA to lease one of its
so-called jack-up rigs--which stand on the ocean floor--in West
Africa for at least $75,000 a day.
Drillers may offer cheaper day rates on rigs if the oil
companies agree to add a few years to a contract, said Jim
Thompson, a lawyer in Houston with Vinson & Elkins who focuses
on energy-related disputes. Such deals are sometimes called "blend
and extend" agreements.
But if oil companies simply want walk away from offshore rig
contracts with lower oil prices as their excuse, Mr. Thompson said
it won't be easy.
"If the gloves come off, there are very few outs for" oil
companies, he said, adding that government-owned firms sometimes
have more flexible contracts.
Either way, drilling companies are generally reluctant to sue
their main clients.
They "have to be careful about winning the battle and losing the
war," said Bill Herbert, an analyst at Simmons & Co., adding
that a fight could fundamentally impair customer relationships.
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