A Surge In Activity For 1984

We have seen the offshore drilling rig market go from full employment a year ago January to its lowest utilization rate — 68% in the Gulf of Mexico and worldwide approximately 80%, in that span of time. I have to go back to the Eisenhower years to recall anything as bad as we have in the Gulf of Mexico right now.

But, of course, then, we only had 30 or 40 rigs to worry about, compared with almost 700 today.

The rig surplus problems have been compounded by the coincidence of weak oil prices and a natural gas surplus. But the real question here is "Will the business recover and when will we see a turn around ?" First and foremost, the offshore drilling business absolutely will recover, if we are to have an energy business at all. Fossil fuels are finite, producers have to replenish their reserves. There is no question that the area of greatest potential is in the oceans of the world.

We have barely scratched the reserves there. The "When" part is the tough thing. The number of new rigs to be delivered to the Gulf of Mexico this year is down to a handful, and the 35 to 40 semi-submersibles coming on stream over the next year mostly have contracts. So, in 1983, I think we can proclaim that the deluge of new construction, happily, will end.

The rate at which the recovery takes place, in great measure, depends of course upon the price of oil. There's no use hoping for a war in the Persian Gulf, since we've had one for years, and the Iraqis have shown an incredible inefficiency at doing anything with Kharg Island. I really think the oil fields in the Mid-East have an almost religious symbolic protection, and only a crazy accident of some sort could precipitate an Iranian crisis again. So, while the price of oil is, as we all know, dependent upon a recovery of the western economies, I think the shaky, but first real, attempt by OPEC to deal with the problem has been made, the problem being not one of "what is the market price", but "how can supply be limited to demand." I think that the producers worldwide are beginning to understand the need to get after it, and I think they ultimately will effect a reasonable quota basis for production. Sure, there will be a period of testing and trying here, but the chaos that would result from an unrestricted flow of oil could not last too long.

We have a striking event that I think will turn this thing around in the area hardest hit— the Gulf of Mexico—and that is the open lease sales scheduled to take place in May, August, and November of 1983. Since the first Outer Continental Shelf lease sale in 1954, through 1982, a total of 12,166 blocks, consisting of 56,361,154 acres, have been offered in the entire Gulf of Mexico. Of this total, 4,762 blocks, consisting of 23,270,127 acres, have been leased to date (25%).

There are currently 1,744 tracts and 9.4 million acres under lease.

Now, the total number of tracts and acreage to be offered in the 1983 lease sales 72, 74 and 79, comprise 23,700 tracts—twice the number offered in the last 19 years — and 130 million acres — almost 2l/> times the amount of acreage offered in the last 19 vears. In Sale 72, held in Mav 1983, (Central Gulf of Mexico, the offshore Louisiana sale), approximately 7,500 tracts, consisting of 39 million acres, were available for bid (as compared to an average of 165 tracts and 750,000 acres offered at lease sales in the past five years). Approximately 2,500 of these tracts, comprising 12 million acres, are in water depths less than 700 feet. The remaining 5,000 tracts (27 million acres) are in water depths greater than 700 feet. Sale 74, to be held in August, 1983 (Western Gulf of Mexico, offshore Texas), will have approximately 5,900 tracts, consisting of 33 million acres, available for bid. Approximately 2,400 tracts, comprising 11.5 million acres, are in water depths of 700 feet or less; the remaining 3,500 tracts (21.4 million acres), are in water depths greater than 700 feet. Sale 79, to be held in November, 1983 for the Eastern Gulf of Mexico, the area offshore Mississippi, Alabama, Florida (MAFLA), will have approximately 10,300 tracts, consisting of 58 million acres, available for bid. Approximately 5,700 tracts (32.7 million acres) are in water depths of 700 feet or less, and 4,600 tracts (25.5 million acres) are in water depths greater than 700 feet.

Obviously, much of the deep water acreage, and a good deal of the Eastern Gulf sale, can be considered "whale pasture," with little immediate drilling in the offing. However, the sales in water depths of less than 700 feet offshore Louisiana and Texas should receive a strong play. In Louisiana, we have 2,500 tracts; let's say 500 are leased, and offshore Texas, of the 5,900 tracts, let's say 300 are leased, and of the 5,700 tracts in the MAFLA area, 200 are leased. We could have, by year end, a thousand new leases in the Gulf of Mexico in drillable water depth. This has never happened before, and how the industry will handle it is a matter of speculation, but there are encouraging signs.

Leases should come at reasonable prices, with weak oil prices and a natural gas surplus looking at us. Wells could be drilled much less expensively with a large, idle fleet of rigs as well as cheaper boat, mud, helicopter, and other support costs. The present gas surplus and weak oil price structure shouldn't inhibit drilling, since first production would be three to four years away, when the price structure should be on the way up. The geophysical and subsurface coverage is comprehensive, and there will be a lot of players in these sales. The acreage we are talking about in the Eastern Gulf is certainly frontier, but there is a new geological romance with MAFLA again. Offshore Louisiana and Texas, we've drilled over 25,000 wells, and we know so much more about it than a typical frontier area, where the number of tracts involved is meaningless, like the Baltimore Canyon and Georges Bank areas of the U.S.

East Coast, where a handful of wells can condemn the entire area. Having a tremendous number of acres is nowhere near as significant elsewhere than it is in a hydrocarbon generating province like offshore Louisiana and Texas.

Many of the major companies have revised their corporate strategies by turning away from foreign exploration and concentrating their efforts in domestic waters. It's going to be some sale. Of course, the drilling will not take place immediately. There is a minimum of 90 days before you can get your first permit, and budgetary restraints may hold things up. But, I would hope for a surge in drilling activity by the first quarter of 1984. We stand a good chance of moving the utilization rate substantially in the right direction, albeit at depressed rates.

The most difficult problem isn't putting the rigs back to work, because I think we are going to see that occur, perhaps in a dramatic fashion. It will be to restore a shattered rate structure.

In restructuring the day rates, utilization would have to get wel above 90 7< before a strong improvement in rate structure comes about. But then, to me, everything is pointing that way.

A year from now, we could well be in the middle of a strong economic recovery in the West, with energy consumption up. Oil prices should have stabilized by then, and with the entire Gulf of Mexico to explore, and new rig construction at a standstill, I think better times are approaching for the offshore drilling industry.

During the "great boom," I was the biggest bear in the group.

Sometimes, I thought, the only bear. In this "bust" cycle, I'm reverting to my traditional stance of not being in step with the rest of the "smart guys," and am becoming a bull. I think that our industry will come out of this thing in great shape.