At $500 Million a Pop, Stacking Drillships is a Gamble That Has No Precedent

indeed…the electrical systems on these ships are not designed at all to sit especially in hot and humid conditions like Trinidad…I wonder if TO and these other owners are even keeping DH running in the switchgear and motor rooms? If these are sitting without DH running, just the thought of lighting up one of these rigs after years of sitting cold is frightening. You’d have to send a team of a dozen electricians aboard with a month do dry and megger everything before closing a single breaker

[B]At $500 Million a Pop, Stacking Drillships is a Gamble That Has No Precedent[/B]

September 20, 2016 by Bloomberg

Deepwater Pathfinder moored off Trinidad and Tobago. Photo credit: Boh/CC

By David Wethe

(Bloomberg) — In a far corner of the Caribbean Sea, one of those idyllic spots touched most days by little more than a fisherman chasing blue marlin, billions of dollars worth of the world’s finest oil equipment bobs quietly in the water.

They are high-tech, deepwater drillships — big, hulking things with giant rigs that tower high above the deck. They’re packed tight in a cluster, nine of them in all. The engines are off. The 20-ton anchors are down. The crews are gone. For months now, they’ve been parked here, 12 miles off the coast of Trinidad & Tobago, waiting for the global oil market to recover.

The ships are owned by a company called Transocean Ltd., the biggest offshore-rig operator in the world. And while the decision to idle a chunk of its fleet would seem logical enough given the collapse in oil drilling activity, Transocean is in truth taking an enormous, and unprecedented, risk. No one, it turns out, had ever shut off these ships before. In the two decades since the newest models hit the market, there never had really been a need to. And no one can tell you, with any certainty or precision, what will happen when they flip the switch back on.

It’s a gamble that Transocean, and a couple smaller rig operators, felt compelled to take after having shelled out millions of dollars to keep the motors running on ships not in use. That technique is called warm-stacking. Parked in a safe harbor and manned by a skeleton crew, it typically costs about $40,000 a day. Cold-stacking — when the engines are cut — costs as little as $15,000 a day. Huge savings, yes, but the angst runs high.

“These drillships were not designed to sit idle,” said Willard Duffey Jr., an electrician who spent two decades with Transocean. The Deepwater Pathfinder, a ship he had served on for four years, was among the first to be parked off the Trinidad coast. The ship made the voyage there from the Gulf of Mexico about a year ago. Duffey was one of the last men aboard before the engines were turned off. He fretted constantly — “did I do everything I could?” — as he flew back home to Ore City, Texas. “To get the Pathfinder back up would be very difficult to guess actually,” he said.

Once famously labeled the “new Ferraris” of the oil world, these are no ordinary ships. Carrying a price tag of about $500 million a piece, they are loaded bow to stern with sophisticated, and very heavy, gadgetry.

Below the water line sit a half-dozen Rolls-Royce thrusters, coordinated by satellite to push against each other and keep the rig hovering on top of wells lying as much as two miles underwater. Up on deck, there’s a robot that can be launched to work a screwdriver or a wrench under water pressures on the seabed that no human could survive. And the 220-foot-tall, dual-activity oil-drilling derrick is capable of simultaneously lifting and lowering gear down to the seafloor, including a diamond-studded drill bit, a five-story-tall blowout preventer and a heavy-drill pipe. The derrick can handle as much as 5 million pounds of gear — equal to the weight of some 20 adult blue whales — going up and down at one time.

All of these fancy elements, though, are what make turning the ships back on so daunting. Chip Keener, whose rig-storage consulting firm advises Transocean, compares it to what would happen if you left a high-tech new car parked in the garage for months. The battery would be dead, sure, but then there’d also be a slew of pre-sets to reprogram. On a drillship, there are thousands and thousands of pre-sets. And unlike your car, those on a ship are essential to its proper functioning. “It’s a big deal,” says Keener.

For now, cold-stacking has been a huge success for Transocean, a long-time Texas powerhouse that’s based today in Switzerland. (It owned the Deepwater Horizon offshore rig that BP Plc was operating in the 2010 Gulf of Mexico disaster.) The company reported a profit of $77 million in the second quarter, surprising investors who had been bracing for a loss. Within minutes the next morning, its stock price had jumped 8.5 percent in New York trading.

“I don’t think a simple congrats on this quarter’s cost beat is really sufficient,” one stunned analyst, Scott Gruber at Citigroup Inc., told Transocean executives on a conference call. “A big kudos to all of you.”

Still, there are any number of deepwater rig operators unwilling to turn the engines off: Noble Corp., Rowan Cos. and Pacific Drilling, to name a few. They’re paying anywhere from $30,000 to $50,000 a day to store their out-of-work ships. Chris Beckett, the CEO of Pacific Drilling, said the unknowns of cold-stacking are just too great and the cost to keep the ships running too manageable — about $10 million a year — to turn them off. He likes the peace of mind that comes with his approach. “We don’t worry about how you start them again,” Beckett said in an interview at the company’s Houston headquarters.

The cold-stack versus warm-stack dilemma doesn’t figure to go away anytime soon.

Nearly half of the world’s available floating rigs are out of work today, and most observers expect that number will climb further. Not only are the drillship operators’ customers — the likes of ConocoPhillips and Total SA — slashing spending in high-cost offshore areas and canceling work contracts early, but new rigs that were ordered in recent years keep rolling out of shipyards. Bloomberg Intelligence estimates as much as $56 billion worth of offshore rigs, capable of drilling in everything from shallow water to oceans more than two miles deep, are still under construction.

It’s a far different mood from a couple years ago, when crude was hovering around $100 a barrel and just about every single deepwater rig on the planet was in use. Transocean’s Pathfinder was in many ways the symbol of those go-go days. In mid-2014, just as oil prices were peaking, Eni SpA agreed to pay Transocean $681,000 a day to lease the ship. It was one of the richest drilling contracts ever, an amount that’s about triple the rate a deal signed today would fetch. By the end of that year, with oil in freefall, Eni canceled the contract four months before it was due to expire.

Things are quiet on the Pathfinder these days. The water is calm off Trinidad, one of the top global destinations for drillship storage. A handful of seamen recruited locally make the rounds, in part to ward off criminal elements. They’re joined every once in a while by Transocean mechanics sent in to monitor the ships. The company’s chief operating officer, John Stobart, recently dropped in to check them out himself. CEO Jeremy Thigpen said Stobart came away encouraged.

“He was really impressed with the preservation of all the critical components,” Thigpen said at an energy conference in New York this month. “His belief is, ‘Listen, we’re going to be able to reactivate these rigs in a timely and low-cost manner.’”

Stobart’s going to have to wait for his chance. Oil, after having briefly rebounded above $50 in June, is slumping again. And Transocean seems prepared to be in Trinidad for a while. The contract to lease out seabed space that the company’s negotiating, island officials say, could extend through October of 2020.

now with this said, all the drillships TO owns that were built in the late 90’s and ear;y 00’s have already paid for themselves many times over and with so many brandnew drillships available to replace them, I do not see any ever going back to work if they end up sitting cold stacked for five years. By that point they will not be worth the cost to resurrect even if oil goes to more than $90/bbl again in 2020. Far easier for TO to just say goodbye and to purchase ships from owners who are in ever worse financial condition than they are.

btw, we are only weeks away from the second anniversary of the beginning of the second great oil crash…it has been a really sucky two years and I don’t think we are any closer to the end than we are from the beginning.

Unfortunately you are correct C-Captain. The cost even after a year of some of these sitting is staggering. This is all economics, outlook, contract possibilities, day rates, return on investment, cost of reactivation, Warm stack costs versus cold stack. Will the unit return to service. Warm stacking a rig over a year can cost 10 million per year or more depending on location and fuel consumption. For cash strapped contractors this expense can add up quickly. To cold stack the same unit could cost about the same for the first year if you consider the preservation expense, custom fees for departing the country they were working in and fuel expenses to cold stack location. The savings comes in the following years. Year two is significant and each year after that is almost no expense. But to reactivate a unit that has been cold stacked for just one year could exceed 100 million for a unit that is worth less than that in the current market. Best day rate one could expect right now would be around 200-250k daily with oil companies not wanting to absorb any mobilization fees it is important to have units staged in different regions ready for quick mobilization. Even so look at a reactivation of a 1 year cold stacked unit for 100 million. The maximum this unit could make if it got a 1-2 year contract is 91,000,000 to 182,000,000. Take away the cost to run the unit bare bones 150k per day for a semi. So now your net is 36 to 72 million over 1 or 2 years. Now subtract the 100 million it took to get the unit back in service and you are looking at a 64 to 28 million dollar loss over 1 or 2 years. So bare minimum you would need a 3 year contract at the highest day rate of 250k just to make a little money and generate cash flow. Very difficult times right now.

I am currently warm stacking my unit now and it is an emotional roller coaster ride. I think we are at a turning point, but I believe next year will be the worst. We must survive right now. If you can stay working do it. The survivors will be in a better position to move back up once we get this all behind us. I think it is important that we never forget these times and start conducting business in a more professional, responsible way once things do pick up. I look at all the decisions that have led us to this point and it didn’t have to be this way. Best rig in the fleet reduced to a liability for the company. It had nothing to do with the unit…It is all about the people assigned to it. Best team I have ever had the pleasure to work with reduced to a minimum manned money hole!!!

Yes, external DH are installed and kept running by the cold stack team who also go out daily to make rounds and other checks. Still, starting one back up from cold would be frightening.

In the last deep downturn (Early 1990’s) I was Manager for three rigs in lay-up. (Two in Cold and one in “Semi-hot” Layup)
With the upturn in the Mid-1990’s all three were sold, refurbished at very high cost and put back in service.
All three were still in operation until this downturn, but I don’t think any of them are still operational, or even exists now.

These were rigs built in the Mid-1970’s and FAR less sophisticated than the DP Drill ships in question here, but the basic problems were the same, with the additional problem of all the Electronic equipment.

How to minimize deterioration, especially of the electric systems? DH was the obvious solution, but it caused brittleness of cable insulation after long layup with too low humidity. It is a balancing act to get it right in compartment with different type of equipment.

Even if all electric motors and pumps were manually turned over regularly, that is not the same as running them.
The larger machinery that could not be turned manually was a problem, especially equipment on exposed deck that could not be DHed. Even the best plans, check lists and reporting system are only as good as the people left behind to do the jobs as specified.

Re-activating a rig that had been cold stacked for 5 years was a VERY difficult and costly task. I remember especially trying to get a “frozen” Elmaco Break to function again took some innovative actions from the Drill crew.

So good luck Transocean. Trying to safe money now to be able to show quarterly profit and pay dividend at the end of the year, MAY be costlier than to keep a skeleton crew on board to run the equipment on a regular basis.