Oil cos hunger for more, plan major boost in E&P spend

American oilman J Paul Getty was bang on target — when he said, “The meek shall inherit the earth but not its mineral rights”. Oil exploration is not for the fainthearted. It is expensive to look for oil and success is often a matter of chance — no wonder then, that in the period of low oil prices, exploration budgets also fell.

The years of neglect are now manifested in the $78/barrel price of crude oil. The continued strength of oil prices over the past three years is now translating into higher spending on exploration.

This has resulted in a bonanza for companies that provide equipment and services to the petroleum industry. Most of the action in India is in the offshore sphere — which requires support equipment like drilling rigs and various kinds of support and supply ships.

Companies that had been dormant for over two decades are now acquiring assets even as new players try to enter the game. Total capex lined up by the leading players over the next few years adds up to over a billion dollars.

Aban Loyd, GE Shipping and Shipping Corporation (SCI) are the biggest players in the offshore space in India. Aban owns and operates oil drilling rigs, while SCI owns and operates support vessels.

GE Shipping has diverse assets, including drilling rigs, support vessels and a construction barge. Smaller players like Jindal Drilling, Garware Offshore, Dolphin Offshore and Varun Shipping are present in niche areas.

Aban Loyd is the largest operator in this business with a total of nine operating assets and one drilling rig on order. Other operators include GE Shipping and Jindal Drilling. In the recent months, GE Shipping, Mercator Lines and Jindal Drilling have all placed orders for a new drilling rig.

The contract value ranges from $171-185m, while the deliveries are scheduled from mid-’08 to late ‘09. Rig building yards around the world have their hands full and can’t offer deliveries before that. Aban Loyd, which is the largest Indian player in this space, recently acquired a 33.8% stake in a Norwegian drilling company for $446m.

Companies are also ordering support ships which include offshore supply vessels, platform supply vessels (PSV), etc. GE Shipping has placed orders for four new offshore vessels with a total value of $90m. Garware Offshore also has four similar ships on order for approximately the same amount.

This kind of feverish activity was last witnessed in the offshore business in the early ‘80s. Most of the offshore vessels operating in India today were acquired in the 1982-85 period for supporting ONGC’s operations at that time. The price of crude oil fell sharply in the early ‘80s and the offshore business witnessed a slowdown in fresh investment, globally.

For instance, the global fleet of jack-up drilling rigs is estimated at 384, of which only 49 rigs have been built in the past 20 years. Now, when companies around the world are investing in exploration and production (E&P), there is a shortage of assets and charter rates have shot up.

Aban Loyd had earlier placed its drilling rigs on three-year contracts at rates of $25-60,000/day whereas the current market rates are over $1,00,000/day.

These orders are being driven by solid demand. ONGC has seen capex on E&P shoot from Rs 4,040 crore in FY02 to Rs 11,421 crore in FY06. More than 95% of ONGC’s capex goes into E&P. With the various NELP rounds, other players are also emerging — companies like Reliance, Cairn and GSPC are expected to be the major spenders.

Last year, Reliance spent Rs 2,200 crore on E&P, one-fourth of the company’s total capex. The government of Gujarat’s flagship company GSPC, which had announced a major gas find in ‘05, will be another big spender. The company has projected an E&P spending of $262m — Rs 1,180 crore — during FY07 in the KG basin block where it made the strike.