Domestic drilling industry to approach operators with cost sharing plea

Oil drilling companies say rules to prevent the spread of the coronavirus are increasing their costs.
With costs spiralling across the petroleum drilling industry — both globally and locally — domestic operators, via the International Association of Drilling Contractors (IADC), will be approaching contractors with a request to share the mounting burden.

“Apart from costs being incurred due to the SOPs (standard operating procedures) we have to follow due to the pandemic, drilling companies also have to pay their crew as this period is treated as ‘crew on board’. Due to this, the cost has escalated for the industry by more than 50 per cent (of the total cost usually incurred) in the last three months,” a senior executive with Greatship (India) told Business Standard.

A mandatory quarantine period of eight-nine days, arrangement of special transport, flight tickets as well as stay at hotels till the time testing for coronavirus (Covid-19) is done, among others, are some of the new cost parameters drilling companies have to undertake owing to the SOPs laid down by the government.

Jindal Drilling and Industries, Aban Offshore and Dolphin Offshore Enterprises (India) are some of the drilling companies in India.

The crew on drilling rigs follows a 28-day cycle, which means, companies have to arrange for change of crew every 28 days.

Currently, domestic drilling companies are in dire straits. However,  they have managed to fund the escalated costs via internal accruals, said industry officials. Going ahead, companies are hopeful of some negotiation with the contractors.

“Through IADC, the domestic drilling industry will be asking contractors to bear the additional cost partially, or else it is going to be difficult (for the industry) to sustain for a longer period,” said the Greatship executive.

Greatship (India) is a 100 per cent-owned subsidiary of GE Shipping. The wholly-owned arm owns and operates all the Indian-flagged vessels and rigs within the group. It owns four modern jack-up rigs.

Globally, the scenario with regard to crew change is worse, mainly in West Asia, the largest region in the world for offshore petroleum drilling.

“Companies in the Middle East (West Asia) largely hire expat crew. With flights not functioning across major routes, it is becoming increasingly difficult for companies in the region to carry out drilling activity,” said an executive with Jindal Drilling and Industries.

Seadrill, EnscoRowan, Nobel Corporation and Diamond offshore, among others, are some of the global drilling companies.

“These companies largely hire Indian or Filipino crew on rigs and it has been a major challenge now,” he added.

In the petroleum drilling industry, companies owning drilling rigs are themselves engaged in drilling activity. There are hardly any examples across the globe where a drilling company hires rigs from a third party for drilling activity. Due to this, drilling business is asset heavy, which makes business scenario even tougher when crude oil prices are volatile.

“An asset light model for companies in this business is difficult as it does not make sense from the long-term perspective. Also, in the current situation, if companies look to go asset light, it is not easy as there is no value to the asset. So, a desired price cannot be fetched,” said an executive with Aban Offshore, on condition of anonymity.

Aban Offshore is the country’s largest offshore drilling services provider to oil companies, mainly to state-owned ONGC.

The industry has been facing hard times since 2014 when oil prices crashed due to geopolitical issues. Companies did manage to tide over the crisis and were doing considerably well last year as even scrapping of old rigs helped stabilise day rates. However, the ongoing pandemic has completely changed business dynamics for the industry not just in India but across globe, leaving companies clueless towards revenue visibility in the coming months.

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