Cancellations hit oil rig builders as global downturn bites

Singapore's once-roaring oil rig industry has been hit by contract cancellations due to weaker energy demand and as plummeting crude prices dampen exploration.

Until the global financial crisis worsened last year, oil rig builders had been riding on soaring oil prices to reap a multi-billion-dollar bonanza.

Orders piled up as drillers expanded into deeper offshore waters to search for more oil and gas to meet surging demand from dynamic economies.

But exploration and production activities have slowed as the worsening economic gloom hurt energy demand, forcing drillers to go slow on new orders and to cancel or renegotiate existing contracts.

"We are forecasting a slowdown in the new rig-building orders in 2009 followed by a recovery in 2010 as sector fundamentals reassert themselves," Swiss banking giant Credit Suisse said in a market analysis.

Keppel Corp, the world's biggest maker of offshore oil rigs, said that two contracts which had been under review had been cancelled, while a third deal had been renegotiated.

The company said it had agreed with Bermuda-based oil rigs operator Scorpion Offshore to terminate a 405 million US dollar oil rig contract on mutually acceptable terms.

Keppel and Lewek Shipping, a subsidiary of Singapore-listed Ezra Holdings, are also currently working towards an amicable, mutual termination of a contract.

However, Keppel said it had agreed with Seadrill Jack-ups Ltd to continue building two jack-up rigs worth 420 million dollars on revised terms.

Excluding the Scorpion and Lewek contracts, Keppel said it still has an order book of about 10.8 billion Singapore dollars (7.25 billion US) extending through to 2012.

Another Singapore-based rig maker, Sembcorp Marine, said that its subsidiary, PPL Shipyard, and Seadrill Jack-ups Ltd had agreed to revised terms on two jack-up rigs ordered in June 2008.

The contract value of the two oil rigs remains at 430 million US dollars, Sembcorp Marine has said.

A jack-up rig -- similar to a floating barge, with legs that can be lowered to the seabed -- is suitable for shallower waters and can take about 26-28 months to build.

Semi-submersibles are designed for exploration at water depths of up to 10,000 feet (3,000 metres) and can take 28-30 months to build.

Macquarie Research said some oil drillers are also deferring fresh orders in anticipation that prices of oil rigs will fall further due to a sharp drop in raw materials used in making the gigantic structures.

"Steel can account for as much as 25-30 percent of the total cost of a deepwater project. Therefore drillers will hold out until prices drop, which may take six to 10 months," it said.

Macquarie said oil's frenzied rise to 147 dollars a barrel attracted investments of "hot money" into the sector.

But as oil prices fell at an even faster rate, these investors bailed out quickly, resulting in projects being cancelled or deferred, it added.

Even if oil prices, currently at around 35 dollars a barrel, recover to between 70 and 90 dollars over the next three to five years, any increase in exploration and production budgets will be slow and spread out, it said.

Order cancellations and postponements have spread into the ship-building sector.

China-linked shipping firm Cosco Corp has announced a series of ship-building cancellations and deferments and has warned shareholders to expect lower profits.

Macquarie said the two cancellations and 10 deferments are equivalent to the sum total of all ship-building orders won by COSCO in 2008.

The "outlook for the shipbuilding sector continues to deteriorate with continued build in customer cancellation, further lowering earnings and cash flows visibility," Macquarie said.

"Demand for new-build vessels is unlikely to turn around in the near term, as global freight rates are sharply lower on slowing demand."