Oil Drilling - an Expensive Business By MERLIN FLOWER for OIL-PRICE.NET, 2009/12/16

Among all the undertakings in the world, this could rank as one of the riskiest ventures-oil drilling. Here's a sampler for what we are talking about from Mukluk Island: In 1983, twelve companies spent nearly $2 billion drilling for oil in the Beaufort Sea, North of Alaska. The exploration was based on oil stains found. But the well turned out to be a dry hole with no oil. Little wonder then that oil drilling is risky and expensive.

According to Arizona Geological Survey, Oil drilling in Arizona costs between $400,000 to $1,000,000, depending on the depth of the hole and its location. A rig capable of drilling most exploratory holes typically costs $8,000-15,000 per day. Well then, why is drilling for oil so expensive?

It is because of some of the costs involved:

• Payments for the contractors, welders, engineers, supervisors, mud loggers, geologists, scientists
• Personnel for drilling, logging, cementing, casing and other logistics
• Clearing all the dues with the landowner (territorial payments if offshore), payment of taxes, fee for attorney, permit to drill the well
• Costs for maintenance: There will be three shifts with personnel employed 24 hours a day, so amenities for the crew like motels, restaurants, transport, water and food.

Onto the process of drilling, how is the well drilled?
Well, the drilling rig bores a hole into the earth through which steel pipes are inserted. Pipes or casings like cement would then be put in between for strength as well as for separating different pressure zones- if they exist. The well is then drilled further, and more casings are added. At times, 2-3 layers of casings would be built depending on the geological composition of the zone. The rotator table then passes the drill string onto the hole. The drill string rotating by 'top drive' or 'power swivel' mechanism extends the drill bit. This extension is done with the help of the derrick (the structure holding the drill string). The drill bit then cuts the rock into pieces.

Drilling fluid, also called mud-mixture of fluids, chemicals, abrasives and solids - is then pumped down the drill string. This fluid clears the cut rock bits onto the surface. Compressed air is substituted for the fluid, at times. In turbo-drilling, a turbine is placed in the drill string. Mud flows through this turbine causing the drill bit to rotate.

We saw earlier that oil drilling is expensive, so are the drilling contractors because:

• Discovery of new oil wells is very rare
• Low yields from old/mature wells
• High risks involved in the exploration process
• Fluctuating price of oil and gas
• Increased demand for oil as well as for drilling contractors

The drilling works are done by specialized drilling companies like Transocean, Diamond Offshore Drilling, Inc and Noble. In general, these drilling companies rent or lease their drilling rigs to oil and gas companies like ExxonMobil, Royal Dutch, BP and Shell. In return, they earn revenue through day rates.

Average well cost in the UK continental shelf in 1998-Northern North Sea £ 8-12 million, West of Shetland £ 5 - 15 million, Southern North Sea £ 7 - 12 million, Irish Sea £ 2 - 3 million. To get a more clear idea of the costs involved let's take a look at some of the drilling companies:

Transocean: This is the world's second largest offshore drilling contractor. Recently the company penned a contract for a well in West Africa for $630,000 a day and its Deepwater Pathfinder is the most expensive drill ship in the world. It also signed a three year contract from a consortium of contractors at $460,000 a day in the Q3 of 2009. Most of Transocean's drilling is occurring in the Far East, the U.K., Middle East, the U.S., as well as parts of Africa and Asia. Average day rate of Transocean has moved from $211,900 in 2007 to $283,800 in the third quarter of 2009.

Diamond offshore drilling, Inc: Operating as offshore contract drilling, the company concentrates more on the Gulf of Mexico. It has about 45 rigs, 30 semi-submersibles (11 high- specification capable of working in water depths of more than 4000 ft, 19 intermediate rigs-work at depths less than 4,000 ft., 15 jack-ups- operates at water depths of up to 400 feet). The day rate was $386,000 in the fourth quarter of 2008 which increased to $360,000 per day in the first quarter of 2009. In the Q2 of 2009, the day rate was $381,000 for high specification floaters, $286,000 for intermediate semis and $146,000 for jack-ups.

Noble: It is the third largest offshore oil exploration and production company with presence in India, Mexico, Brazil, Middle East and West Africa. It has 63 drilling units (13 semi submersibles, 44 jack-ups and three submersibles). The day rate was $83,417 in 2006 and $164,000 in 2009 (by comparison average day-rates for Noble's international fleet was $60,922 in 2005 and $83,417 in 2006).

Ensco International: It has 45 jack-ups, one semi-submersible, one barge rig and three ultra deep water semi submersible rigs. Apart from the US, the company has presence in Europe, Asia Pacific and Africa and the Middle East. The day rate of the company rose to $155,000 in 2008, a dramatic increase from the rates of $114,762 in 2006 and $139,882 in 2007.

Seadrill: This Norway based company received contracts worth $4.1 billion for three deepwater rigs from Brazilian Petrobras - day rates was more than $600,000.

Though the oil prices have fallen in recent times, the companies still earn profit, in fact, their profit has surged- as seen from the above discussion-- as most of their contract run through 2010.