Credit Crunch May Block 20% of Deep Oil Rigs, Slow Petrobras

By David Wethe

Oct. 28 (Bloomberg) -- As many as 20 of the 100 deepwater oil rigs on order worldwide may be delayed or canceled as loan availability erodes, possibly slowing developments including the biggest petroleum discovery in the Americas in three decades.

About half of the 20 rigs in question are rented for when they're completed in two to three years -- no longer enough to ensure financing for units that can cost $800 million to build, said Brian Uhlmer, an analyst at Pritchard Capital Partners in Houston. The drillers building those rigs are mostly fledgling contractors and may lack enough cash to satisfy lenders amid a global credit crunch, he said.

Norway's Sevan Marine ASA has lost 70 percent of its value this month amid concern it won't get financing for two drilling units. Houston-based Atwood Oceanics Inc. said Oct. 16 that it won't exercise an option to build a deepwater rig at Jurong Shipyard Pte. Ltd. in Singapore. New rigs were being ordered to ease a shortage of deepwater gear needed to exploit offshore prospects like Brazil's Tupi, announced in November by Petroleo Brasileiro SA, or Petrobras.

``Petrobras would probably be the dominant oil and gas company that gets hit by this,'' Uhlmer said.

Jose Sergio Gabrielli, chief executive officer at state- controlled Petrobras, said the Rio de Janeiro-based company may need to help find financing for some of its suppliers. ``We are concerned about the supply chain of products for Petrobras,'' Gabrielli told reporters at a conference in Houston last week.

`Supply Chain' Vital

Chief Financial Officer Almir Barbassa, speaking on the sidelines of the same conference, added that some suppliers are affected by the loss of trust by lenders.

``This causes much more problem to our supply chain, as Mr. Gabrielli said, than to ourself directly, but we cannot survive without our supply chain,'' Barbassa said. ``We feel that they are going to find some way to finance themselves.''

Executives at Noble Corp., the third-largest U.S. offshore oil driller, were quizzed about financing availability in the industry on their earnings conference call Oct. 22. ``A number of companies'' recently awarded letters of intent, known as LOIs, by Petrobras may have difficulty getting rigs financed, CEO David Williams told investors and analysts on the call.

``While we don't believe it's likely that we or other contractors would be interested in stepping into those agreements due to the low day rates contained within the LOIs, it has opened up some dialogue with Petrobras for additional opportunities for Noble,'' Williams said.

Brazilian Rigs

Petrobras plans to add 63 deepwater rigs by 2018 to develop so-called pre-salt fields in the region that includes Tupi, the company said Aug. 13. Gabrielli said in a May interview that the company is leasing most of the world's rigs that can drill in more than 3,000 meters (9,800 feet) of water.

Tupi and four to seven similar prospects off Brazil's coast may hold 50 billion barrels of oil and may cost $240 billion to develop, according to Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. Even after crude prices tumbled more than $80 a barrel from the all-time high set in July, that much oil would be worth more than $3 trillion.

Noble, Transocean Inc. and other large U.S. drillers may be poised to take advantage of the credit crunch by using their large cash balances and access to credit to buy sought-after rigs at a discount, said Adam Miller, a debt analyst at Fitch Ratings Inc. in Chicago.

Those companies would likely go after rigs that were being built on speculation because they wouldn't be tied to day rates signed in the past that are lower than today's rates, Miller said. Anadarko Petroleum Corp., Exxon Mobil Corp. and other producers have leased advanced deepwater rigs at $600,000 or more a day because of a shortage of such units.

Progress Payments

Drilling companies typically must make so-called progress payments to the shipyards building their rigs at certain project phases. Some drillers rely on debt to make those payments and pay back the money when the rigs enter service and start generating income.

National Oilwell Varco Inc., the world's largest maker of oilfield equipment, said last week that one of its customers was past due on progress payments. Chief Financial Officer Clay Williams declined to identify the customer or what equipment was ordered. He said the project represents about 1.5 percent of National Oilwell Varco's $11.8 billion order backlog.

``In view of that, we've stopped work on their project and we're working with them to try to get paid and get back on track,'' Williams said in a telephone interview. ``Most of the credit impact we're seeing so far isn't on our existing book of business, but rather on the prospects out there.''

Drilling Seen Slowing

National Oilwell Varco limits its risk by requiring down payments of at least 10 percent on the derricks and other major pieces of equipment it builds for customers, according to Marshall Adkins, an analyst at Raymond James & Associates Inc. in Houston.

The number of oil and gas rigs active around the world climbed in September to 3,557, the highest since 1985, according to a count by Baker Hughes Inc. U.S. rig counts will drop by about 400 as producers cut spending amid declining natural-gas prices and tightening credit, Barclays Capital Inc. analyst James Crandell said this month in a note to clients.

The shortage of deepwater rigs brought inexperienced contractors to the industry in the past several years, and those are the drillers now in jeopardy of failing to deliver on new rigs, said Jeffrey Chastain, vice president of investor relations at Pride International Inc. Houston-based Pride, which has lost 71 percent of its market value since the end of June, has four offshore rigs on order.

``Being new, they don't have the history of operating rigs,'' Chastain said in a telephone interview. ``They're challenged by having to set up an infrastructure that includes hiring qualified personnel to run the rigs once they're delivered.''

To contact the reporter on this story: David Wethe in Houston at dwethe@bloomberg.net.