The rigs, which generally operate in 400 feet of water or less, are leaving for more favorable contracts in the Middle East, West Africa and Latin America, where rig supplies are tight and demand is high.
The decision to relocate has been made easier by a decline in U.S. natural gas prices, smaller returns from wells in the shallow waters of the Continental Shelf, and a huge rise in rig insurance costs following the 2005 hurricanes, analysts and rig operators said.
Even with the migration, however, analysts said there are still too many jack-up rigs in the Gulf, and more may need to leave before daily rental rates move back in line with other regions. Until then, rates could keep falling and operators with a big presence in the shallow Gulf could remain under pressure, they said.
Staying away
"Frankly, a lot of the customers just haven't returned to the shelf," said Ian MacPherson, industry analyst with Simmons & Company International in Houston.
The situation has created some anxiety for rig operators who believed the jack-up market in the Gulf would have come back by now.
"Most of the oddsmakers two months ago would have said where the rig count was going to be today was the magic number. And that obviously hasn't been the number," said Dan Rabun, CEO of Ensco International, a Dallas-based jack-up operator, in a conference call in late February. Ensco, which over the last three years has cut its jack-up rig count in the Gulf from 22 to 14, still views the Gulf as an important market. But the company said it will "continue evaluating international opportunities" for jack-ups in its Gulf fleet.
Rental rates down or flat
Over the past five years, roughly 50 jack-ups have left the region — many of which are technologically advanced rigs that can drill in more than 300 feet of water, he said. And rig operators have announced they will remove at least nine jack-ups from the Gulf in the first half of 2007.
Even so, some daily rental rates — a closely watched gauge of demand — have still been down or flat, making the shallow waters of the Gulf one of the only offshore exploration sites in the world where that is true.
MacPherson said the day rate for a middle-of-the-road jack-up in the Gulf has slipped by about 30 percent since last year. It now stands at around $70,000 to $90,000 a day, he said.
While that is high by historical standards, it is lower than many rates being offered in international regions. And customers in places like the Middle East are agreeing to lock in higher rates in multiyear contracts. The Gulf is better known for short-term contracts that create more uncertainty for drillers.
Whether rates in the Gulf will rebound will depend in part on customers' willingness to contract rigs before another hurricane season, which begins in June.
Hurricanes Katrina and Rita caused major damage to drilling and production equipment and facilities throughout the Gulf Coast during 2005. It also reduced supplies of available drilling equipment, which in turn led to a big increase in drilling day rates in late 2005 through mid-2006. But rates began to decline last year before the hurricane season, just as they have this year.
The insurance factor
Ensco said in its 2006 annual report that the cost of insuring its rig fleet last year "was almost five times the pre-storm level even after we assumed more of the risk of certain losses." The company's competitors tell similar stories.
The many challenges of operating in the Gulf's shallow waters have led many major oil companies to leave in search of larger fields in the Gulf's deep waters or in international locales. But smaller producers and foreign firms are seeing the transition as an opportunity to enter or expand in the region, MacPherson said.
Take W&T Offshore, a fast-growing oil and gas exploration company in Houston. The firm is snapping up acreage in the Gulf's shelf and expects to grow its oil and gas reserves this year, largely from contributions in the region.
"I love the shelf," said Tracy Krohn, CEO of W&T Offshore. "It's kind of music to my ears when I hear competitors are leaving."
Last month, Houston-based Hercules Offshore announced it would buy fellow offshore driller Todco for $2.3 billion in a deal making Hercules the largest jack-up operator in the Gulf, with 33 rigs.
John Rynd, president of Hercules, said the deal will give the firm a stronger base to go after business in international markets, where it hopes to place more rigs in coming years. Despite current headwinds, he also remains bullish about growth prospects in the shallow Gulf.
"It's been called the Dead Sea on more than one occasion," he said. "We don't believe it's the Dead Sea."
