Newfoundland 'somewhat isolated' from plunge in oil rig demand

A worldwide slump in the market for drill rigs has largely bypassed Newfoundland and Labrador's offshore, mostly because of the growing interest in deepwater finds such as the Flemish Pass Basin.

In fact, Terry Childs of Rigzone, a leading online resource for news and information in the oil and gas industry, says he would not be surprised if the number of rigs off Canada's eastern coast doubles in the next three to five years.

"That's assuming that exploration will result in further discoveries and field development," Childs told delegates at the 2015 Newfoundland and Labrador Oil and Gas Industries Association (NOIA) conference in St. John's on Wednesday.

There are currently three drill rigs on contract in the offshore, and a fourth, the newly built West Mira, is expected to arrive later this year or early 2016.

It's a relatively small fleet when compared to the thousands of rigs that are operable worldwide, but unlike elsewhere, Childs doesn't expect to see a decline anytime soon.

In fact, oil exploration is at a fever pitch in many regards, with oil companies banking on the prediction that energy demand will increase by 35 per cent by 2040.

A trio of major industry players submitted the highest-ever bid — $559 million for a 266,139-hectare parcel in the Flemish Pass — for oil exploration rights in the Newfoundland offshore last year.

And Statoil is continuing an aggressive exploration program in the Bay du Nord field, which could begin producing by as early as 2020.

That's in stark contrast to the global picture, Childs explained.

Some 35 rigs have been retired since last September, and most of those under construction have been delayed by six months or longer.

The so-called "day rate" for rigs has also plummeted by as much as 50 per cent in some cases as the market softens, and many existing contracts are being renegotiated, he explained.

"Fortunately for this market in eastern Canada, so far you have escaped all those maladies," he said. "You have been somewhat isolated from some of those things."

Harsh conditions among the worst

But Childs said the situation off Newfoundland and Labrador's coast is not all positive.

He estimates there are only about a dozen rigs capable of operating in the harsh and remote environments that are now catching the attention of oil companies worldwide, which means higher costs and greater technical challenges.

Childs said the conditions are among the most challenging in the world.

He was also critical of the time and effort it takes to get a rig approved for operations in the region, saying "guidelines and procedures are not as structured here."

He said it took 140 days to modify the West Aquarius for operations in Newfoundland's offshore.

Rigs getting bigger, drilling deeper

And two iconic names in the offshore — the Henry Goodrich and the GSF Grand Banks — have uncertain futures.

The Goodrich, which recently completed a contract for Husky Energy, just left the area and is expected to be "stacked" in the North Sea. The rig was a workhorse in Newfoundland's offshore, drilling 80 wells since 1999, said Childs.

The Grand Banks, which has drilled the most wells of any rig in the offshore, could also be gone by this fall.

Childs said the departure of these rigs is not surprising. They are being replaced by bigger rigs that are capable of drilling at much deeper depths.

One well for Statoil, for example, was drilled in ocean depths of more than 2,800 metres, a record for the area.

The region's first well drilled in 1966 was just 183 metres.

The rigs are also drilling farther from shore.

Hibernia, for example, which started producing oil in 1997, is roughly 300 kilometres from St. John's.

The much-touted Bay du Nord field in the Flemish Pass, however, is a further 200 kilometres away.

"It's an expensive proposition," said Childs.

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