Seadrill cancels order for West Mira drill rig at 11th hour
New 6th-generation rig had undergone sea trials, was scheduled to arrive in N.L. waters next year
In yet another blow to Newfoundland and Labrador's offshore oil industry, drilling contractor Seadrill Limited announced Tuesday it is cancelling its order for the much anticipated West Mira, a sixth-generation ultra-deepwater semi-submersible rig.
The rig is under construction in South Korea at a cost of $500 million US, and had already undergone sea trials.
It was scheduled to arrive in offshore Newfoundland early in 2016 as part of a five-year contract with Husky Energy for operations in Canada and Greenland.
But Seadrill said in a news release it has exercised its cancellation rights "due to the shipyard's inability to deliver the unit within the timeframe required under the contract."
The rig was ordered in the second quarter of 2012, and the delivery date stated in the construction contract was Dec. 31, 2014.
Under the contract terms, Seadrill said it also has the ability to recoup the $168 million in pre-delivery instalments to the Shipyard, plus accrued interest.
The news coincides with a prolonged slump in worldwide oil prices, and increasing pressure by oil companies such as Husky for drilling contractors like Seadrill to lower their day rates.
According to sources, the original contract for the West Mira would cost Husky $590,000 per day.
That leaves just two drill rigs — both owned by Seadrill — now operational in Newfoundland's offshore. One industry insider is not ruling out the possibility the number may be reduced to zero within a year or two.
Future uncertain, analyst says
Terry Childs, a senior analyst with Texas-based Rigzone, said the West Hercules, which is under contract to Statoil, could depart by next spring.
He said the future of the West Aquarius is also uncertain.
"There is a scenario unfolding that could see no rigs there at some point soon," Childs stated in an email to CBC News.
"Given the difficulties of getting a rig into the region, I figured the operators and contractors would do everything they could to keep them there, but apparently not."
The decision by Seadrill to cancel delivery of the West Mira came as a shock to those assigned to the rig, many of whom are Newfoundlanders.
Sources say crew members en route to the rig were abruptly turned around at airports Monday, and those already in Korea were told to pack their bags and leave.
The workers were hopeful of long-term employment with the rig, said a source, who asked not to be named.
It's a dramatic reversal from the rosy picture being painted by people like Childs just three months ago.
During a speech in mid-June to delegates at the annual Newfoundland and Labrador Oil and Gas Industries Association (NOIA) conference in St. John's, Childs said the province's industry was "somewhat isolated" from the decline in oil rig demand.
He further projected the number of rigs in offshore Newfoundland could double within three to five years.
But a lot has changed in three months.
"Given the current market … I don't know if that will actually come to pass," he told CBC News during an interview Monday.
Rebound in oil no longer imminent
In June, most analysts were projecting that oil prices would rebound to between $70 and $85 per barrel by the end of 2015.
Those projections have since been severely reduced, and by Monday afternoon, Brent crude was trading at under $48. Brent is the benchmark for Newfoundland and Labrador oil.
Most analysts are now saying it will take at least two or three years before a recovery in prices, and late last week, Goldman Sachs predicted oil could fall as low as $20 per barrel.
The prolonged slump is a consequence of a serious oversupply and concerns about a slumping Chinese economy.
"Given that and given the cost of doing business and operating off eastern Canada, I can't see where too many operators will be hiring rigs," said Childs.
There are three producing oil fields in Newfoundland's offshore, with roughly 10,000 people working directly in the industry.
Companies have been cutting costs in a bid to cope with reduced profits, and the drilling sector is now in their sights.
Companies around the world have been renegotiating so-called day rates for drill rigs for some time, and Childs said that practice is now coming to this province.
In its second-quarter report to investors last month, Seadrill said it has "tentatively agreed with Husky to reduce the day rate on the West Mira due to the late delivery of the unit."
But the worst-case scenario now seems to have unfolded, with Seadrill cancelling the West Mira contract.
Seadrill said in its statement that it remains in discussions with Husky to find an alternative solution to meet its drilling requirements.
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