Low rig rates may have led RIL to scrap drillship deal

Reliance had entered into a contract with Transocean Ltd for its ultra-deepwater drillship Discoverer India in 2010, a contract which was effective upto 2021

A fall in rig rates and low utilisation were likely to have led to Reliance Industries’ decision on Monday to terminate its contract with Transocean for an ultra-deepwater drillship, analysts and industry executives said.

Reliance had entered into a contract with Transocean for its ultra-deepwater drillship Discoverer India in 2010, a contract that was effective up to 2021. Reliance, however, terminated the contract effective December 2016.

“Reliance Industries has elected to exercise its contractual option to terminate the contract for the ultra-deepwater drillship Discoverer India, effective December 2016, and prior to its expiration in January 2021. In accordance with the contract, Transocean will be compensated by Reliance and its partners for the early termination through a lump-sum payment of approximately $160 million,” Transocean said in a statement on Monday.

Reliance has not made any statement on the termination. Executives of Reliance did not offer any comment on the development.

Analysts added the $160-million payment would not be a major deterrent for Reliance in the current scenario of rig rates and rig utilisation. “Rigs are now easily available. Rig rates across categories have gone down by 20-40 per cent,” said an industry source on condition of anonymity.

According IHS Markit , an energy data firm, the total contracted utilisation for drillships worldwide was below 70 per cent in August.

Transocean’s fleet status report in July stated Discoverer India’s day rate, according to the contract, was $508,000.  “The rate at which this rig will be available when it is next contracted will be lower,” said the executive quoted earlier.

Analysts agree the decision will lead to cost savings by Reliance. “Whether Reliance decides to go ahead on the KG development, there is no clarity,” said an oil and gas analyst with a brokerage firm.

“Our KG D6 block has produced 2.6 trillion cubic feet (TCF) of gas and 29 million barrels of crude oil since commencement of output. We are making our best efforts to sustain production from this complex deep water basin. We are also evaluating, along with our partner BP, development plans to monetise the remaining resources of 4-5 TCF from this block, in the framework of the new gas pricing policy,” said Mukesh Ambani, chairman, Reliance Industries, at the company’s annual general meeting in September.

Other analysts see this as a positive move for the company if it plans to take up capital expenditure later. “Six months later you will probably get the rig at a better rate if you plan to undertake capex then,” said a second analyst with another brokerage firm.