ONGC tender to idle nearly 70% of the domestic drilling industry

Contractors have trouble deploying rigs overseas

Nearly 70 per cent of the domestic drilling industry could go idle as state-owned Oil and Natural Gas Corporation (ONGC), the country’s largest oil and gas explorer, refuses to differentiate between old junk rigs and the new generation high spec jack-ups in its latest tender.

“We (the domestic drilling firms) are forced to compete with old rigs in the tender and are not offered any premium despite our rigs being technologically improved and safety enhanced,” a senior official with Jindal Drilling told Business Standard on the condition of anonymity.

ONGC owns 10 jack-up rigs and usually charters the balance 20 from fleet owners. Currently, the jack-up rigs hired by ONGC have an average age of 39 years.

ONGC is the largest client for most of the domestic drilling industry and nearly 95 per cent of the industry revenue comes from it. “We (the drilling industry) built new generation jack-up rigs mainly to cater to ONGC. But its latest tender has no room for us and this will lead to major idling of new domestic rigs. Old rigs would be available at a much cheaper rate, about 30-35 per cent lower,” said the senior official.

Greatship, Jagson, Dynamic Drilling, Aban Offshore along with Jindal Drilling are some of the top drilling companies in the domestic market. Over the last few years, these firms have actively invested in new generation high specification jack-up rigs to align themselves with ONGC’s fleet modernisation plan. In 2006, ONGC realised the need to modernise its fleet to meet the rising workload and decided to issue annual tenders to hire jack-up rigs, in turn asking bidders to build rigs to suit the specifications of the oil explorer.

“An investment of about $200 million has been made per jack-up rig by the Indian contractors. After this huge investment, we understand that rigs are going to be idle since ONGC has chosen to not differentiate,” said one of the bidders to ONGC’s latest tender.

In its latest tender, which closed on December 3, ONGC introduced the “Quality, Cost, Based Selection” criteria which gives 25 per cent weightage to technical and 75 per cent to commercial aspects. But, in effect, the technical weightage given is only 7.5 per cent and this translates into a cost difference of just about $1,000-$1,500 a day between a new generation and a 39-year-old rig.

“The new generation rig bidder can barely get its operational cost since it has to compete with the old junk rig,” explained one of the bidders. Though deploying the new generation jack-up rigs in international waters may look like the next best option for the domestic firms from a business perspective, it makes no sense, say domestic drilling firms.

“There are several barriers in doing business overseas as regions like South East Asia and Middle East have cabotage and so only if their rigs are idle would Indian rigs get the business. There are also issues with hiring labour and crew which makes it difficult for Indian contractors to deploy rigs overseas,” said an official with a drilling firm.

 

Key irritants

•  Oil rig prices 30-35% lower than new generation rigs
• Domestic drilling contractors don't have option to deploy rigs overseas
• ONGC tender doesn't offer premium to new generation rigs
• Cabotage in other countries makes it difficult to deploy domestic rigs overseas