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Fram Drilling - Seeking drilling opportunities abroad

Jon H. Willman, CEO at Fram Drilling

In the recent years, the oil and gas drilling sector has experienced one of the most challenging downturns due to the fall in oil prices and the investment limitations of oil and gas companies. Historically, the drilling market has experienced 4-years activity cycles and the last peak occurred between the end of 2013 and the beginning of 2014. After the peak of the cycle, the downturn began and the production of shale oil exceeded the market’s expectations. The oil price dropped from USD $110 to USD $50 in 2015 and further down to USD $35 by the beginning of 2016. As a result, oil and gas companies focused their efforts on putting cost-cutting strategies in place and significantly reduced their budgets for exploration and drilling activities. Thus, large drilling companies with considerable financial obligations faced the effects of the downturn.

Despite the dire situation, some investors saw windows of opportunity in the drilling market. Such is the case of Fram Drilling, a drilling company established in late 2015, at the middle of the oil and gas industry’s downturn. “People tend to forget that in 1999-2000 the oil price was around USD $10. From a historic perspective, an oil price of roughly USD $30 may not be the most challenging scenario experienced by the oil and gas sector,” says John H. Willmann, CEO at Fram Drilling. “However, the recent drop of the oil price has created the deepest crisis in the rig sector. We aimed to create Fram Drilling during this downturn, but the crisis has proven to be deeper than we expected,” says J. H. Willmann.

According to J. H. Willmann, in 1999, the floater supply was over 120 rigs and the demand was of 130-140 rigs, which pushed the day rates up. In the following years, the oil price continuously increased up to roughly USD $140 in 2008. As a result, the supply of floaters grew to roughly 370 and there was a considerable gap between supply and demand, despite of the numerous rigs that were built during this period. “The number of rigs slowly built up, but the demand remained higher pushing the day rates to over USD $600,000 for a rig,” says J. H. Willmann.

However, following the drop of oil prices in 2015, the demand for rigs decreased from 280 to 140 and the market experienced the opposite situation: an oversupply of rigs. “The day rates plunged down and the market utilization was at around 50%, which is the most considerable crisis of the rig sector in modern history,” says J. H. Willmann. “This situation creates more opportunities for new players but, at the same time, dealing with the challenges of the crisis has been tough,” he continues.

The CEO at Fram Drilling considers that the investors’ appetite is returning and aims to take advantage of the windows of opportunity created to attract capital to the rig market. “The market’s momentum is increasing day by day, but it is still possible to acquire assets at reasonable prices due to the oversupply of rigs and the considerable number of stacked new-builds,” says J. H. Willmann. In order to face the current downturn, the rig sector has the possibility to scrap older models of rigs to reduce the supply in the market or to try to outlast the crisis expecting to use such rigs in the future. J. H. Willmann says that both scenarios are a possibility, but believes that a large number of rigs will be scrapped because the market leans toward contracting new-builds. “The rig sector has embraced the new improvements and the new-builds are designed to perform more efficient and environmentally friendly operations, in addition to their lower costs,” says J. H. Willmann.

Oil and gas companies choose rigs in accordance to their needs and the characteristics of a specific field. In the North Sea, oil and gas companies focus very much on HSE and on the efficiency of the rigs, automation, and on quicker and safer ways of performing drilling operations. “The new rigs, with higher specifications, are preferred in the North Sea. However, those rigs have higher day rates, costs, and CAPEX,” says J. H. Willmann. High-specification rigs are usually preferred to perform operations in regions with harsh environments and extreme water depths such as the North Sea, the Barents Sea, Russia, Argentina, and Canada, leaving out many capable and high quality rigs with lower specifications.

On the other hand, there are oil and gas regions in which oil and gas companies are still much more labor intensive, where drilling activities are seen as part of the companies’ policies to employ people and do not have the same push to acquire higher specification assets. Fram Drilling aims to exploit the opportunities of closing good deals and acquire the high-quality rigs that have been left out to perform operations in benign and mid waters, in off-coast areas of regions such as Brazil or the Gulf of Mexico. “We can perform perfectly competent operations using such rigs and remain in line with the companies’ expectations to fit the field and fulfill the requirement to employ people. Not every oil and gas company is embracing automation, robot technologies, and unmanned subsea drilling facilities,” says J.H. Willmann. “The ideas are there and the prototypes have progressed considerably, but the technology has not been fully developed and they are not yet fully available in the market,” he continues. In such oil and gas regions labor is still an essential pillar to perform activities.

Fram Drilling is optimistic about the future of the drilling industry due to the continuous increase in the global energy demand. While the global energy mix is changing and coal is being replaced with renewable energies, fossil fueled generation still accounts for 81% of the total power generation activities. Coal represents roughly one third of fossil fueled generation. “It may take around 20 years but, even if coal is replaced with renewable energies, oil and gas generation will still play a crucial role during this time,” comments J. H. Willmann. “Oil and gas production is currently declining in every market due to the depletion of the reserves. Thus, the need to perform more drilling operations arises,” he adds. If the market follows the scrapping trends, it will be necessary to start new-build programs to have newer rigs to meet the demand in the future.

The increase in energy demand is a positive development for the drilling sector despite the underinvestment period of 3 years. The demand for oil and gas has increased from 93 million barrels o.e. per day in 2014 to 97 million barrels o.e. in the present. In addition, natural gas is playing an increasingly important role in the power generation industry. “The largest advantage from an environmental point of view, is to replace coal production with cleaner oil and gas and renewable energies such as biomass, wind, and solar,” says J. H, Wilmann.

However, the main challenge faced by the renewable energy sector is the transportability of the resources. “Oil is a movable commodity. Until the transportability issues of green energy are solved, oil will be the main source of energy for transportation,” says J. H. Willman. On the other hand, the infrastructure built around fossil fuels has been developed for over 100 years and it may take some time to develop such a substantial system around renewable energies. “We bet on the fact that the demand for oil will be relevant for years to come and, therefore, drilling services will be required,” comments J. H. Willman.

Fram Drilling is present in the Mexican market with own organization and in Brazil and West Africa through partners. Oil production in Mexico dropped from 4 million barrels o.e. to under 2 million barrels o.e. per day. After the approval ofthe Energy Reform, the goal is to increase production back to 3.5 million barrels per day and considerable activities will take place in deep waters. In the present, 3 or 4 floating rigs are deployed in Mexico, while 30-40 are currently in operation in Brazil. On the other hand, 22 jack-up rigs are in operation and roughly the same amount of jack-up rigs are idle in Mexico. “The potential to position floating rigs in Mexico is remarkable, much more in comparison to jack-up rigs,” says J. H. Wilmann. “It is natural to believe that the stacked jack-up rigs will be preferred by the local market. However, there are no stacked floating rigs in Mexico, therefore, we are currently targeting this segment,” he continues.

Fram Drilling aims to grow and cover a large share of the market. The company is currently operating one rig and is keen to take advantage of the economies of scale in the drilling sector. In addition, the company has secured agreements with various partners, promoting cooperation with established players to seize the current opportunities in the market and taking advantage of the flexibility offered by new players. “Our target is to build up on equity in Mexico to have 5-10 rigs in our portfolio. We aim to transfer Norwegian competence to Mexico in terms of accuracy, efficiency, and standards and blend it with the benefits of operating in this country,” says J. H. Wilmann. “Mexico offers remarkable human capital at a much lower cost. If we can blend the benefits of the two markets it is possible to build very efficient and safe operations at a cost efficient level,” concludes J. H. Wilmann.

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