Rate of Increase in Offshore Costs
Authors: Laborde Alden J. 
Published: December 2007

While one can observe a considerable degree of confusion in the oil industry, the result, no doubt, of the diminishing supply of oil and gas at a time of rapidly growing demand, along with severe environmental pressures, price controls, political unrest, and other problems, I did not realize that the frustrations had reached such proportions as to cause you to draft a hand-to-mouth drilling contractor to talk to you about economics. You will probably have a banker up here next to tell you probably have a banker up here next to tell you how to drill a well. I find it easy enough to handle part of the assignment, at least that part which part of the assignment, at least that part which deals with recognizing a number of problem areas, most of them with the scope of my own experiences and so obvious that they cannot be missed. I can even give some ball-park figures to measure some of them by. But I hope you do not expect any profound analysis of the causes nor great and new profound analysis of the causes nor great and new proposals for solutions of problems like the proposals for solutions of problems like the price-cost spiral under which we are suffering price-cost spiral under which we are suffering so severely. For example, I can relate from my personal memory that I had a hand in building just about the first really offshore rig ever, in 1953, and it cost less than $2 million. And had you followed me around for a year when I was trying to raise that sum, you would certainly agree with me that it was indeed a lot of money. Skipping on to today, I can also recite my personal involvement just last month in accepting from the builder our newest offshore unit and handing over a check for $21 million. The two events I have just related are some I know about and can stand behind there is no long-hair theory involved. But anything else I say in trying to figure out and explain what may have happened in the cost area during this 20-year span, you should take with a grain of salt, and even more so when I speculate on why it happened. For while I might argue my rights and my standing in the narrow field of offshore drilling rigs, I would not challenge you if you asked the obvious what does he know about the rest of the oil business or of economics in general. But being caught I will at least press out loud what I think happened to bring about a more than tenfold increase in the cost of those offshore rigs, the last one being able only in modest degree to do better than the first the lackluster job of digging a hole in the ground to about the same depth and at about the same rate, that hole ultimately to flow about the same amount of oil and it only slightly more valuable than that which was produced by the first some 20 years ago. I would say that in absolute terms the latest rig would have cost just about twice that one 20 years ago, taken item for item, ton of steel for ton of steel, if it were identical in every respects But great changes have been made in the size and capability of the rig, the new one being designed to drill afloat in almost unlimited water depth, while the original one could barely handle 40 ft of water, which means, among other things, about twice as much steel in the hull and about $1 million worth of anchors, chain and windlasses which the first one did not need. Since it drills afloat, there is another $1 million worth of mud risers, subsea blowout preventer systems and controls, tensioning systems, preventer systems and controls, tensioning systems, motion compensators and the like. And the unit being intended to go great distances, it is selfpropelled, meaning pilot houses, propulsion motors, rudders, compasses, ship's officers, extra fuel storage, Coast Guard inspections so add another million. Add another million for quarters for the extra crews, coming to accommodations for 80 instead of 40 people. Throw in the 100-ton cranes now necessary to handle the heavier subsea equipment packages plus the installations necessary to service the dives, the communications equipment required by various laws, the extra large and heavy helicopter landing area required under the safety rules of various nations in whose waters one intends to operate, then add enough extra horsepower to run all these new and bigger systems and we are probably getting close to the $20 million I probably getting close to the $20 million I mentioned. If not there yet, the cunning and ingenuity of shipyards in negotiating the contract for the job in this seller's market will insure that labor escalation, steel price changes and other cost increases, together with changes in the design required for any reason, will make up the difference. Also, we find that our good customers are prone to go window shopping at the Offshore Technology Conferences and other gatherings and they are like kids in a toy store.

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