Published on November 1, 2007
Slide1: UH BAUER COLLEGE OF BUSINESS: MARCH 30, 2006 PRESENTATION Rowan Companies, Inc. John Buvens, General Counsel Ted Gobillot, Associate General Counsel Slide2: Emma Lindsay Joe Slide3: Overview of Rowan Companies, Inc. Emerging Trends in the Offshore Drilling Industry How is an offshore well drilled? Oilco/Drillco Relationship: Who provides what? Risks: What can happen? What is an indemnity agreement? How do the parties allocate risk? Slide4: Overview of Rowan Companies, Inc. Founded in 1923 by Arch and Charlie Rowan Two units: Drilling and Manufacturing Total workforce: 4,500+ employees HQ at Williams Tower (ex-Transco Tower) On NYSE and publicly-owned since 1967 2005: Revenue of over $1B; $4.5B market cap Slide5: DRILLING DIVISION HQ in Houston; operations onshore in Texas, Louisiana, Mississippi and Oklahoma; offshore in the U.S. GOM, east coast of Canada, North Sea, Persian Gulf and Trinidad 20 offshore rigs; 17 land rigs Accounts for 75% of RCI's revenue Slide6: Land Rig Locator Map Land Rig Locator Map TEXAS LOUISIANA MISS LR-34 LR-54 LR-53 LR-14 LR-52 LR-15 LR-33 LR-9, 29, 35 LR-26, 30, 31, 51 LR-18 LR-41 9- Texas 7- Louisiana 1- Oklahoma 17 Land Rigs Operating Currently 100% Utilized Current Average Well Depth: 15,980 ft. LR-12 Slide8: MANUFACTURING DIVISION Acquisitions: LeTourneau (1994), Ellis Williams (1999), OEM (2001) HQ in Longview, TX; manufacturing facilities in Vicksburg, MS and Houston, TX Manufactures jack-up rigs, land rigs and rig component parts, equipment for the timber and mining industries Accounts for 25% of RCI’s revenues Slide9: LeTourneau Products Slide10: World’s Largest Front-End Loader Slide11: 3000 HP Mud Pump Drawworks Rotary Table Manufacturing Division Slide12: ROWAN’S RIG CONSTRUCTION PROGRAM Large Fixed Capital Investment Purchase LeTourneau Restore Vicksburg, MS Facility Hire and Train Workers Rig Construction Cost: $180-$500 Million Ongoing Maintenance and Labor Cost Volatile Revenue Stream Dayrates Track Commodity Prices Boom-and-Bust Business Gorilla V Experience Slide13: Worldwide Jack-up Newbuilds and Attrition 1950-2005 Additions to the fleet Attrition Source: ODS-Petrodata Average Age of Retired Rigs: 30 years Number of Retired Rigs per year (20-year average): 6 rigs Scheduled Construction / On Order 2009 55 Rigs Under Construction 2006 - 10 2007 – 20 2008 - 20 2009 - 5 Slide14: Land Dayrate History 1998-2005 $17,242 Dayrates through March 27, 2006 Current Average Dayrate $22,559 Slide16: CONSTRUCTION OF THE HANK BOSWELL: DECEMBER 2004 March 2005: March 2005 June 2005: June 2005 August 2005: August 2005 September 2005: September 2005 October 2005: October 2005 November 2005: November 2005 December 2005: December 2005 Slide24: January 2006 February 2006: February 2006 Slide26: March 2006 Slide27: Following Construction, Rig Walks into Mississippi River Slide28: Rig Travels Down Mississippi River Slide29: Rig Crosses Under Four Bridges En Route to U.S. GOM Slide30: Bob Palmer (2003) vs. Rowan-Texas (1973) Slide31: Under Tow To Location Slide32: Jacked Up on Open Location Slide33: Jacked up on Location and Cantilevered out over Platform Slide34: Heavy-Lift Rig Hauler Slide35: Rig Floats Onto Submerged Deck Slide36: Single-Rig Dry Tow Double-Rig Dry Tow Transport of Rigs Overseas Slide37: Triple-Rig Dry Tow Slide38: Rowan Fleet Migrates to Saudi Arabia 35,000 Tons 12,300 miles 60 days Slide39: Sharjah Roads Slide40: Jacked up in Halifax Harbor, Nova Scotia, Canada Slide41: Emerging Trends in the Offshore Drilling Industry Current Status Global Supply and Demand Saudi Arabia as swing producer Declining Production in GOM The Moratorium The Stakeholders in GOM Extending Life of GOM Evolving Technology Deep Shelf and Deep Water Royalty Relief by MMS Emergence of Liquified Natural Gas Law of the Sea Treaty Fallout from Hurricanes Katrina and Rita Slide42: E. Canada: 100% C & S America: 82% US GOM: 82% Mexico: 100% West Africa: 100% North Sea: 100% Middle East: 98% SE Asia: 97% 85 2 0 27 3 32 21 0 80 2 31 1 19 14 0 Worldwide Jack-up Supply / Demand Worldwide Utilization: 92% Source: ODS – Petrodata 0 Indian Ocean: 100% 25 0 Total Number of Jack-up Rigs Worldwide: 390 Slide43: Houston Chronicle: March 23, 2006 DEEP-WATER EXPLORATION, DRILLING FLOURISH IN THE GULF NEW ORLEANS - Petroleum operators announced 10 new deep-water discoveries in the Gulf of Mexico in 2005 and the number of drilling rigs exploring in deep water has increased sevenfold in a year, a federal agency is reporting. Deep water is considered to be 1,000 feet or deeper. The deepest discovery reported last year was by BP in 9,576 feet of water. "Last year continued to be a strong year for deep-water activity in the Gulf of Mexico," said Chris Oynes, the agency's Gulf of Mexico regional director. "There is intense interest in oil and gas potential in the deep water." In March, there were 42 rigs drilling or working on development wells in deep-water areas, including 10 rigs in 5,000 feet or more, the agency said. A year ago, there were six rigs in ultradeep water. On March 15, petroleum exploration companies put $588.3 million in high bids for 405 offshore tracts off Louisiana, Mississippi and Alabama. The figure far exceeded last year's auction by the agency, when $342 million in high bids were accepted for 403 tracts that exploration firms are betting on to produce in the central Gulf of Mexico. Slide44: GlobalSantaFe Corp., the world’s second-largest offshore driller by market value, said Thursday it reached an agreement with an unidentified customer to provide a new deep-water rig that would generate about $1 billion in revenue over seven years. Keppel Fels, a unit of Keppel Corp., has been contracted to build the rig at its Singapore shipyard at a cost of about $590 million, Houston-based GlobalSantaFe said. Delivery of the rig, to be named GSF Development Driller III, is expected in early 2009, the company said. The new rig may generate an average of about $390,000 a day for GlobalSantaFe, based on the total revenue and duration of the agreement. Houston Chronicle: March 2, 2006 GLOBALSANTAFE WINS CONTRACT: DEEP-WATER RIG WILL COST $590 MILLION Slide45: Houston Chronicle: March 11, 2006 LOST LANGUAGE DRAINS BILLIONS: MYSTERIOUS ERROR TO COST GOVERNMENT ENERGY ROYALTIES WASHINGTON – How it happened or who’s responsible is a mystery eight years after the fact. But what may have been a simple error – or perhaps something more ominous – has given a multimillion-dollar windfall to a group of oil and natural gas companies and could cost the government billions of dollars more in the years to come. The Interior Department disclosed this week that a provision was mysteriously deleted from hundreds of federal drilling leases in the late 1990s that would have required producers to pay royalties, once prices reached a certain level, on oil or gas taken from deep waters of the Gulf of Mexico. In 1995, Congress exempted deep-water oil from royalty payments to spur development. But a price threshold was included in leases issued in 1996 and 1997 and again in leases sold in each year since 2000 that reinstates the royalties if market prices reach a certain level. For some reason the language “was inadvertently dropped” from an addendum attached to more than 1,100 leases the Interior Department’s Minerals Management Service issued for 1998 and 1999, Walter Cruickshank, the agency’s deputy director, told a House Government Reform subcommittee Wednesday. He said officials have not been able to determine who made the change. “It is clear that there is no record telling people to take the language out,” he said, and it was widely known that the department wanted the price threshold restriction in any oil and gas leases as a matter of policy. In the late 1990s, when oil prices were well below the threshold, the issue may not have attracted attention. Rep. Darrell Issa, R-Calif., the subcommittee chairman, called the whole matter “suspicious.” “This is a $7 billion word processing error,” Issa told reporters. He said some of the leases issued during those two years could remain in effect for as long as 85 years, so the government will be unable to collect royalty payments from oil and gas taken from those leases because they lacked the threshold language. If prices remain high, lost royalties “will be in the billions of dollars,” he acknowledged. Slide46: Houston Chronicle: March 5, 2006 TRANSOCEAN HAS NEW DRILL SHIP IN THE WORKS TRANSOCEAN, the world's largest offshore oil and natural gas driller, has been awarded contracts from Chevron Corp. that will lead to construction of a new deep-water rig and generate as much as $1.7 billion in revenue. The contracts include a new drillship that will cost an estimated $650 million to build and will be used by Chevron for five years, Houston-based Transocean said Wednesday in a prepared statement. The drillship will be Transocean's first new deep-water rig since 2001 and will be among the most expensive ever built. Chevron also extended agreements to use two other deep-water rigs. Transocean and other drillers have been reluctant to build new rigs without first having multiyear contracts in place for their use. With the most prized deep-water rigs in short supply and producers racing to capitalize on soaring energy prices, rents have climbed to unprecedented highs. The new drillship, to be named Discoverer Clear Leader, will be built at the Daewoo Shipbuilding and Marine Engineering Co. shipyard in South Korea, Transocean said. Construction is expected to take 30 months, and the contract with Chevron is scheduled to start in the second quarter of 2009. The rig may generate revenue of $493 million for Transocean during the first three years, or an average rate of about $450,000 a day, company spokesman Guy Cantwell said. Rates during the final two years are linked to oil prices and are expected to range from $400,000 to $500,000 a day, he said. The Discoverer Clear Leader will be capable of operating in waters as deep as 12,000 feet and will be able to drill wells as deep as 40,000 feet, the company said. Slide47: Less than 200m Greater than 1,000 m Slide48: 10,000’ 30,000’ Llano Cretaceous Shelf Edge N S DEEPWATER FLEX TREND (Shelf Edge) SHELF Jason ST172 Hickory Conger Pleistocene Pliocene Miocene Mid. Miocene Low. Miocene Paleogene Mesozoic 20,000’ Salt Salt Basement Rock Tahiti Thunder Horse Typical Shelf Source: Newfield Exploration Slide49: How is an offshore well drilled? The Basic Rig Systems are: Power System Hoisting System Rotating System Circulating System Well Control System Slide51: Making a Drillstring Connection Slide52: Land Rig Substructure Slide53: Derrick Slide54: TYPES OF OFFSHORE RIGS Drilling from beach (1890’s) Drilling from wharves (1910’s) Platform rig and barge (1920’s) Submersible barge rig (1940’s) Jackup rig (1950’s) Semi-submersible rig (1970’s) Drillship (1980’s) Slide55: Drilling from Wharf: Oil Rock City in Caspian Sea, Baku, Russia Slide56: Submersible Barge Rig Slide57: Jackup Drilling Rig Slide58: Semi-Submersible Drilling Rig Slide59: Drillship Slide61: Drillco Personnel Slide62: Roughnecks Slide63: Men Working on Well Slide64: Driller Derrickman Slide65: Lease rights and drilling permits Well program Transportation of rig to Oilco’s wellsite “Company man” aboard rig 24/7 Mud Engineer aboard rig 24/7 Specialized services Air and/or sea transportation for all personnel and equipment Fuel Drilling mud Well evaluation services Production equipment (platforms, pipelines, compressors) OILCO PROVIDES: Slide66: THE EXCHANGE Oilco pays Drillco a dayrate charge Drillco’s dayrate charges account for 40-60% of Oilco’s total well costs Oilco expects delivery of well in compliance with Oilco’s well program and in a safe and timely manner Oilco gets 83.3% of production Slide67: Risks WHAT BAD STUFF CAN HAPPEN? Boat accidents Crane accidents Equipment defects and malfunction Lightning strikes Hurricanes Pipeline strikes Platform strikes Punchthroughs Blowouts Helicopter accidents Sabotage Nationalization/confiscation War Risk/Terrorism Slide68: Lightning Strike Slide69: Hurricane Lili (October 2002) Slide70: Rowan-Houston following Hurricane Lili Slide71: Salvage Operation Re Rowan-Houston Slide72: Salvage Operation Re Rowan-Houston Slide73: Seminal Spindletop Blowout (1900) Slide74: Derrick Collapse Slide75: Land Rig Blowout Slide76: Offshore Egypt August 2004 Slide77: Rig sinks and Platform is destroyed Slide78: New Risk: Icebergs and Ice Flows Ivan, Katrina and Rita: Ivan, Katrina and Rita Three of the worst hurricanes to ever hit the U.S. Gulf of Mexico. Struck within a 13-month period, devastating the offshore oil and gas industry Slide80: IVAN SCORECARD (September 2004) Approximately 33,000 miles of pipeline, 4,000 platforms, 135 drilling rigs and 30,000 offshore workers in GOM. Approximately 10,000 miles of pipeline, 1,500 platforms and 40 drilling rigs in Ivan’s direct path. Total Damage Platforms: 31 destroyed or damaged Pipelines: hundreds of miles of pipelines buried, snapped and/or damaged due to mudslides; production shut-in for months Drilling Rigs: 6 damaged No one injured or killed due to evacuations Slide81: Hurricane Ivan: September 2004 Slide82: Hurricane Katrina 2005 Slide83: Path of Rita Path of Katrina Slide84: Hurricane Damage Refinery Damage in Pascagoula, MS Slide85: Aviation Base in Venice, LA Marine facility in Fourchon, LA Slide86: Shell Mars Platform Before After Slide87: Chevron Typhoon Platform Before After Slide88: Diamond Ocean Warwick GSF Adriatic VII Slide89: GlobalSantaFe High Island III Slide90: NOBLE THERALD MARTIN OFF COAST LOUISIANA RIG DRIFTED 125 MILES DRAGGING 6 ANCHORS BEFORE BEACHING ITSELF IN VERMILLION Slide91: Before After ROWAN’S LOSSES Rowan-New Orleans (capsized and found) Rowan-Halifax (capsized and found) Rowan-Odessa (capsized and found) Rowan-Fort Worth (capsized and not found) Rowan-Louisiana (beached and destroyed) Slide92: This 10-ton anchor was racked on the exterior of the hull 50 feet above the sea before the storm Slide93: Ex-President Clinton hard at work on a rescue mission Slide94: Hurricanes Katrina/Rita Scorecard Platforms: 167 destroyed or damaged Drilling Rigs: 8 destroyed; 22 extensively damaged; 19 knocked off station and adrift Pipelines and Refineries: extensive damage No one injured or killed in offshore industry Fallout: (1) tight rig supply and price increases (2) increase in oil and gas prices (3) government intervention (4) increase in insurance costs Slide95: Source: ODS - Petrodata Katrina/Rita Fallout: Dayrate Increases Katrina/Rita Fallout: Insurance: Katrina/Rita Fallout: Insurance Big Losses: Hurricane Katrina results in the largest insured loss in history. Hurricane Rita is the most devastating storm to hit the offshore drilling industry and particularly Rowan. Higher Premiums: The losses due to Hurricanes Katrina and Rita has caused an increase of between 300% and 500% in insurance premiums. Less Coverage: Insurers are requiring drillers to accept more risk in the form of higher deductibles and maximum aggregate windstorm coverages. Slide97: POTENTIAL DAMAGES Injury and death to Oilco’s and Drillco’s personnel Damage to Oilco’s property Damage to Drillco’s rig Third-party damage (beaches, fishermen, reefs, oysterbeds, adjacent pipelines and reservoirs) Loss or damage to the hole Well control costs Pollution control costs Reservoir loss or damage Debris removal Slide98: Indemnity Agreements Following an accident, management has three questions: What happened? What does the contract say? Do we have insurance? Slide99: What is an indemnity agreement? American system of liability is fault-based Contract-based allocation vs. fault-based allocation Indemnity agreement is only as good as the financial resources of party who gives it and that party’s insurer Prepare management for the possibility of a harsh result If used, the indemnifying party, its insurers and eventually the courts will closely scrutinize the indemnity agreement Carefully read, review and re-review indemnity language Know the law Slide105: WHY ALLOCATE RISK? Tailor risk to insurance coverage, but you should protect your coverage, loss-history and insurer Avoid insuring the same risk twice Possibility of acquiring insurance for an assumed but uninsured risk Preserve customer relationships Avoid company-breaking risks Avoid biased courts and unpredictable jury verdicts Avoid litigation expenses Market conditions may dictate risk allocation Take advantage of unsuspecting party Assume risks that you can control through operations and avoid risks that you cannot control Allocation of risk should reflect value of contracted services Slide106: Risk Allocation in Offshore Drilling Contracts A. Injury and Death Industry Norm: knock-for-knock Oilco’s Indemnity: Oilco shall be responsible for and hold harmless and indemnify the Drillco Group from and against all claims, demands and causes of action of every kind and character on account of injury, illness or death of Oilco’s employees, subcontractors or invitees. Drillco’s Indemnity: Drillco shall be responsible for and hold harmless and indemnify the Oilco Group from and aginst all claims, demands and causes of aciton of every kind and character on account of injury, illness or death of Drillco’s employees, subcontractors or invitees. Drillco assumes vast majority of personal injury risk because Drillco has more personnel on rig. Slide107: A. Injury and Death: Knock-for-knock B. Property Damage Industry Norm: Qualified knock-for-knock Oilco’s Indemnity: Oilco shall be responsible for and hold harmless and indemnify the Drillco Group from and against damage to or loss of the property and equipment of Oilco, its parent, subsidiary and affiliated companies, its partners and co-venturers, and their respective subcontractors. Drillco’s Indemnity: Drillco shall be responsible for and hold harmless and indemnify the Oilco Group from and against damage to or loss of the property and equipment of Drillco, its parent, subsidiary and affiliated companies, and their respective subcontractors; provided, however, that Oilco shall reimburse Drillco 75% of the repair or replacement cost for damage to or loss of any drillpipe, drill collars or other in-hole equipment when such equipment is being used in the hole below the rotary table. Slide108: A. Injury and Death: Knock-for-knock B. Property Damage: Qualified knock-for-knock C. Third-party damage Industry Norm: Not addressed in contract so liability is allocated on a fault basis Slide109: A. Injury and Death: Knock-for-knock B. Property Damage: Qualified knock-for-knock Third-party damage: Fault-based Loss of Hole Industry Norm: Oilco assumes risk with a fault-based redrilling discount Indemnity: In the event of loss or damage to the hole Oilco shall be responsible for and hold harmless and indemnify the Drillco Group from such damage to or loss of the hole; provided that in the event such loss or damage is caused by Drillco’s gross negligence or willful misconduct, Drillco shall upon Oilco’s request and as Oilco’s exclusive remedy for such loss or damage, repair the damaged portion or redrill to the depth at which the loss or damage occurred at 85% of the dayrate. Slide110: A. Injury and Death: Knock-for-knock B. Property Damage: Qualified knock-for-knock Third-party damage: Fault-based Loss of Hole: Oilco assumes Well Control Costs Industry Norm: Oilco assumes risk Indemnity: Oilco shall be responsible for and hold harmless and indemnify the Drillco Group for the cost of regaining control of any wild well. Slide111: A. Injury and Death: Knock-for-knock B. Property Damage: Qualified knock-for-knock Third-party damage: Fault-based Loss of Hole: Oilco assumes Well Control Costs: Oilco assumes Reservoir Loss or Damage Industry Norm: Oilco assumes risk without qualification Indemnity: Oilco shall be responsible for and hold harmless and indemnify the Drillco Group from and against all claims on account of injury to, destruction of, or loss or impairment of any property right in or to oil, gas or other mineral substance and for any loss or damage to any formation, strata or reservoir beneath the seabed. Slide112: A. Injury and Death: Knock-for-knock B. Property Damage: Qualified knock-for-knock C. Third-party damage: Fault-based D. Loss of Hole: Oilco assumes E. Well Control Costs: Oilco assumes F. Reservoir Loss or Damage: Oilco assumes G. Pollution Industry Norm: Drillco assumes pollution emanating from rig, and Oilco assumes wellbore pollution with qualification. Drillco's Indemnity: Drillco shall be responsible for and hold harmless and indemnify the Oilco Group for control and removal of pollution or contamination which originates above the surface of the water from spills of fuels, lubricants, motor oils, paints, solvents and garbage wholly in Contractor's possession and control and directly associated with Contractor's equipment and facilities. Oilco's Indemnity: Oilco shall be responsible for and hold harmless and indemnify the Drillco Group for control and removal of all pollution or contamination other than that assumed by Drillco above, including all pollution or contamination resulting from fire, blowout, cratering, seepage or any other uncontrolled flow of oil, gas, water or other substance; provided, however, that in the event any such pollution or contamination is caused by the gross negligence or willful misconduct of Contractor, Contractor shall assume the first $1,000,000 of such pollution or contamination. Slide113: A. Injury and Death: Knock-for-knock B. Property Damage: Qualified knock-for-knock C. Third-party damage: Fault-based D. Loss of Hole: Oilco assumes E. Well Control Costs: Oilco assumes F. Reservoir Loss or Damage: Oilco assumes Pollution: Split risk Debris Removal Industry Norm: Each party will pay the costs to raise and remove its own equipment. Oilco’s Indemnity: Oilco shall at all times be responsible for and hold harmless and indemnify the Drillco Group for the cost of removal of debris that is the property or equipment of the Oilco Group. Drillco’s Indemnity: Drillco shall at all times be responsible for and hold harmless and indemnify the Oilco Group for the cost of removal of debris that is the property or equipment of the Drillco Group, but only to the extent removal of such debris is required by governmental authority or impedes Oilco’s ongoing operations.