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Interview

with Magnar Fagerbakke, Vice President Markets & Contracts, COSL Drilling Europe AS

23.01.2013 / Energyboardroom

Globally, COSL is seeking to increasing the international portion of the business to 40 percent by 2015. How does Norway fit within this internationalization drive?

Norway represents the first step for the company’s international expansion. Soon COSL Drilling Europe will have five units in operation in the North Sea area in both Norway and the UK: two accommodation units and three drilling units. There is a fourth drilling unit on its way and when this drilling unit has been awarded a contract , a new strategy will be launched by COSL.

This strategy has not been decided upon and several alternatives exist. One alternative might be that COSL concentrate on European waters as well as Arctic operations from the Faroe Islands to Greenland and Canada. This might be one of the alternative strategies where we should focus as a company for the years to come.

However, we first need to get the rigs in operation and secure their income before investing in new drilling units. Once we see that things are going well with number four then we can look into new business opportunities.

What we need for our strategic direction is units which can drill in water depth up to 1500m , to be capable to drill wells in these geographical areas. This covers the Barents Sea area as well as Greenland. Most of the Barents Sea is only down to 500m of water and to the very West of the Barents Sea the depth goes down to approx.. 1200 – 1500m, so our winterized drilling unit no. 4 is a perfect match for these environments.
Future expansion will play on the economies of scale that we can generate from our inventory and Norwegian facilities. COSL has significant base facilities north of Bergen at Mongstad supplying two drilling units working on the Troll field and the one drilling unit working in the North Sea for Statoil. All the units are so similar that maintaining them from the same facility makes sense.

14 new rigs are projected to join this market in the period 2013 to end 2015. What is your perspective on the attractiveness of Norway as a rig market?

I started to work with the rig market back in 1997 when there was an upturn in the market. However, in Q31998 board members of some of the major drilling contractors started to sell their shares, which was a indicator to move out of the rig market and there was a significant decrease in demand from 1999 onwards as a result of the drop in oil price. In summer 2001 Statoil had 12 drilling units on contract in Norway and many of these rigs were left to go off contract reducing the demand side significanly. Therefore by Q3 2003 there were only seven semisubmersibles working in Norway, five for Statoil and two for NorskHydro.

Contrasting the situation in 2003 with today (December 2012), we now see nine jackups working in Norway, one drillship and 24 semi-submersibles making 34 drilling units in total. Two more rigs will start in early 2013, the Leiv Eiriksson from Ocean Rig and the West Hercules from North Atlantic Drilling. COSLPromoter will start on her 8 year contract with Statoil on the Troll field end of 2012. There are in addition a number of new builds due to come to Norway including the COSLProspector, four Songa rigs, the Island Innovator (2013), ,Rowan Drilling with 2 jack-ups and Maersk supplying three more making 14 potential units coming to Norway. It is clear that Norway has become a very attractive market for the drilling contractors.

The oil price is key in determining the attractiveness of the market and the rig rate. More than 95 percent of the rig rate is linked to the oil price so the correlation is very strong. The oil price is especially dominant in Norway because the rig rate is made known when a contract is decided upon. The oil companies here are all using more or less the same breakeven price for oil so when the price is good for one it is good for them all.

Currently there is a fantastic increase in the activity level, something never before been seen in Norway. The market is very good for drilling contractors and you can demand a slightly higher rate because of the 2:4 system, requiring three shifts compared to 2:2 in the UK. Essentially, if you need 110 people to man a rig in the UK, you need 165 in Norway and this represents a significant difference in costs.

Statoil is driving forward a “fit-for-purpose” rig concept as well as a new ownership regime. How will this affect the market and your operations?

COSL in Norway was essentially founded on two contracts with Hydro awarde back in April 2007. These are eight-year contracts with options in addition. The rigs we brought to the Norwegian market were perfect for the operational environment drilling down to 500m. There is only one field in Norway in production deeper than 460m which is the Ormen Lange gas field. Our units cost approximately half the price of the deepwater units which has entered the Norwegian market in recent years.. COSL rigs are therefore already well suited for the NCS. Statoil has stated that COSL units are very close to what they are looking for. Our rigs are also appreciated from an HSE perspective because the cranes have no blind zones and the operator can see where he/she should put his load. The PSA also appreciated this.

The overall shift towards purpose built rigs makes good sense. Statoil has a large number of subsea wells which need to be maintained and you need purpose built units to be efficient. The first time Statoil started looking at this was in 1997. In places like the Halten area there is a mass of subsea installations, flowlines and line pipes – a subsea spaghetti. This means that you cannot use your anchors without having a risk for damaging such installations if something should happen to the anchor chain and anything falling from the rigs could cause a massive oil spill. This is among other why Statoil has been working on the Catergory D rigs, as well as on a Category J (Jackup) rig and light well intervention units. Statoil has been proactive in meeting the need for lower-cost specialized units fit for purpose on the NCS.

How well is COSL positioned for the movement towards Arctic production?

Our fourth semi-submersible drilling unit, the COSLProspector, is winterized according to DNV notations. We have theICE-T, Winterized Basic and DNV clean notations. We can also quickly winterize the other units on the NCS for use in the Arctic. Our equipment is all designed to function at minus 20 degrees which is sufficient, but you also need wind walls, extra sheltering and extra heating below the helideck and for all the escape passages/routes.

We believe that the fourth COSL rig is a perfect unit for the Arctic. The drilling unit is designed with the highest focus on no environmental spill to the sea from the rig . There is a fantastic slop unit which can separate oil from water down to 5 ppm or less when the Norwegian standard is 15 – 20. We are therefore at the forefront in environmental standards. From 2015 there will also be “Tier 3” emissions regulations for engines and the fourth COSL rig has engines which meet these requirements.

To what extent is exposure to the Norwegian market beneficial to COSL’s global R&D?

Chinese companies have been very good at assimilating technology developed in this market. Our parent company in Beijingis planning to build 30 new vessels and they have toured the West coast of Norway and settled on a ship design that we use in the North Sea for supply vessels. They are using Norwegian designs even though they construct the vessels at yards in China. They are eager to import our technology, thereby jumping around 20 years or more in development.

COSL’s Norwegian arm will continue to install the best technology on our drilling units and we will remain attentive to environmental regulations. We are in a strong position to be a player in the North of Norway.

How is it to work for a Chinese company in Norway?

COSL is a great owner. COSL acquired our company in 2008 during the financial crisis and if it were not for COSL we would most probably not be in the market today as a separate new drilling contractor in the market. They provide us with a lot of space and we provide them with good results. Now and again it is challenging when we adapt Chinese ambitions to Norwegian regulations but this is rare.

What would be your final message on behalf of COSL Drilling Europe?

We have managed to construct three semi-submersibles in China and introduce these to the Norwegian market which has the highest and most challenging requirements and regulations in the world. Many thought that we would not achieve this, but we did and the whole organisation is prod of what this young organisation has achieved.

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