Hire charges for oil rigs set to rise

Upstream players like ONGC are expected to see a sharp rise in their oil rig hire costs, when the long term contracts come up for renewal.

That's because the day hire charges for an oil rig in India are currently estimated at $140, 000 - $150, 000 per day as compared to $70,000 - $80, 000 levels a year earlier, say analysts.

In several West Asian countries, the day hire rates for an oil rig are currently estimated to have reached $300,000 levels per day, given the boom in the upstream industry.

Although, not strictly comparable, but even when the shipping industry was at its peak in FY 05, it had to deal with surging prices of buying new or second hand ships, coupled with higher repair and maintenance costs.

ONGC, currently operates 40-odd oil rigs in the country, on three year contracts, say analysts. It incurs a cost of approximately $ 56, 000 - $ 57,000 per rig per day as part of these long term contracts.

As a result, the total cost incurred by ONGC for oil rigs is estimated at $ 2.28 million per day. And given the current boom in the upstream oil and gas industry, it does appear inevitable that when its oil rig contracts come up for renewal, ONGC's production expenses will rise too.

A key beneficiary of this trend is expected to be players like Aban Loyd Chiles Offshore.

ONGC was estimated to be incurring $3-3.5 per barrel in FY 05 related to oil rigs out of its total cost (which includes taxes, depreciation) of about $21 per barrel.

Analysts project that this cost could reach $ 7 - 7.5 per barrel over the next quarters. Other players involved in the domestic upstream industry like Cairn Energy are also expected to be hit by higher oil rig costs.

To break even at higher oil rig hire rates, an upstream player is estimated to have minimum production of 3,000 - 4,000 barrels of oil per day from a rig, say analysts. Indian upstream players have been able to achieve 8, 000 - 10, 000 barrels of oil per day from a rig.