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Noble Updating -- Not Upgrading -- Offshore Fleet

Noble Inc., one of the biggest offshore drilling contractors in the world, is updating its extensive global drilling suite to meet the needs of its clients, a do-over of a strategy from the late 1990s, when offshore rigs were merely upgraded, CEO David Williams said Thursday.

Some analysts have questioned the strategy, noting that the makeover is costing billions. However, Noble management, which outlined the strategy during a financial analyst meeting in Houston, said it makes perfect sense today.

"In the late 1990s, our strategy was to enhance and convert, rather than to build, and we targeted niche markets," said Williams. "But that was 17 years ago. The question we asked ourselves was: 'does that still work?' And we believe the answer is 'no.' Industry has evolved past that. We really believe the client needs require more technology, more capability...Upgrading has run its course."

Noble's suite today is exclusively devoted to offshore rigs. By rig count it's the second largest offshore drilling contractor with 79 units: 15 semisubmersibles, 14 ships, 49 jackups and two submersibles that are stacked on the Outer Continental Shelf of the Gulf of Mexico. It also has a floating production storage offloading system, and it operates the Hibernia platform in Eastern Canada for ExxonMobil Corp.

"Make no mistake," said operations chief Bernie Wolford. "We are transforming the company in a post-Macondo world for some of the toughest clients on the planet. It's a common theme, but our secret sauce is our people. It's how we make a difference, through our people, who are delivering and making us successful."

Noble hired about 1,200 people last year, and it plans to hire as many this year and again in 2013. There's a "huge demand for talented people," said Wolford.

"Without question, we are seeing great visibility this year and see it throughout the decade," said Williams. "The industry is experiencing a growth in capacity, with 100 drillships ordered for deepwater and about 50 still to be delivered. Even the non-deepwater fleet is experiencing growth. For us, we look at where the pricing points, pricing power come in, and we're in a very good position on the floating fleet right now...The jackup fleet side also has very, very strong utilization, 94% today, with 136 added or expected to be added to 2015...Clearly, there are strong fundamentals across all market sectors."

The "major fundamental drivers" for offshore operators include the sustained level for crude oil prices, said Williams. "Are operators concerned about falling prices? Operators don't panic about short-term fluctuations in price. An $80 [oil price] range or below is where they plan their operations."

Another driver has been exploration success in deepwater around the world, he said. "It's been great in 4,500 feet of water or deeper. Since 2006 we've had at least 20 discoveries a year, with a strong base of operators including national oil companies, international companies, independents and majors. They understand the formations and the new technology."

In addition, a "geographic expansion" has been a boon to the offshore industry. "More countries are opening up acreage," said Williams. "We've seen a dramatic expansion from outside the 'Golden Triangle'" of the Gulf of Mexico to Angola and Brazil, that has given operators "excellent access. There's a lot of development coming and operators are making long-term commitments."

Beyond the discoveries, operators have begun making a "shift to field development," which also has enhanced industry success, said the Noble chief. And with that have come "increasingly complex wells...more technical rigs are more desired."

Two years ago, Noble management began to work on how to respond to the new market. The company implemented a three-step process to transform its fleet to "premium" status by adding state-of-the art equipment, which has included the addition of newbuilds, eight ultra-deep drillships and six jackups. "The third piece is selling rigs that have a better utility somewhere else," said Williams. "We are trying to radically change the Noble fleet. We've added 12 newbuilds since 2007, and we have about $10 billion in capital committed to date covering capacity additions...

"We believe a further expansion is likely. A harsh environment semi[submersible] design is under view. It's more a question of 'when' than 'if.' We're also evaluating many opportunities for contracted units, which could be in place, or a dialogue could be in place, by the end of this year."

A key component of its growth is an alliance with the U.S. arm of Royal Dutch Shell plc, which plans to begin drilling in Alaska's Beaufort and Chukchi seas late this summer. Noble's Discoverer is to be used by Shell in the Beaufort and Kulluk is to be used in the Chukchi, Williams said. The ships would travel to the northern end of Alaska by the end of July to work for three months; Shell plans to drill some exploratory wells by September (see Daily GPI, April 30).

"It's a good economic value, and we're in it for the money," said Williams "We do a lot of business with Shell; we have a growing portfolio." However, he admitted that the venture is a bit risky because of the harsh Arctic environment, as well as because of protest groups that have attempted to prevent the drilling from moving forward.

The Beaufort/Chukchi project is "atypical for us," said Wolford. "We are providing an unprecedented level of support. We are more integrated with Shell than ever, and there is a huge amount of stakeholder, special interest group and risk than ever."

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