The head of Singapore-based Keppel Corp., the world's largest oil rig builder, believes oil prices will hold at present levels. In an exclusive interview with CNBC's Christine Tan on Managing Asia, Choo Chiau Beng says demand for oil and gas will remain strong.
Q: You have seen a strong rebound in rig building orders because high oil prices drive energy firms to step up exploration and production. What new orders have you secured so far?
We have a very strong order book this year: over S$7 billion ($5.6 Billion) of new orders and over S$9 billion of net orders. What we see is they are fundamentally driven. The world is getting wealthier, and the need for oil and gas is very fundamental. It is compounded now by the fact that the Japanese earthquake and tsunami, which was a very tragic event, caused a nuclear scare in very old reactors.
What it means is that the demand for oil, gas, coal and the renewables are becoming even more pressing. So we see that the oil prices are fundamentally priced correctly.
Q: So you think oil prices are sustainable at these levels?
I personally feel oil price will likely stay around this level or above this level.
Q: At what level of oil price would trigger a pullback in orders?
For a lot of projects, some of our customers told us, or publicly, that even at $60 oil, they would still continue with their projects. But I think that at $80 oil, a lot of the projects are viable. We see the demand for drilling deeper wells and more difficult wells to get the remaining oil out. You see, a lot of people do not understand that the past 50 years, when oil reservoir was depleted to 20-30-40 percent level, it was considered as dry. But today, with new technologies, you can continue to use enhance recovery with multilateral drilling in deeper horizons. You can take out another 20-30 percent and $80 oil is very viable for projects with very low risks.
Q: Another positive development has been the resumption of deepwater drilling in the Gulf of Mexico. Has that led to a significant pick up in demand for your deepwater units?
Deepwater drilling in the Gulf of Mexico hasn't quite recovered yet. What has happened is that people are now differentiating good new rigs with old inefficient rigs. And what is happening is of course safety has become a bigger issue, and a responsible oil company will always choose better equipment. What has happened now is we have a lot of orders for jack-ups, we haven't got any big orders for big water units yet because most of the orders for deepwater went to drill ships, deepwater drill ships which are more suitable to be built by Korean yards.
Q: Let’s talk about this competition. Has this forced you to re-look at how you price your contracts, just to retain some of your key customers?
We have to. We have to always be very responsive to the market. What we have found is our strategy to be near market, near (our) customers has worked. Because we are in Brazil, and we know that Brazil is today one of the strongest marketplaces in the world for offshore, and we have the most capable yard there. So I think we have shown our customers that we can deliver.
This is an excerpt taken from CNBC’s longest-running feature program Managing Asia. Catch the show with anchor Christine Tan over the weekend on CNBC.