Oil Glut Concealed by Rig Scarcity Making Drillers Better Bet By Vibeke Laroi and Bruce Blythe http://www.bloomberg.com/apps/news?pid=20601109&sid=aruMVI013R70&refer=home Feb. 26 (Bloomberg) -- The professionals most familiar with the so-called oil shortage know there's an estimated 3 trillion barrels under land and sea. That's why they're making their biggest bets in drilling rigs where the scarcity is no illusion. Oil drillers ``are the most attractive way to go,'' said Don Hodges, who holds about 160,000 shares of Transocean Inc. and about 120,000 shares of GlobalSantaFe Corp. among the $1.1 billion managed by Dallas-based Hodges Capital Management. ``There is a shortage, it takes time to build one and it takes a lot of money. Their earnings are going to go up every year for the foreseeable future.'' Orders for offshore rigs have surged sixfold in the past five years, and rental rates are at the highest ever after oil prices tripled and industry profits soared. The wait for the most sophisticated rigs, which can drill in waters more than a mile deep, is a record three years, and the cost to lease one has quadrupled since 2004, climbing to more than $500,000 a day. ``It's a big problem,'' Ashley Heppenstall, chief executive officer of Stockholm-based oil producer Lundin Petroleum AB, said in an interview. ``There has been a gross underinvestment in the industry for a number of years and we paid for that last year. We had delays in some of our drilling campaigns.'' Lundin plans to sink wells this year in Norway, Russia and Sudan, and has permits to explore in Vietnam, Ethiopia and Congo. `Most Attractive' The rise in rig costs contributed to the five-year jump in oil prices by driving up production costs, hindering the discovery of new deposits and slowing the development of existing finds. The oil left underground in the U.S. alone is enough to replace every barrel pumped from Iran for the next 20 years, according to statistics compiled by London-based BP Plc, Europe's second-biggest oil company. Rising oil prices are braking global economic growth. Each $10-a-barrel increase in crude sustained for a year shaves between 0.4 percentage point and 0.6 percentage point off economic expansion, according to William Murray, a spokesman for the International Monetary Fund in Washington. Exxon Mobil Corp., BP and the rest of the largest oil producers are being forced to pay more to get the rigs they need to meet the world's ever-rising energy demand. With crude prices above $50 for most of the past two years, investors from Boone Pickens to billionaire John Fredriksen, who controls the world's largest oil tanker company, are betting on drilling companies to outperform producers. Building Costs The price to build a deepwater rig has nearly doubled in less than a decade because of rising costs for steel, equipment and shipyard space, according to JPMorgan Chase & Co. analyst David C. Smith. A new deepwater rig that's capable of drilling in waters 7,500 feet or more costs $525 million to $625 million to build, up from $300 million to $400 million during the late 1990s, according to the Dallas-based analyst. The shares of drillers are poised to replace oil and gas producers as the industry leaders, Hodges said. The Standard & Poor's 500 Oil & Gas Drilling Index, which includes Transocean, Noble Corp. and Dallas-based Ensco International Inc., is little changed in the past year. A measure grouping producers such as Exxon Mobil and Chevron Corp., the Standard & Poor's 500 Integrated Oil & Gas Index, jumped 22 percent in that time. The losers are smaller companies that sink wildcat wells in hopes of finding a gusher. Desire Petroleum Plc, a U.K.-based oil explorer with a permit to drill offshore the Falkland Islands near Argentina, has sought a rig since early 2005. The firm lost 1.68 million pounds ($3.3 million) in its most recent six-month period. Waiting List ``Enormous shortages of rigs are affecting everybody, from oil majors to companies such as ourselves,'' Ian Duncan, CEO at Desire Petroleum, said in a telephone interview. ``It is difficult to find a rig anywhere.'' The rigs most in demand are known as drillships and semisubmersibles, equipment used in deep waters. The battle for rigs has intensified as oil producers boost exploration in the Gulf of Mexico, West Africa and Brazil. The number of offshore rigs in West Africa has increased to 56 from 44 a year ago, according to industry analyst ODS-Petrodata. In Asia and Australia, the number rose to 86 from 79. ``It takes three years from when you order a rig until it is delivered, and we haven't seen this before,'' said Martin Huseby Karlsen, an analyst with DnB NOR Markets in Oslo. Lease rates have soared to a record. Seadrill Ltd., the Norwegian driller founded by Fredriksen, last month said it rented out a rig for an unprecedented $525,000 a day. Contracts in early 2004 were signed for about $125,000 a day.