Seadrill cancels order for West Mira drill rig at 11th hour

In yet another blow to Newfoundland and Labrador's offshore oil industry, drilling contractor Seadrill Limited announced Tuesdayit is cancelling its order for the much anticipatedWest Mira, a sixth-generation ultra-deepwater semi-submersible rig.

The rig is under construction in South Korea at a cost of $500 million US,and had already undergone sea trials.

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It was scheduled to arrive in offshore Newfoundland early in 2016 as part of a five-year contract with Husky Energy for operations in Canada and Greenland.

ButSeadrillsaid in a news release ithas exercised its cancellation rights "due to the shipyard's inability to deliver the unit within the timeframe required under the contract."

The rig was ordered in the second quarter of 2012, and the delivery date stated in the construction contract was Dec. 31, 2014.

Under the contract terms,Seadrillsaid it alsohas the ability to recoup the $168 million in pre-delivery instalments to the Shipyard, plus accrued interest.

The news coincides with a prolonged slump in worldwide oil prices, and increasing pressure by oil companies such as Husky fordrilling contractors likeSeadrillto lower their day rates.

According to sources, the original contract for the WestMirawould cost Husky $590,000 per day.

That leaves just two drill rigs both owned bySeadrillnow operational in Newfoundland's offshore. One industry insider is not ruling out the possibility the number may be reduced to zero within a year or two.

Future uncertain, analyst says

TerryChilds, a senior analyst with Texas-basedRigzone, said the West Hercules, which is under contract toStatoil, could depart by next spring.

He said the future of the West Aquarius is also uncertain.

"There is a scenario unfolding that could see no rigs there at some point soon,"Childsstated in anemailto CBC News.

"Given the difficulties of getting a rig into the region, I figured the operators and contractors would do everything they could to keep them there, but apparently not."

The decision bySeadrillto cancel delivery of the WestMiracame as a shock to those assigned tothe rig, many of whom are Newfoundlanders.

Sources saycrewmembersen route to the rig were abruptly turned around at airportsMonday, and those already in Korea were told to pack their bags and leave.

The workers were hopeful of long-term employment with the rig, said a source, who asked not to be named.

It's a dramatic reversal from the rosy picture being painted by people likeChildsjust three months ago.

During a speech in mid-June to delegates at the annual Newfoundland and Labrador Oil and Gas Industries Association (NOIA) conference in St. John's,Childs said the province's industry was "somewhat isolated" from the decline in oil rig demand.

He further projectedthe number of rigs in offshore Newfoundland could double within three to five years.

But a lot has changed in three months.

"Given the current market I don't know if that will actually come to pass," he told CBC News during an interview Monday.

Rebound in oil no longer imminent

In June, most analysts were projecting that oil prices would rebound to between $70 and $85 per barrel by the end of 2015.

Those projections have since been severely reduced, and by Monday afternoon, Brent crude was trading at under $48. Brent is the benchmark for Newfoundland and Labrador oil.

Most analysts are now saying it will take at least two or three years before a recovery in prices, and late last week, Goldman Sachspredicted oil could fall as low as $20 per barrel.

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The prolonged slump is a consequence ofa serious oversupply and concerns about a slumping Chinese economy.

"Given that and given the cost of doing business and operating off eastern Canada, I can't see where too many operators will be hiring rigs," said Childs.

There are three producing oil fields in Newfoundland's offshore, with roughly 10,000 people working directly in the industry.

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Companies have been cutting costs in a bid to cope with reduced profits, andthe drilling sector is now in their sights.

Companiesaround the world have been renegotiating so-called day rates for drill rigs for some time, andChildssaidthat practice is now coming to this province.

In its second-quarter report to investors last month, Seadrillsaid it has "tentatively agreed with Husky to reduce the day rate on the West Mira due to the late delivery of the unit."

But the worst-case scenario now seems to have unfolded, with Seadrill cancellingthe West Mira contract.

Seadrillsaid in its statement that itremains in discussions with Husky to find an alternative solution to meet its drilling requirements.