The downward spiral

Audrey Leon

March 1, 2016

Most of the news in the rig market is bad, but there are bright spots if you look hard enough. Audrey Leon sets out the details.

Image from OE Staff.

Not much has changed for the positive in the last six months within the floating rig market. Utilization continues to plunge as contracts dry up. But with utilization down, and rates declining, surely that would boost exploration, right? Well, not exactly.

Operators have cut back on exploration budgets, and instead are concerned with cash flow. They are in survival mode.

“Oil and gas companies are postponing or cancelling exploration activity to conserve cash, although declining rig rates mean these wells would generally be much cheaper to drill than they would have been 18 months ago,” says Tom Kellock, Head of Offshore Rig Consulting, IHS.

Being in a cash-negative position definitely hinders exploration efforts. “Offshore exploration success in 2015, in terms of liquids volumes, were the lowest levels the industry has seen in the past 15 years,” says Joachim Bjørni, an analyst with Rystad Energy. “Looking at company guidance for 2016, offshore exploration activity is set for a further decline.”

A recent report from Clarksons Research paints an even grimmer picture, calling the current offshore rig market “the worst in 30 years,” with global utilization dropping from 87% to 73% in 2015.

According to Clarksons’ data, global floater working utilization declined from 91% to 77%, down from a high of 97% in 2013, while global jackup working utilization has declined from 86% to 70%, down from a high of 95% in 2013. Average charter rates for high-spec jackups fell 43% y-o-y to $99,000/d, with average ultra-deepwater floater rates dropping by 42% y-o-y to $253,000/d, from a 2014 peak of nearly $600,000/d.

Infield Rigs’ data (as of 11 February 2016) shows that there are 686 mobile offshore drilling units (MODUs) worldwide, with only 471 contracted, at a utilization rate of 68%. On 18 November, Infield Rigs reported 690 MODUs worldwide, with only 500 contracted, at a utilization rate of 72% (see page 21 for a breakdown of current rig stats).

Analysts Quest Offshore don’t foresee total well demand picking back up to pre-oil price drop levels (2011-2014) of over 600 wells any time soon. Leslie Cook, senior research consultant for drilling, Quest Offshore Resources, said this year the company sees well demand at half of what it used to be, 300-320 wells.

“This volatility in oil prices brings out the conservatism in the industry,” Cook says. “It diminishes the pioneering spirit. We’re seeing the majors go back to low-risk plays.”

However, some supermajors are making commitments to higher risk plays, Cook says, such as Total (Uruguay), ExxonMobil (Guyana), Anadarko (Colombia), and Chevron (Tiber – Lower Tertiary Gulf of Mexico) (see page 90 for more on Uruguay, Guyana and Colombia).

Regional view

So where are the resilient areas? Cook says the Gulf of Mexico, because it has a mix of supermajors and smaller operators. However, some majors have opted to pull out of the deep water, such as ConocoPhillips and Marathon. Freeport-McMoRan announced late last year they would consider leaving offshore altogether and refocus on the mining segment.

Despite all of its challenges of late, Brazil is another bright spot, Cook says. “Brazil has a lot of good opportunity going forward, they just need to figure out what they are going to do with Petrobras and how to overcome the whole corruption issue,” Cook says, “but other than that there’s a lot of oil down there.”

According to IHS’ regional data, as of February 2016, utilization rates range from 38% to 89%, with Australia/New Zealand and South America at the higher end and the US Gulf of Mexico and Southeast Asia below 40%.

To retire or not retire

Despite low utilization rates, rig owners seemed to have stopped removing older units from their fleet, making matters worse. In early 2015, Norwegian analysts Rystad Energy said as many as 88 units needed to be taken out of the market by 2017. Bjørni told OE that in order for the market to balance again towards 2020 more retirements are needed, about 40 floaters and 80 jackups must exit before utilization returns to near-historic levels.

“Rig contractors got off to a really good start at the beginning of the year – they took out 30-40 rigs in 1H 2015,” Cook says. “48 rigs [were] taken out of service and retired in 2015, but in 2H it tapers off.”

Cook says of the 22 contracted newbuilds that were supposed to come out in 2015, only 12 made it out of the yard, and just eight made it into service by year end. Of the 20 uncontracted newbuilds, only five made it out of the yard and are yet to be used.

There are, however, some rigs still leaving. In February, Noble Corp. retired two offshore drilling units, the jackup Noble Charles Copeland and ex-Shell Arctic drillship Noble Discoverer. The retirements bring Noble’s full fleet to 30. The Noble Discoverer drillship contract was terminated by Shell in December 2015, following the supermajor’s announcement that it would suspend its Arctic exploration plans offshore Alaska.

Shell had previously terminated the contract for the other drilling unit in its Alaskan program, Transocean’s Polar Pioneer, which is now cold-stacked.

According to Transocean’s February fleet status report, the company has 21 units stacked and six sit idle. But the news in Q4 wasn’t all bad for Transocean.

In February, the newbuild ultra-deepwater drillship Deepwater Thalassa started its 10-year contract for Shell at its Stones project in the US Gulf of Mexico on a $519,000 day rate. The rig is designed to operate in up to 12,000ft water depth and drill wells to 40,000ft.

At the end of January, Chevron had moved Transocean’s Deepwater Asgard drillship to the deepwater Tiber prospect in Keathley Canyon block 102, in the US Gulf of Mexico, according to BSEE data.

The Deepwater Asgard, built in 2014, started a two-year contract with Chevron in April 2015 with a $623,000/d dayrate, according to Transocean. Like the Deepwater Thalassa, the Asgard can work in up to 12,000ft water depth and drill to 40,000ft deep.

Jackups

Currently, the jackup market leaves a lot to be desired. Bjørni says Rystad estimates that the global jackup market will continue to drop in 2016, but a market recovery is expected in 2017. In terms of markets expected to fair well out to 2020, Bjørni says the main markets for jackups are the Middle East and Mexico.

However, some rig owners are opting to sell a substantial number of jackups or dump the entire fleet. In Q4, Diamond Offshore said it would sell all of its remaining jackups, except the Ocean Scepter, which is contracted to Pemex until 2017.

Jackup and liftboat owner Hercules Offshore declared bankruptcy late 2015, emerging from it in November following a financial restructuring, then in February announcing it would form a special committee to consider its options, including selling or merging with another company. As of late January, Hercules had 19 jackups stacked out of its 27 units.

Fairing slightly better is Rowan Companies, which only had three jackup rigs stacked (out of 27 jackup units), as of January 2016. A fourth rig, Rowan Louisiana, which was previously stacked, was sold in Q4.

According to its October fleet status report, Ensco, which has a sizable global jackup fleet, has four units cold stacked in the Gulf of Mexico, one in Bahrain, and one in Malaysia, while another five units do not have contracts. The company also has three jackups under construction, due for delivery during 2016.

Most of Maersk Drilling’s jackup fleet is in Europe, primarily Norway. According to the company’s February fleet status report, its latest newbuild XL Enhanced 4, under construction at Daewoo Shipbuilding & Marine Engineering’s Okpo yard in South Korea, is due for delivery by mid-2016. The XLE series are built for ultra-harsh environments and rated for up to 492ft (150m) water depth and drill depths of 40,000ft (12,000m). Once completed, the jackup will begin a five-year contract, starting in 2017, with BP off Norway.