Waiting for the bright side

Stephen Gordon, Clarksons Research

March 1, 2017

2016 was a year of huge challenges for the offshore drilling rig sector as the low oil price environment and reduced E&P spending continued to bite. Stephen Gordon, of Clarksons Research, charts the state of the market, which is arguably facing some of its toughest times since the 1980s.

Laid up rigs offshore Invergordon, Scotland, are indicative of the increasingly common choice among drilling contractors to stack inactive assets.  Photo from iStock.

The offshore drilling market began last year facing up to its worst market for 30 years, and despite a rising oil price, 2016 delivered a raft of gloomy statistics. The long-term perspective and the nature of the current down cycle has parallels with 1986, which, historically, was the lowest point for the oil industry.

Utilization falls to 64%

Across 2016, total working rig utilization fell by 11%, declining from 75% to 64% over the year and to its lowest level since 1986. Putting this in context, working rig utilization finished 2013 at 96%; so the current market is into deep recessionary levels. In January 2017, the working offshore rig count sat at 456 (312 jackups and 144 floaters), dropping by 105 units year-on-year and down from 746 working rigs at the end of 2013.

Dayrates for new contracts also continued to slide downward as cost pressures built, with the global average ultra deepwater floater dayrate dropping 60% since the peak in 2013 (US$564,000). Now, the dayrate sits close to opex levels at $178,000.

The global average dayrate for jackups has dropped to $93,000, 45% down from the peak in 2013. In contrast to the dayrates for floaters, dayrates in the jackup market were more stable across 2016 and at the start of January 2017, broadly sat a margin above opex. Competition for any tenders is fierce, while “blend and extend” remains a market feature.

Opex levels themselves are down by an estimated 30% from market peak, as the cost-cutting focus across oil and gas filters down through the supply chain.

Regionally, there have been a few bright spots. These areas of optimism are particularly in parts of the world where exploration and production is dominated by national oil companies. As an example, the number of working jackups in India stood at 34 units in January 2017. China also had 34 rigs working. These numbers reflect a year-on-year rise. In the Middle East, activity remained relatively stable at 116 to 108 rigs across 2016.

Long-term rig utilization numbers show peaks in the mid-1980s, in 2008 and 2014, followed by a precipitous drop.  Data courtesy of Clarksons Research.

Supply calibration and future hope?

What could be potentially helpful for the future is more scrapping and stacking of units, which would start to tighten supply. The active fleet – counted in terms of rigs available for deployment – actually dropped by 5% across 2016, with 44 units scrapped and 54 units entering cold stacking.

With the industry looking to move large numbers of rigs out of service, ABS provided guidance with its Guide for Lay-Up and Reactivation of Mobile Offshore Drilling Units, which provides a means for defining the status of a stacked unit. It outlines five options for rig lay-up and guidance for maintaining the asset, defining the three basic options: “Laid-up,” “Laid-up Warm Stacked” (with personnel onboard) and “Laid-up Cold Stacked” (unmanned with no personnel on board), and introducing an “Enhanced” status for out-of-service units that indicates the unit has had its lay-up location and procedures reviewed to a higher standard and verified by ABS in accordance with the guide. The guide also includes requirements for reactivation that allows surveyors to verify that the unit meets class standards to move onsite and begin operations.

It is increasingly difficult to use the available data to track the exact status of rigs and their ability to re-enter the market precisely, even for assets that recently reached the end of a drilling contract.

Left: From the beginning of 2014 to February 2017, a total of 116 rigs were scrapped. Data courtesy of Clarksons Research.

Right: The number of cold stacked assets in all sectors was nearly seven times higher in January 2017 than in January 2008. Data courtesy of Clarksons Research.

Orderbook uncertainty

The status of the rig orderbook at shipyards remains largely uncertain. Numbers generated from Clarksons’ data indicate that the rig orderbook for 2017 stands at 164 units, with an aggregate original newbuild contract value of $60 billion.

It is important to note that while there are orders on the books, delivery dates remain uncertain. Nearly 60% of the orderbook is largely constructed, but it is very possible that these units will remain in yards for some time and in some cases face an uncertain future entirely.

Rig utilization dropped significantly between 2014 and 2017. Data courtesy of Clarksons Research.

Deliveries from the yards last year fell by 30% as delivery dates continued to slip in the face of the financial pressures faced by rig owners. In fact, there were only three floaters delivered into the market. Slightly more encouraging is the fact that 23 jackups were added to the global fleet during 2016.

As of January, Chinese yards had 65 jackups and 12 floaters on order. Singapore yards had 22 jackups and four floaters on order, and South Korean yards had orders for 19 floaters and three jackups. These yards are facing particular pressures in dealing with their orderbook inventory.

Outlook

The immediate outlook remains challenging. Moving toward a significant upside, at least in terms of dayrates for 2017, may be difficult. There are, however, starting to be some signs of improved tendering levels, specifically for jackups and in certain regions of the world (i.e. in the Middle East and India where the rig count is stable or rising) and a greater appetite for acquiring assets, albeit at very “competitive” prices.

While the market may be showing signs of increased activity, it is too early to predict a move toward a more positive picture. More evidence will be needed as 2017 progresses to understand if the market cycle has bottomed out.

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