Ultra deepwater supply facing steepest recovery

Liz Tysall and Oddmund Føre, Rystad Energy

March 1, 2017

Over enthusiasm in the recent floating rig building cycle has led to an ultra deepwater “hangover” that will take several years of recovery, says Liz Tysall and Oddmund Føre, of Rystad Energy.

Transocean drillship stationed at the entrance of Guanabara Bay in Rio de Janeiro. Photo from iStock.

Although drilling contractors are scrapping floating rigs at a relatively decent pace, removing only older rigs will not correct the looming supply over-hang in the ultra deepwater market. Cold stacking in the ultra deepwater market will close the gap, but will not resolve the problem long-term.

Utilization statistics

As we head into 2017, utilization of the competitive floating rig fleet stands at 47%. This compares to early 2014 when utilization was at 85%. As oil prices started declining in 2014, drilling contractors were reading the writing on the wall and rig attrition began in earnest. By the end of 2014, 19 floating rigs exited the fleet, followed by 27 during 2015 and 24 during 2016. Since 2014, taking into consideration rig attrition and new entrants, the annualized rate of decline for the competitive floating rig fleet has been approximately -6%/yr. Rig attrition announcements slowed slightly towards the end of 2016. Based on research by Rystad Energy, we expect retirements of between 8-10 floating rigs during 1H 2017.

Taking a closer look at some statistics, 39% of the idle floating rigs have delivery dates prior to the year 2000. The SPS (special periodic survey) on 20% of these units has lapsed and another 54% have surveys that will come due during either 2017 or 2018. For those units with surveys coming due within the next two years, only seven are ultra deepwater. Of the remaining units, nine are deepwater and 13 are midwater.

Re-shaping the floating rig fleet

Setting aside SPS due dates, hypothetically, if only units that were 25+ years old were removed during 2017 and all newbuilds (excluding Brazilian newbuilds) scheduled for delivery entered, this would bring the 2017 competitive fleet down to 205 units. Which is closer to levels seen just prior to 2010. Removal of these units changes the composition of the fleet into 13 midwater units, 12 deepwater units and 180 ultra deepwater units. While this is drastic, only a couple of drilling contractors would be “out of business,” so to speak, and making a few others pure jackup contractors.

Given the number of stranded newbuilds and the state of the shipyards, these contractors could theoretically refresh their fleets. However, the market is not quite at the point where drilling contractors are willing to take on the additional expense of acquiring newbuilds. Thus far, only two drilling contractors have announced acquisitions. These two separate transactions involved three units and only one of these units had a contract in place. As to the other two rigs, one was immediately cold stacked and the other is still under construction. In making adjustments to what the fleet would look like in 2018 and 2019 by removing units 25+ years old and adding newbuilds to the fleet, we could expect to see competitive supply at approximately 213 units and 220 units, respectively. Without removing any units 25+ years, the competitive supply in 2018 and 2019 would be 281 units and 286 units, respectively.

Based on announced newbuild delivery dates and rig attrition to date, Figure 1 depicts what the composition of the floating rig fleet will look like out until 2019.

Source: Rystad Energy RigCube

Ultra deepwater supply overhang

Retirement of floating rigs older than 25 years dramatically highlights the supply overhang in the ultra deepwater market. It should be noted only five rigs in the ultra deepwater market are older than 25 years. One is working, one is warm stacked and the remaining three are cold stacked. For the remainder of the competitive ultra deepwater fleet, 8% have SPS that has lapsed while 30% have surveys due in either 2017 or 2018. Within the subset of the younger ultra deepwater competitive fleet, 36% are cold stacked. Removing these cold stacked rigs from the active fleet is just at the breakeven point for newbuilds scheduled for delivery between 2017 and 2020, (excluding Brazilian newbuilds).

Road to recovery

Rystad Energy’s base case oil price scenario implies that oil will average at US$62/bbl for 2017 followed by a steady recovery towards 2020 and a real oil price of $90/bbl. Several factors that will contribute to an increase in floating rig demand: an increase in infill drilling demand; previously deferred FID (final investment decision) sanctions moving forward; and exploration activity growing on the back of cost compression across the offshore sector. Figure 2 highlights demand with competitive floating rig age-based attrition scenarios.

While data from RigCube indicates demand for floating rigs will begin to pick up in 2018, retirements need to continue at nearly the same pace as the past three years to help bring the market closer to being balanced.

Liz Tysall is a senior analyst at Rystad Energy and joined the Houston office in 2016. Prior to Rystad, Liz worked for Rigzone for 18 years and brings with her a sound knowledge of the oil and gas industry with a focus on the offshore drilling market.

Oddmund Føre
is a senior analyst and product manager of RigCube. His primary focus is on the analysis of the global offshore drilling market as well as the production and spending on the Norwegian Continental Shelf.