Rigs & Drillships: The Global Offshore Drilling Market

By Tsvetana Paraskova

Global offshore drilling activity and the rig market have finally emerged from the downturn which began with the oil price collapse in 2014.

Service contractors were hit the hardest by the oil price slump and the following significant reduction in drilling activity by oil and gas E&P companies. Now that oil prices have increased from the 2015-2016 lows, drilling activity is picking up pace again, as delayed projects are now being sanctioned and upstream investment is slightly recovering from the lows of 2016 and 2017.

During the downturn, drilling contractors suffered the most among the oil and gas industry segments, with purchases down by more than 60 per cent, according to estimates from Rystad Energy.

The drilling segment is now set to slowly regain ground with renewed interest in project sanctioning, thanks to more stable oil prices, the energy research and business intelligence company said in June 2019.

Across all oilfield services segments, offshore purchases hit a rock bottom of US$191 billion last year, down from a peak of US$352 billion in 2014.

This year, spending on floaters is expected to jump by 30 per cent from the industry low of 2018, while spending on jack-ups and barges will rise more than 7 per cent, Rystad Energy reckons.

“After a successful year in 2018 for major E&Ps, the now cash-flush exploration and production companies are expected to increase their spending on mobile offshore drillers. The floater segment, in particular, is where we anticipate the most rapid growth and this is driven by a new wave of greenfield (development) projects in deeper water,” according to the company.

Going forward, the floater segment growth will be driven by higher activity in ultra-deep waters and harsh environments, with projects in the North Sea, both in Norway and the UK, the US Gulf of Mexico, Brazil, and West Africa, Rystad Energy said.

“Several high-end sixth and seventh generation drillships have received long-term contracts since the third quarter of 2018 and rigs in this segment are expected to be close to fully utilised in the coming years. As of May 2019, not only the sixth and seventh generation drillships but floaters, in general, are seeing more rigs on contract this year in comparison to last year’s total,” Rystad noted.

The offshore rig market improved over the past year and a half, but utilisation rates are still below the 2010-2014 up-cycle of average 76-per cent rate, Westwood Global Energy Group said in its RigOutlook forecast in June.

As at May 2019, a total of 460 mobile offshore drilling units (MODUs) were working globally—the highest level of activity in three years, since May 2016, when there were a total of 466 rigs working. Currently, the global utilisation rate for the MODU fleet is at 59 per cent, which is 12 per centage points higher than the lows seen in February 2017, according to Westwood.

“While there remain some regional markets which continue to be challenged, the rig market as a whole appears to have emerged from one of the worst downturns in its history. Over the coming months and years, demand is expected to continue to increase as a backlog of delayed projects continues to be worked through, and aging, under-spec rigs continue to be retired,” Matt Adams, Senior Analyst, Rigs & Wells at Westwood, said, commenting on the outlook.

“Whilst, even in the most optimistic scenario, it seems unlikely that the offshore rig market will return to the heights of the previous upturn, there should no-doubt be cautious optimism,” Adams noted.

The acceleration in offshore rig activity lifts rig rates for certain types of rigs in some areas, with the ultra-deep water (UDW) floating rigs drawing a lot of attention, Westwood said in May 2019. Utilisation in the 139-rig fleet of UDW floating rigs is currently 76.9 per cent, while one-third of rigs are contracted into 2021 or even later.

According to Westwood’s Riglogix Rig Requirements analysis, more than 200 drilling programmes are currently planned to be carried out with either a semi or drillship over the next three to four years. The Norwegian sector of the North Sea, South America, and Africa are expected to be among the regions with high rig demand over the next few years.

At present, overall working jackup utilisation rate is approaching 70 per cent—this is up from 60 per cent just a year ago, Westwood has estimated.

“After an extended downturn, the market is watching closely to see when improved utilisation will yield higher day rates. In some areas, day rates are already hitting over $200,000, and continued demand for specific types of rigs is good news for the industry,” said Steve Robertson, Head of Rigs and Wells at Westwood Global Energy Group.

“The fact that some operators are committing to rigs far in advance is a clear sign that they are anticipating further day rate rises.”

Earlier this year, Wood Mackenzie expected day rates for floating rigs—which had stayed low in 2018—to remain low this year, but the market is set to balance out next year.

“Despite encouraging signs indicating the potential for higher exploration activity, we believe day rates will remain low throughout 2019, but we can expect the market to balance out in 2020,” Mhairidh Evans, Principal Analyst, Upstream Supply Chain at WoodMac, said in February, and pointed to signs of renewed optimism in the offshore upstream supply chain after a difficult few years.

During the downturn, the supply chain in oil and gas exploration and production “has had to roll with the punches” and is still struggling to assess where the post-downturn ‘new normal’ in demand will be, Wood Mackenzie’s Evans said in an analysis in April. According to Wood Mackenzie Upstream Supply Chain research, demand for floating rigs plunged by 55 per cent between 2013 and 2018, subsea demand dropped by 40 per cent, demand for floating production systems (FPS) including leased units went down by 25 per cent, and demand for subsea umbilicals, risers and flowlines (SURF) installations also dropped by 25%.

Rigs suffered the most because of the smaller projects with fewer wells and facilities, Evans says. Subsea demand will be driven over the next few years by subsea tiebacks which are now “the development type of choice more than ever before,” the analyst noted. Demand for FPS will return to the levels seen in 2013, while SURF installation demand did not fall as much as the other offshore packages, because there was installation demand of transmission lines not directly associated with offshore development, according to WoodMac.

There is some growth ahead, but it will be patchy and depending on the region, so growth will not be at a great pace, the consultancy said. The upstream supply chain is not raking in much cash flows these days.

“Margins are still dangerously low and expectations from operators are still for low pricing and fast execution and there’s still a lot of uncertainty about what the future holds,” according to WoodMac.

However there is a way forward for offshore upstream and it is ‘simple complexity’, Evans said. Operators continue to stick to simpler project executions to which they have adapted during the downturn. Yet, the industry acknowledges “that the lower hanging fruit has gone, and the remaining projects are more complex,” Evans noted, and continued:

“But that’s not all bad. For the supply chain, complex often equates to longer, and longer will mean bigger, more sustained returns for a sector ripe for recovery.”