Worldwide demand for drilling rigs in 2006 will continue to outpace supply
Day rates in 2006 have potential to eclipse record highs from 2005
Terry Childs, Rig Data Manager, ODS-Petrodata, Inc.
The mobile offshore drilling rig market begins 2006 in an enviable position. Worldwide rig demand is strong and utilization of the marketed fleet is virtually 100% in every geographic region for every rig type. Day rates have reached all-time highs, and further increases are expected. Operators and rig owners alike have reported record profits, and as a result, operator spending will increase this year. Record high oil and natural gas prices were not only reached but also sustained for much of the past year. The number of new rig orders placed last year was staggering, so much so that some are now wondering if once again contactors are overbuilding. While many waited for further consolidation amongst drilling contractors, a reverse trend took place with several new companies emerging in the new rig order frenzy. However, it remains to be seen how many will survive to actually operate the rigs they ordered.
Despite all the good news from 2005, all was not well, particularly outside the business as the industry’s public image in the US and elsewhere was tarnished on several fronts. First, operators reported what in many cases were referred to as “obscene” profits, with full-page newspaper ads then taken out in an attempt to explain the results. Prices at the gas pumps rose with every oil price hike and spiked even more from the large-scale production shut-ins caused by Hurricanes Katrina and Rita. As a result, the CEO’s of five of the world’s largest oil companies were called in front of a Senate committee to explain their high profits and gasoline prices. While the scrutiny will no doubt continue this year, 2006 has all the markings of being another good one, as demand in almost every part of the world will continue to outpace supply. Below is a look at the rig markets in the major rig arenas around the world as of mid-January.
The US Gulf of Mexico
Contract backlog in the US Gulf is at an all time high. Currently, only five floating rigs have any availability in 2006, but pending contracts and/or extensions will soon push availability for those units into 2007 or beyond. A few floating rigs are leaving the area this year, but other incoming units will keep supply relatively stable. However, strong demand will continue and outside of possible sublet time, rig availability will be virtually non-existent this year. As for the bottom-supported fleet (jackups and submersibles), six-month or longer contracts are becoming more the rule rather than the exception, something not seen historically in this market. Currently, some 36 rigs have contracts that end between July and December, which accounts for just over 40% of the contracted fleet here. As more jackups are signed to term contracts, the available number of rigs for spot work shrinks, and the wait to get one of those is increasing as multiple contracts are tying up those rigs for several months. Rig owners have begun to reactivate cold-stacked units, but not without a term contract in hand. While these rigs will add to available marketed supply, they will initially add no capacity to the spot market. With no fewer than 10 jackups departing the Gulf this year for long-term contracts elsewhere, the market will continue to be undersupplied in 2006.
Turning to day rates, many segments of the fleet hit all-time highs in 2005, and those numbers are likely to be eclipsed this year, albeit probably not by the amounts seen last year. Today, several floaters have contracts that expire in 2007 at rates well below more recent fixtures, so these rigs will be in line for significant increases as they are either extended or sign up new work. In 2005, it was not uncommon for a floating rig day rate to increase by $50,000 from one contract to the next, and several rigs saw increases of over $100,000; and this will occur again for 2006 fixtures but whether new highs are set is the only question. Rates for jackups saw huge increases as well, although not as great, in either absolute or percentage terms, as those for floaters. While a handful of rigs have been released due to escalating rates, owners have had few problems finding other homes for those rigs and in most cases for longer terms and at higher rates. While all indications are that 2006 should be another strong year, the day rate debate grows louder, and it remains to be seen if and when this will impact activity.
The North Sea
This region has experienced quite a recovery in the past few years. Activity in a region that had in years past been referred to as “The Dead Sea” is now as strong as anywhere else in the world. A rash of contract signings in late 2005 has left literally just a few months of jackup and semi availability for all of 2006, with 2007 forecasts indicating a likely shortage of four or five semis, and between two and six jackups. Three units are currently undergoing reactivation for firm contracts, leaving only two cold-stacked rigs in the region, the lowest figure in years.
A recent announcement by the UK government that it was increasing the Supplementary Corporation Tax (SCT) tax rate by 10% has raised concern there. Some believe it could result in the cancellation of drilling plans as well as forcing a few rigs to leave the area. However, given the contracts in place at present, operators would likely face significant early termination fees, so any tax increase will probably not affect near-term operations, and 2006 should be a very strong year in the region.
Here again, day rates have risen to all time highs and show few signs of slowing down. For jackups, recent fixtures of standard units have reached $165,000, with expectations of reaching $200,000 sometime this year. Meanwhile, high-spec fixtures outside Norway now routinely exceed $200,000 and are being offered around $250,000 or more. Off Norway, the current leading edge rate for these units is $295,000, with bids over $300,000 now common. For semis, the region boasts the only floating rig in the world to currently have a $500,000 day rate in place, this for a contract that begins in 2007. Otherwise, leading edge rates for standard, high-spec and deepwater units range from $330,000 to $465,000. It is understood, however, that current bids for semis both in and outside Norway are in the $350,000 to $400,000 range.
Asia/Pacific
Just like everywhere else, the 2005 rig market in this region was strong, with the outlook for 2006 just as robust. Rig shortages exist in practically every area and for every rig type within the region. On the jackup front, it is expected that the first available units in Southeast Asia will be in the form of newbuild units starting in February. Twenty-seven of the 38 existing jackups here have firm programs that do not end until 2007 or later. Three of the eight jackups that are being built in Singapore and scheduled for delivery in 2006 have long-term contracts in Southeast Asia or India. For those who already have jackups, the tender process has come to a halt, except in those countries where it is legally required. Otherwise, operators are renewing contracts via direct negotiation with the owners. India is, at this point, set to see a net supply gain of two jackups in 2006, but this will still fall short of demand levels, which will increase by eight-to-ten units by the end of 2006.
As a result, contractors with newbuilds coming out are targeting the country as a destination for their units. The jackup market in Australia could see a one-rig undersupply around mid-year, but supply and demand should remain relatively in balance. On the floater side, there currently is about a five-rig semi shortage expected for Southeast Asia, and overall no deepwater availability for the entire year. The first two available floating rigs come off contract in August and September, but new commitments for both units should be in place shortly. As a result, the door is now open for one or both cold-stacked drillships in the region to be reactivated. Both are believed to need six to nine months of reactivation work. A semi and drillship undersupply will also exist in India starting in the second-half of the year, and a similar situation is expected off China and Japan as well. A balanced supply and demand market will exist off Australia although two units will move into the area against one departure.
Day rates have increased markedly over the past year and continue to reach record levels. Southeast Asia 300-ft. jackups are now being fixed as high as $147,000. Off India, all-time high fixtures are also being recorded. Newbuild jackups have been fixed at up to $165,000 and ONGC has fixed a 300-ft. jackup at $115,000, nearly twice the rig’s previous rate. In turn, day rates for standard floaters are now being offered at $150,000 and over, up from $135,000. Meanwhile, recent fixtures for deeper-rated units are still in the $200,000 range.
West Africa
This region has been one of the more active areas during the past year, as several long-term contracts have been awarded. Currently, the only rig not under contract is a tender-assisted unit. Four of the first five available jackups in 2006 have one-year options that will likely be exercised, leaving only one jackup available during the first half of 2006. The incumbent floating rig market in West Africa is now sold out in 2006, with the only availability likely to come from sublets. An undersupply of three to five floaters is predicted in West Africa by 4Q 2006 despite a net gain of three semis over the year. Marketed supply will increase from 17 units to 20 by December, while demand should increase from 16 units in January to around 24 by December as operators such as Shell, ExxonMobil and Total increase their drilling activity.
Naturally, day rates continue to push on. Jackup rates increased steadily last year and are now up to $145,000 for both 250-ft. and 300-ft. jackups. However, fixtures in the $160,000s can be expected in 2006. Meanwhile, standard semis are now being fixed at around $230,000 to $320,000 for higher-spec units; mid-water semis capable of drilling in up to 5,000 ft are picking up work in the $350,000s; and ultra-deep units are now being offered in the $450,000 to $500,000 range.
Latin America
At the moment, activity in this market is humming along, although concerns about Mexico continue to surface. While initial beliefs were that Pemex was going to release rigs, this has proven not to be the case, and in fact, the company has tendered for additional rigs. The concern now appears to be over the upcoming presidential election this summer. Assuming the government’s stance on offshore drilling remains the same, Pemex will bring in two or three additional jackups in 2006 and will continue to renew existing contracts when they expire. The operator has proven recently that it is willing to step up and pay the rates necessary to keep rigs in the region. In 2006, rates for new awards will eclipse $100,000 (up from rates in the $30,000’s fixed in 2002/2003), rising to over $140,000 for larger units. In the other active country in this region, Trinidad, three of the five working jackups come up for renewal this year, with two likely to receive long-term extensions. Also, theRowan Gorilla IIIwill arrive this summer to begin a one-year plus one-year option contract with EOG Resources.
The floating rig fleet in this region is essentially tied up to mid-2008. Despite the fact that it will lose two drillships in the first-half of this year, Petrobras extended contracts for its floating rig fleet in 2005 and signed new contracts that will bring additional rigs to the area. Coupled with other operators’ plans for drilling in the area, no fewer than five floaters will mobilize to the area for contracts starting over the next few years. Elsewhere in the region, only one of seven semis will come up for renewal off Mexico in 2006 and that is not until October, so the market should remain balanced for the entire year
In finalizing its extensions earlier in 2005, Petrobras was able to avoid the meteoric rise in rates that occurred later in the year. The highest rate the operator fixed was $220,000 for a rig that today would likely command over $400,000 in any other market. In comparison, Shell signed two much shallower-rated units later in the year at $240,000 and $280,000, respectively.
Middle East
This region could see the greatest increase in activity anywhere in the world in 2006. Should the planned rig demand here materialize, it could pull several more rigs from other areas of the world. According to the most recent ODS-Petrodata short-term forecast, jackup demand in the region will increase from around 71 rigs in December 2005 to 86 by December 2006, primarily from planned increases in activity off Saudi Arabia, Qatar and Iran. It is believed that Saudi Aramco could want as many as three more jackups this year, while operators off Qatar are said to be looking at adding up to six units in 2006. Meanwhile, supply in 2006 is currently projected to increase by only three units, from 78 to 81. As a result, unless additional units are mobilized to the region, the market will be undersupplied starting in the second half of 2006.
As for day rates, the Middle East jackup market has not witnessed the record numbers being agreed in Southeast Asia or West Africa, where 300-ft jackups are now being chartered at nearly $150,000. The highest fixtures to date in the Gulf were for Saudi Aramco’s long-term charter of four Rowan jackups at around $107,000. Recently, however, a 250-ft. rated jackup received a five-year contract at $120,000. It is believed that jackup rates fixed this year will approach $150,000 or more for larger units, while smaller units should get $80,000 to 90,000.•
