The mobile rig building cycle of the late 1990s continues to run its course. While orders dropped off substantially as commodity prices began a rapid decline over the past 18 months, rigs on order are emerging from construction yards. The end of this building cycle is on the horizon and growing nearer as each new or upgraded rig enters service.
Offshore's 1999 Worldwide Survey of Mobile Offshore Drilling Unit Construction and Upgrades shows the majority of the rigs (23) currently under construction will be completed by the end of this year. For deliveries in 2000, the number slacks to 18. Three units are scheduled for delivery in 2001.
Even with the typical 2-3 month delays that have plagued contractors and shipyards, and the few cancellations that have occurred, the building cycle should not progress far into the coming millennium. This end to the building cycle offers a number advantages to rig contractors, among them a much-needed change to the current state of rig utilization.
Current market
The drop in new orders is a function of operator cutbacks. A number of the newbuilds, conversions, and upgrades that have come into the market in the past 18 months are sitting idle or being sent to work in other regions than originally scheduled. In addition, with the current low day rate scenario and operators canceling contracts, some contractors have had to trade out lower day rates for longer contract periods in order to keep expensive assets working and attempt to recover some of their capital investment.
While it may equal out in the long-term, meaning that the longer contract will still cover the cost of the rig, the added time at lower day rates falls short of the contractor's financial timeframe expectations.
When the majority of the contracts were entered into, rig contractors expected that when the two and a half to three year initial contract period ended, the rig could obtain its next contract at a higher day rate. This event then shortens full payout of the asset in a positive market, but with the market in the current negative position, full payout is extended. The contractor then must spread the debt farther along the timeline, instead of shortening it.
Bright spot
While this may sound like doom and gloom for the rig contractors, a cycle has produced some advantages. With the end of the building cycle, contractors will once again have an opportunity to enhance their leverage in the market.
- Drilling contractors have had an opportunity to completely overhaul their fleets. Most vessels have either been converted or upgraded, and virtually all have been refitted in some manner. The fleet will be much higher in quality and much younger.
- Drilling units will be much more versatile and offer operators flexibility to meet almost any needs.
- More rigs will be available, especially for deepwater, when supply and demand economics fall into balance.
While the economics for newbuilding will still not be justified for some time, contractors will again get what they had expected to obtain from the second contract on their rigs, if not more. Contractors will have sufficient rigs to develop a strong contracts backlog when activity picks up.
Rig fabrication
Although improvement and rebuilding of the fleet may be good for drilling contractors, rig fabricators are suffering a massive curtailment of orders. Some yards will definitely die off or be acquired as work declines. However, the more diversified shipyards that do not specialize entirely on rigs will continue to prosper - especially those with production unit fabrication capabilities.
In addition, even after the drilling units have left to begin operations, they will be back for additions, refits, and other work. With the large amount of prototype equipment on these overhauled rigs, the chances of malfunction and need for refinement are quite high.
The building cycle has been of great benefit to the fabrication facilities that have been able to send out refitted units and newbuilds on time and on budget. Producers now have a good picture of better or weaker facilities. Yards with the strong records of on-time delivery, such as Samsung and Hyundai, will hold more clout when newbuilding or refitting is required.
The end of the cycle will result in a modern fleet of drilling units, an unprecedented achievement. Almost every available unit for upgrade has moved through the fabrication yards and many of the newbuilds will join the fleet this year. The industry will soon know whether they are justifying the billions in expense.
1999 survey data
A total of 114 mobile offshore drilling units are listed in Offshore's annual survey. Included are 36 jackups, 18 drillships, and 54 semisubmersibles. An additional six barge rigs are listed in a separate chart. The vessels in the survey are listed in one of the following stages: recently completed, under construction, or planned within the last year. Forty-eight of the units are newbuilds (12 jackups, 14 drillships, 19 semisubmersibles, and 3 barge rigs). The remaining 66 are being converted or upgraded (24 jackups, 4 drillships, 35 semisubmersibles, and 3 barge rigs).
Of the total rigs listed, 61 have been completed since July of 1998 (24 jackups, 6 drillships, 25 semisubmersibles, and 6 barge rigs). However, the majority of the rigs, 45 units, are currently under construction and due for delivery within the next few years (7 jackups, 12 drillships, and 26 semisubmersibles). Only seven rigs are in the planning stages (4 jackups, and 3 semisubmersibles), and only one of these is new construction. This decrease in planning is demonstrated by the 50% dropoff from last year's survey (13 planned rigs in 1998).
Each vessel listing includes the name and type of vessel, whether it is a newbuild, the stage of construction or upgrade (planned, underway, recently completed), new capabilities or upgraded features, the proposed date of completion, and the construction yard. Most information contained within the survey was submitted by the companies, with the remainder gathered from other sources.
