Modest recovery possible in offshore rig market

With 573 of the world’s 749 mobile offshore drilling rigs under contract, worldwide fleet utilization is 76.5%. While offshore rig utilization has not recovered to the levels of a year ago when the worldwide utilization rate was 86.7%, some improvement has been recorded. In August 2009, offshore rig fleet utilization dipped to 74.9%, and since then has been increasing slowly. However, with so many rigs out of work, upcoming new additions to the fleet could spell trouble in some market segments.

According to ODS-Petrodata’s online RigBase market intelligence tool, 176 mobile offshore rigs of various types are without contracts at this time. This number includes 121 jackups, 21 semisubmersibles, and one drillship. Figure 1 shows the contracted and working counts for the worldwide fleet and the working count for the three major mobile offshore rig types since 2002.

With the rig market already facing an oversupply, the scheduled influx of new rigs can only push utilization down in some offshore rig market segments, leading to more downward pressure on day rates. According to ODS-Petrodata’s research, there are currently 108 rigs under construction worldwide. Of these rigs, only 44 have contracts lined up after delivery. In addition to the rigs already under construction, a further 37 rigs are planned or on order. Of these rigs, only 13 have contracts waiting.

One rig was delivered this year, a jackup which has been warm stacked in Singapore before it heads to the Middle East. Another 65 rigs are scheduled to be delivered in 2010. Of the rigs to be delivered in 2010, 30 have contracts, the overwhelming majority of which are drillships and semisubmersibles. A total of 27 jackups are set to be delivered this year with no contract in place.

US Gulf of Mexico

The recent economic crisis and relatively low oil and natural gas prices hit the drilling industry in the US Gulf of Mexico hard. Effectively, the downturn split the US Gulf rig market into the floating rig market, and these rigs generally kept working, and the jackup market, where large numbers of rigs left the region or were stacked.

At present, fleet utilization in the US Gulf of Mexico is at 55.9%, the lowest of any major rig market. There are a total of 118 rigs in the region, of which 66 are contracted. Jackup utilization in the US Gulf is at 40.8%, down from a lackluster 65.4% a year ago. Meanwhile, semisubmersible and drillship utilization in the area is at 100%, as operators in the US Gulf continue their deepwater activities.

The current jackup surplus in the U.S. Gulf stands at 45 rigs, with 31 of these cold stacked. However, many drilling contractors in the region are confident the market is at bottom and a slow turnaround is in the making.

After a dismal 2009, further recovery in jackup demand is predicted for the US Gulf, according to ODS-Petrodata’sWorld Rig Forecast – Short Term Trends report. An increase in demand of two or three jackups is expected over the first half of the year, with a lull from August to October for hurricane season. Then jackup demand is likely to increase again, finishing the year with a four to five rig increase in demand.

With operators still eager to exploit deepwater resources, demand for drillships and semisubmersibles in the US GoM will increase in 2010. Both jackup and semi demand will go up by around six rigs, with almost the entire marketed supply of semis and drillships finding work throughout the year.

Latin America

Drilling in Latin America is primarily driven by Mexico, Venezuela, and Brazil. Currently 36 mobile rigs are deployed in Mexican waters, 33 of which are under contract for a fleet utilization rate of 91.7%. State company Pemex is the sole operator in Mexico.

In Mexico, demand for jackups will decline throughout 2010, leading to around five fewer rigs being employed by Pemex by the time December arrives. This decline is due to Pemex’s attempts to refocus some of its efforts from shallow water drilling to deepwater exploration. Semisubmersible activity in Mexican waters will go up by one or two rigs.

Currently 87 of 114 rigs in South America are under contract, for a fleet utilization rate of 76.3%. Brazil alone is home to 63 rigs, working for homegrown operators such as Petrobras and OGX Petroleo, and international companies like Anadarko Petroleum and Chevron.

In South America, demand for all rig types will go up throughout the year, driven by increased exploration and development drilling offshore Brazil and steady demand from Venezuela. Jackup demand will increase by one or two rigs, but the biggest gains will be seen in the floating rig market, particularly semisubmersibles.

Europe, Mediterranean, and Black Sea

The European rig fleet stands much where it did a year ago, with 104 rigs versus 102 rigs in January 2009. However, only 90 rigs are under contract in Northwest Europe and the Mediterranean Sea, versus 100 at the beginning of last year. With 14 rigs lacking a contract, fleet utilization is 86.5%.

Jackup and semisubmersible demand in Northwest Europe is expected to increase modestly for much of 2010. An increase in demand for jackups and semisubmersibles also is predicted for the Mediterranean and Black Seas.

West Africa

West Africa’s offshore rig fleet currently numbers 62 rigs, 48 of them under contract for a utilization rate of 77.4%. Drillship utilization is at 100%, followed by semisubmersible utilization at 80.9%, and jackup utilization at 66.7%.

The most active operators in the area include Total with seven rigs under contract, ExxonMobil with six rigs, and Chevron Corp. subsidiary Cabinda Gulf with five.

Demand for rigs in West Africa is expected to grow 10% over the coming year, supported by robust drilling programs offshore Nigeria and Angola. Demand growth is expected for all rig types, and demand for drillships may outstrip the marketed supply.

Middle East

The mobile offshore rig fleet in the Middle East includes 118 rigs, of which only 90 are under contract, and the oversupply situation is not expected to be remedied this year even with the relatively robust increase in rig demand the region may see over the next 12 months. The Middle East is effectively a jackup-only market, and as noted above, the world has too many jackups at present. However, demand for jackups in the Middle East is likely to increase steadily over 2010, with Saudi Arabia and the UAE responsible for much of the increase.

Saudi Aramco is the most active operator in the Middle East, with 22 rigs drilling, followed by IOOC with six, and Adma-Opco and ZADCO with five rigs each.

Caspian Sea

In the Caspian Sea, half of the 12 rigs in the region are under contract. The rigs in the region are evenly split between jackups and semisubmersibles. Four rigs in the region are under contract and drilling, with a fifth rig owner-operated and drilling. Three rigs are drilling off Turkmenistan and two off Azerbaijan.

Six rigs in the Caspian Sea are cold stacked, all in Azerbaijan. The majority of these rigs belong to the SOCAR, Azerbaijan’s state oil company. One rig for the Caspian Sea is under construction, the long-delayed COSL-managed semisubmersibleIran Alborz. The semi is scheduled to begin work for NIOC some time in 2010.

Asia/Australia

In the Asia/Australia region, overall offshore rig fleet utilization is at 79.8%, with 99 of the 124 rigs in the area under contract. Breaking this down, jackup utilization is 77.9%, semisubmersible utilization is 83.3% and drillship utilization is 85.7%.

Demand in the various markets of the Asia/Australia region is fragmented. In the Indian Ocean, demand for jackups, semis, and drillships is expected to be relatively flat over the next year. In Southeast Asia, demand for all three rig types is predicted to increase, but by less than a dozen or so rigs overall. In the Far East, semisubmersible and drillship demand is expected to stay flat, while jackup demand is likely to increase. In Australia and New Zealand, demand for semisubmersibles is expected to increase by one or two rigs early in the year before dropping below current activity levels. Drillship and jackup demand is not likely to change.

Day rates

With softer offshore rig fleet utilization in many markets, day rates are under downward pressure. The US Gulf jackup market has been hit particularly hard. Where jackup rates in the region at the end of 2008 ranged from $50,000 to $200,000 per day, depending on rig capabilities, rates at the end of 2009 ranged from $28,000 to $100,000 per day, according to ODS-Petrodata’s Offshore Rig Locator.

Declines in contract rates for jackups were seen in other markets, and the paucity of new contracts in some rig market segments has resulted in no current market rates being set. For instance, in Northwest Europe, jackup rates ranged from $180,000 to $405,000 per day at the end of 2008, while rates ended 2009 ranging between $89,500 and $170,000. In West Africa, floating rig rates ranged between $250,000 and $410,000 per day at the end of 2008, while so few new contracts were signed in the last quarter of 2009 that there is effectively no current market rate for five of the six floating rig market segments tracked in the region by ODS-Petrodata.

Day rates historically track fleet utilization, as seen in Figure 2. Rates generally increase with sustained levels of fleet utilization above 90% or so, depending on the rig market segment. Little movement is likely in offshore rig day rates until fleet utilization improves.