Data shows offshore drilling market tighter than it appears

In a continuing sign of a recovering offshore oil and gas market, offshore drilling rig market utilisation may be as much as 18% higher than generally reported and far tighter than perceived, according to a Westwood Global Energy market analyst.

“While there has been much excitement over the past year regarding rapidly increasing offshore rig utilisation (and day rates), it appears the true extent of this tightening market is still not always being accurately represented across the industry,” writes Westwood Global Energy’s RigLogix research director Teresa Wilkie.

“There is a simple reason for this — there are several ways to look at offshore rig utilisation,” she says.

A respected rig market analyst, Ms Wilkie knows a thing or two about offshore rig utilisation, having been at both IHS Markit and most recently Esgian Rig Analytics, before rejoining Westwood Global Energy in March. She was a senior rig market analyst for Westwood Global Energy from 2018 to 2020. Ms Wilkie will be on hand to discuss increased drilling opportunities in frontier regions at the Annual Offshore Support Journal Conference, Awards & Exhibition in June.

“A commonly used method, but one that is causing misrepresentation in market outlooks, considers only contracted rig utilisation within the marketed (i.e., excluding cold-stacked) rig fleet. This method looks at how many rigs are currently on hire within a set period but does not consider those non-working rigs that have future contracts in place,” she explains.

When considering only the contracted and marketed offshore drilling rigs in the main segments, RigLogix data shows jack-up utilisation at 82%, followed by drillships at around 79% and semi-submersibles at 64%. Traditionally, a utilisation level of 85% would result in upward pressures on day rates and spur reactivations, she notes, but this is already happening in the market. So, what gives?

 “We know day rates are quickly increasing, rig reactivations have started, and rig sales of units stranded at the shipyards are taking off,” says Ms Wilkie. “All of these are indications of a tight rig market, but those utilisation levels are not high enough to cause the type of increases we have seen.”

Getting a true picture of rig availability requires a deeper dive into the data. “To get an idea of what is really going on, you need to also consider those rigs that are currently idle, undergoing reactivation or other shipyard work but are committed for work in the future and hence not available for hire in the near term,” she says. This means not just looking at contracted offshore rig utilization, but also committed offshore rig utilisation. By adding future committed marketed rigs to currently working and contracted units, a “wildly different utilisation tale” is revealed, Ms Wilkie says.

“Utilisation of semi-submersibles stands at 82%; 18% above the contracted level”

“Although semi-subs are still lagging behind jack-ups and drillships,” she says “utilisation of semi-submersibles stands at 82%, some 18% above the contracted level. Jack-up and drillship usage are both up 10% over contracted utilisation, with the 92% for drillships, representing a nearly sold-out market.”

This sheds new light on drillship activity in the US Gulf of Mexico and Brazil, “which are both currently fully utilized, with all rigs either currently on hire or preparing for future campaigns.”

As a result of the overall tightness in the market, offshore drill rigs are being fixed at day rates that are higher than their previous contracts.

In its most recent fleet status report, Transocean disclosed rising average estimated contract day rates for both its ultra-deepwater (UDW) fleet and harsh-environment semi-submersible fleets. The Big Board-listed drilling contractor reports average estimated contract day rates for its UDW fleet will rise from US$312,000 per day for Q2 2022 to US$355,000 per day in Q1 2023, while days rates for its harsh environment semi-submersible fleet will climb from US$386,000 in Q2 2022 to US$439,000 in Q1 2023.

Ms Wilkie points out that as active rigs sell out, drilling contractors will look to cold-stacked fleets and newbuilds to meet the technical requirements of oil operators.

“Day rates have the potential to reach highs not witnessed in almost a decade”

“With many operators bidding for drilling programmes that do not begin until late 2022 or in 2023, drilling contractors have the time necessary to reactivate or complete construction of these rigs. Most rig owners report needing a six- to 12-month reactivation period,” she says.

However, drilling contractors will require multi-year contracts for these assets because they “do not have the financial wherewithal to reactivate speculatively, given that costs for such shipyard work is estimated, for example with a floating rig, to be anywhere from US$50M to US$100M.”

Ms Wilkie concludes: “In the interim, as tendering and direct negotiations for offshore rigs continue to surge, especially so with the renewed focus on energy security following the invasion of Ukraine by Russia, rig availability will be squeezed further and day rates (which have now reached close to US$400,000 per day for 7^th generation drillships) have the potential to reach highs not witnessed in almost a decade.”