A recovery in the market is underway, with global offshore drilling rig utilisation rising, but OSV day rates have been slow to follow
Despite oil price volatility driven by geopolitical instability and rising Middle East tensions, there are positive signs that a recovery is underway in the offshore oil and gas market. The global fleet of active drilling rigs at the end of July had grown to 282, up 47 year-on-year, according to Baker Hughes.
Baker Hughes, which tracks global rig activity, reported that the biggest jump in regional offshore drilling activity in July was recorded in Europe, with 52 rigs actively drilling, up from 32 year-on-year (yoy). Of those 52 rigs, 39 were drilling in the North Sea, up from 15 rigs one year ago. That level of active rigs had not been seen in the North Sea in five years, since July 2014.
A recovery is also underway in the US, where the number of active offshore drill rigs reached 25 in July, up from 16 yoy. Drilling activity in the US Gulf of Mexico rose from a year ago, with 23 rigs active, up from 15. Still, it is a far cry from the heady days of 2014, when 59 rigs were active in the US Gulf of Mexico.
In a white paper, titled RigOutlook – a quantitative forecast for the offshore rig market, Westwood Global Energy Group provides a clearer supply and demand picture in the rig market, detailing current and historic utilisation rates. Rig utilisation is traditionally one of the key indicators used by OSV owners to determine the health of the offshore drilling market.
Westwood Global Energy estimates current utilisation rates for mobile offshore drilling units (MODUs) – encompassing jackups, semi-submersibles and drillships – is 59%, up from 47% in 2017, but well below the 2010-2014 average of about 76%.
Healthy drillship activity in US Gulf
And in another positive sign for the US Gulf of Mexico, Westwood Global Energy puts drillship utilisation at 91% in June 2019, compared to just 62% in September 2018. This represents the region’s highest point for over six years. The US jackup market has also seen a marked improvement in utilisation, rising from a low of just 6% in October 2016 to 46% in May 2019 – although this is likely to fall back to 36% in June.
One of the most active drilling contractors in the US Gulf was Diamond Offshore Drilling. Diamond Offshore’s four ultra-deepwater drillships, Ocean BlackHawk, Ocean BlackHornet, Ocean BlackRhino and Ocean BlackLion, have all been operating under contracts in the US Gulf for Anadarko, BP and Hess. Overall, it has 13 semi-submersibles and drillships activated, with three rigs stacked, two in Malaysia and one in the Canary Islands. The semi-submersible Ocean Onyx is undergoing upgrades and reactivation in Singapore for a contract with Beach in Australasia starting in January 2020.
On the demand side, 460 MODUs were actively working as a of May 2019, a 12% yoy rise, and the highest level since May 2016, when 466 rigs were working, according to Westwood Global Energy.
Drilling activity in the Middle East has also picked up in recent months. Westwood Global Energy estimates that 115 MODUs were working in the Persian Gulf as of May 2019 – all of which are jackups – the highest since February 2016, and higher than both the 2010-12 and 2013-15 averages (81 and 110 rigs, respectively).
In the North Sea, 57 MODUs were working in May 2019; four units higher than May 2018 and eight higher than May 2017. Heading into the summer months – which are typically the busiest time of year for North Sea rig contractors – as many as 66 rigs are expected to be working by September 2019, based on contracts already signed, with a notable improvement in demand for harsh environment rigs.
In the North Sea, the demand improvements already explored paired with 29 retirements out of the region (somewhat offset by relocations into the region) have pushed utilisation north of 60% and potentially as high as 71% by July 2019. This is compared to utilisation of just 46% at the start of 2018 and 53% in August 2017 – the former being in the typically quieter winter months (poor weather) and the latter being the high point of 2017.
In the Persian Gulf, utilisation has yet to recover materially, despite the current highs of 115 rigs actively working. This is due to a marked increase in the jackup supply in the region, from an average of 140 rigs through 2014 to as many as 170 in May 2018, although this has since reduced to 160 units.
In southeast Asia, 40 MODUs were working in May 2019, with as many as 44 expected to be working by July, which will be the highest level since late-2015. However, when indexed to average rig counts through 2014, current activity is little over 55% of what it was. Similarly, in West Africa, there has been a sharp increase in rig demand since the start of 2018, despite activity in Nigeria and Angola being suppressed by political and economic issues. An average of 32 MODUs were working in May 2019; the highest level for over three years, although again this remains well below 2014 levels.
Time to retire
On the supply side, Westwood Global reports that 207 MODUs have been retired from the global fleet since the start of 2015 (as of end-May 2019). The largest quantity of these were removed from the fleet in 2018 (57 rigs), 26 of which by Borr Drilling following its acquisition of Paragon Offshore, including the sale of 17 jackups for non-drilling operations. A further 15 rigs have been retired in 2019, including four rigs by Shelf Drilling, three by Borr Drilling, and three by Transocean.
While these retirements have gone some way to offsetting the negative impacts of falling rig demand through the downturn, the delivery of 101 newbuild rigs has limited this effect – particularly in the early years of the downturn. Near term, a further 87 rigs – including jackups ordered prior to the end of 2014 – have yet to be delivered, 53 of which are currently expected before the end of 2019, although delivery dates have tended to slip and will likely continue to do so, says Westwood Global Energy.
Newbuild deepwater drilling rigs
In H1 2019, there have been six deliveries of floating deepwater drilling rigs, according to research firm Rystad Energy. Norway’s Odfjell Drilling took delivery of the semi-submersibles Deepsea Yantai and Deepsea Nordkapp. In the first half of 2019, drilling contractors Transocean and Seadrill took delivery of one semi-submersible each, with two new drillships having been handed over to Sonadrill.
Rystad Energy says this trend could accelerate in the second half of 2019, with another eight units scheduled for delivery. Rystad Energy says if the current schedules are met, a total of 14 newbuilds will be delivered for 2019. But still the fabricators have several projects in their pipeline; in 2020, 11 additional floaters are likely to be completed and delivered, followed up by another five in 2021.
OSV day rates lagging
While the increased drilling activity is welcome news for OSV owners, day rates have not risen as one might expect. Reflective of that are the H1 results for OSV owner Tidewater, which operates in all of the major drilling regions following its merger with Gulfmark Offshore last year. For the six months ending 30 June 2019, Tidewater reported average vessel day rates for the Americas including the US Gulf of US$11,871, down 23% from US$15,323 from the same period yoy. Average day rates for Tidewater’s Middle East and Asia Pacific fleet were US$7,249 for the six months ended 30 June 2019, down 7% from US$7,770 yoy. On a positive note, average vessel day rates for Tidewater vessels in Europe and the Mediterranean jumped sharply, up almost 30% to US$12,004 from US$9,246 yoy.