Offshore rig market update: is the worst behind us?

The crude oil price and Covid-19 were held as equally to blame as the biggest challenges for the offshore rig market over the past 6 months by 87% of respondents to a poll during Riviera’s webinar Offshore Rig Market Update: Is the worst behind us? Only 2% agreed that the oil price was only to blame and another 2% felt that Covid-19 was solely to blame. The remainder (9%), saw Covid-19 as predominantly to blame.

Offshore energy services company Westwood Global Energy Group, which provides comprehensive analysis on all major infrastructure and assets across the offshore energy sector, sponsored the event, which was hosted by Riviera’s executive editor and head of business relations Edwin Lampert. Westwood Global Energy Group head of offshore, rigs and wells Thom Payne and head of its specialist RigLogix, Terry Childs, formed the panel.

It was Mr Payne’s task to paint the picture of the outlook for the global offshore exploration and production market. He commenced with a short-term market review. “July saw an improvement in the oil market with prices holding firmer at around US$40/bbl to US$45/bbl, which has carried on into August,” he said. “This is a welcome reprieve from the first half of the year which saw an unprecedented swing in supply and demand.”

“This culminated in a staggering 22M b/d oversupply in April 2020 as global economies headed into lockdowns coupled with the disillusion over OPEC plus. Demand fell to 78M b/d,” he noted.

He said “Saudi Arabia pumped an additional 1.6M b/d driving Brent (crude oil price) down to a temporary US$10/bbl and also seeing WTI futures plunging into negative territory.” This nadir passed over and since then the situation has improved with OPEC+ committing to a 9.7M b/d cut in production in May 2020 with an average compliance of 96%.

“August estimates are at 96% compliance, too,” he said. He noted that the 9.7M b/d cut in production agreement tapers off to 7.7M b/d starting in August through to the end of the year. In a webinar poll, attendees were asked if their organisation had experienced an uptick. The majority (68%) replied in the negative and only 32% had noticed an uptick.

What is Westwood Global Energy Group’s view on crude oil prices? “We believe that if OPEC+’s cuts hold and the IEA’s current demand trajectory plays out, then the net draw position should widen to 5.0M b/d for the rest of the year and oil prices should average around US$50/bbl in 2020/2021. We expect a full erosion of the built-up storage by August 2021 and I expect that (crude oil) prices will move back to US$60/bbl by 2022,” said Mr Payne.

In a webinar poll, 59% of respondents agreed that the crude oil price would move back to US$60/bbl with the remainder (41%) disagreeing.

Mr Childs, referred to as the rig database guru by Mr Payne, was tasked with producing a summary of the global offshore rig market. He noted that the current offshore rig fleet consists of 510 jackups, 117 semisubmersibles and 102 drillships. The combined crude oil price crash and the Covid-19 virus impact has hit rig supply hard; almost half of the jack-up attrition this year has taken place since March 2020, and the floating rig fleet has declined by 15 units during same period.

“Rig attrition has come to the forefront, but it has been expected for many years,” said Mr Childs, “and there has been a huge decline in demand. Marketed utilisation, which counts non-cold stacked rigs, was near 80% in March 2020 and but has fallen by 8% since then.”

Contract backlog, the forward cover of work booked for rigs, fell sharply. Mr Childs said over 17,000 days and US$1.9Bn in rig contract backlog has been lost since mid-March due to contract terminations, suspensions and declined options. “We should point out that this is not all lost revenue. There will be a termination fee in some form, such as a day rate, but the backlog is lost and another idle rig is added to the fleet,” he said.

Turning to the regional outlook for the rig market, Mr Childs noted that Latin America, west Africa, and the US Gulf were traditionally referred to by drilling contractors as the ‘Golden Triangle’. Today, east and southern Africa should be included. “The US Gulf deepwater rig market has somewhat diminished but Latin America and Mexico all have tenders due,” he said, “A lot of contractors believe 2021 will be a strong year.” In a poll, most attendees felt that Africa and the Middle East would provide the greatest market opportunity in the next five years.

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