Brent crude oil prices surged over 10% on 9 November, propelled by the news of a Covid-19 vaccine that had proven 90% effective in trials and production cuts by oil producers
As a result, Brent crude closed at US$43.48 per barrel, up US$4.03 from a US$39.45 close on 6 November.
There was also some sentiment that President-elect Joe Biden’s administration could be a stabilising factor for the US economy, with the possibility of another economic stimulus package. Mr Biden is also expected to tighten regulations around fracking, which could curtail oil and gas output, potentially limiting supply and raising oil prices. An effective vaccine from Pfizer or other drug manufacturers could spell the end of countrywide lockdowns, improving the outlook for energy.
Pfizer’s announcement was welcome news in a year that has been marked by unprecedented challenges. With only six weeks remaining in 2020, deepwater drilling activity slipped, while global offshore jack-up drilling rose across the board, spurred on by activity in the North Sea, southeast Asia and the Middle East. As a result, global jack-up drilling rose to 320 active units during week 46, up three units week-on-week.
Floating rig activity, meanwhile, slowed, with 105 units contracted, down from 107 week-on-week, with activity falling in the North Sea and South America.
Noble Drilling – one of several offshore drilling contractors that have sought Chapter 11 bankruptcy protection during the severe market downturn – reported securing a firm contract for five wells, plus options for two additional awards to drill one well in its latest fleet status report. Under the award, the drill rig Noble Hans Deul was contracted by an international oil company in the UK North Sea from March 2021 to May 2022. Gas also continues to drive activity. A contract for Noble Mick O’Brien, meanwhile, was extended to late August 2021 by Qatar Gas in Qatar.
Noble Drilling also reported the sale of Noble Bully I, Noble Bully II, Noble Paul Romano, Noble Jim Day and Noble Danny Adkins. In reporting its Q3 2020 results, Noble said it was selling the cold-stacked rigs based on the market outlook, stacking costs and potential reactivation costs.
Drilling rig contractors continue to pare jack-up drilling rigs, semi-submersibles and drill ships from their fleets. Westwood Global Energy reports that as of the end of October, 38 units had been retired, including 17 jack-ups with an average age of 36 years and 16 semis averaging 27 years old. While those long-in-the-tooth units might not surprise anyone, what is surprising is that five drill ships retired had an average age of 9.2 years.
An insightful analysis by Westwood Global Energy’s head of RigLogix Terry Childs, and senior analyst Jun Lin Too digs into why these youthful drill ships – owned by Valaris and Noble Drilling – were sent out to pasture and why some 14 others might meet similar fates.
“Looking at their history, there are a few eye-catching numbers, but one stands out,” writes Mr Childs. “Only two of the five ever earned a dayrate under US$350,000.” However, the lifetime contract revenue for each rig ranged from US$600M to a little over US$1Bn, but none had worked for more than eight years at the time of retirement. Two of the five had passed due special periodic survey (SPS) dates, pointed out the Westwood Global Energy analysts.
The drill ships Valaris DS-3, Valaris DS-5 and Valaris DS-6 were delivered between 2010-2012, at build costs of US$730M, US$720M and US$745M, respectively.
Meanwhile, Noble’s drill ships, Noble Bully I and Noble Bully II, were both delivered in 2011 at a cost of US$600M each.
Crunching the numbers, the analysts said the lifetime revenue to construction cost ratios for these five rigs ranged from 0.9x to 1.6x – “probably not what a rig owner might expect when ordering a rig.”
Within the current fleet of 100 drillships (excluding 17 units under construction), RigLogix data in Table 1 below reveals that there are 14 units that have been inactive for two or more years and have their SPS overdue or due this year. Moreover, 11 of these units are currently cold stacked and eight of those 11 are less than 10 years old.
Among the 14 drillships listed, only three have earned revenues 2x or more their construction cost, and two of the rigs have earned no revenues at all as they have not worked since they were delivered. In contrast, some rigs retired before 2020 had a much higher revenue versus construction cost ratio.
GSF CR Luigs (retired in 2018), for instance, earned lifetime revenues 4.7x its US$383M construction cost.
Drill ships inactive for more than two years with SPS overdue or due in 2020
Rig Name |
Rig Manager |
Rig Age |
Next SPS Date |
Construction Cost (US$M) |
Total Contract Revenue Generated (US$M) |
Contract Revenue to Construction Cost Ratio |
West Navigator * |
North Atlantic Drilling Ltd |
20.7 |
28-Feb-2015 |
$650 |
$1,691.9 |
2.60 |
Discoverer Clear Leader |
Transocean |
11.6 |
26-Mar-2019 |
$650 |
$1,623.3 |
2.50 |
Discoverer Americas |
Transocean |
11.3 |
3-Aug-2019 |
$615 |
$1,231.5 |
2.00 |
Deepwater Champion |
Transocean |
1.2 |
3-May-2016 |
$740 |
$1,147.8 |
1.55 |
Valaris DS-11 |
Valaris |
6.9 |
9-Dec-2018 |
$600 |
$706.5 |
1.18 |
Ocean Rig Athena |
Transocean |
6.7 |
23-Mar-2019 |
$608 |
$634.4 |
1.04 |
Ocean Rig Mylos |
Transocean |
7.2 |
19-Aug-2018 |
$608 |
$626.4 |
1.03 |
Bolette Dolphin |
Dolphin Drilling |
6.7 |
21-Feb-2019 |
$615 |
$571.3 |
0.93 |
Valaris Reliance |
Valaris |
6.0 |
6-Nov-2019 |
$600 |
$497.4 |
0.83 |
Titanium Explorer |
Vantage Drilling |
8.5 |
19-Apr-2017 |
$782 |
$509.5 |
0.65 |
Ocean Rig Apollo |
Transocean |
5.7 |
4-Apr-2020 |
$755 |
$159.9 |
0.21 |
Valaris DS-9 |
Valaris |
5.6 |
19-Apr-2020 |
$645 |
$61.5 |
0.10 |
Dalian Developer (Zhong Yuan 110) |
Dalian Deepwater Developer Ltd |
5.4 |
29-Jun-2020 |
$561 |
$0.0 |
0.00 |
Pacific Meltem |
Pacific Drilling |
6.0 |
25-Nov-2020 |
$600 |
$0.0 |
0.00 |
* Calculated from 10 years of full dayrate history (2005 – 2014). Rig names in bold indicate a complete dayrate history was used in the calculations. Figures not adjusted for inflation. Rig ages as of 31 October 2020
Source: RigLogix/Westwood Global Energy
Further, pointed out Mr Childs, the rigs were built during the previous building boom, with costs upwards of US$800M, leaving owners well short of payback.
“The odds are not very good that more than 1-2 of the rigs on the above list will ever make their way back into the fleet given that the US$500,000 to US$735,000 day rates many of these rigs earned for a few years are not likely to be seen again, and with reactivation now in the US$40M to US$50M range, considerable losses will be realised upon retirement in some cases.”
He also said there are other drillships not on the above list that will be retired, pointing to an additional 17 units as potential retirement candidates. Of the 31 total attrition candidates, 19 are owned by Seadrill, Transocean and Valaris combined and most were ordered in the last rig building boom between 2010 and 2012.
“Rig owners aim for a 10-15% annualised ROI when ordering a rig. Since the highest annual ROI of the five units retired so far in 2020 was an estimated 6%, it should be assumed that going forward, a 10-15% ROI for any drillship left in the fleet is unlikely, and perhaps one-half of that range will become the new norm. It likely also means that finding the financing to order a new rig will be considerably more difficult in the future.”
Noble Drilling, Diamond Offshore, Valaris and, as we reported last week, Pacific Drilling have filed for Chapter 11 bankruptcy protection. Westwood Global Energy expects other rig owners are likely to join that list sooner rather than later. This could lead to potential industry consolidation and possible mergers of one-time rivals.
Still, Mr Childs had some sobering thoughts for the offshore drilling contractors. “The industry cannot retire its way out of the current oversupply and an increase in rig demand will have to take place to balance the market,” said Mr Childs. “Relief is some way off and dependent on oil prices. For the drillship fleet, Westwood’s high-case demand forecast for 2021, assuming a US$50/bbl oil price, shows utilisation increasing by only about 2% over the predicted 65% for 2020, before increasing to just over 85% in 2022, which assumes Brent oil prices recover to $60/bbl.”
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