Drill-ship utilisation levels reach 82% in March with fixtures to surpass US$200,000 by late 2021 or early 2022, and better times to come for the battered deepwater drilling market, writes RigLogix head of offshore Terry Childs
It goes without saying that the past year has been unprecedented for not just the offshore rig market, but the oil and gas industry as a whole. The Covid-19 pandemic has interrupted rig contracting and drilling operations in every region and while activity in some geographies has shown signs of recovery, a new ’normal’ has been put in place for crew movements and other logistical protocols.
In addition, several major rig owners have gone through or are currently in the midst of Chapter 11 bankruptcy proceedings, and consolidation rumours are once again running rampant, further fuelling uncertainty over the near-term future of the global fleet. The number of annual drill ship retirements since 2016 has ranged from five to seven units, and there is no reason to expect anything less in 2021.
According to RigLogix data, marketed (excluding cold-stacked units) committed drill-ship utilisation in February and March was just under 82% – higher than any month since February 2020. As seen in the graph below, utilisation in 2020 fell to just below 70% in July and despite some ups and downs, has sharply increased since December last year. The recent upward swing was brought about by a combination of a three-rig supply decline coupled with a near five-rig increase in demand. For the entire period, a supply decline has been responsible for utilisation not falling off the deep end, falling from 94 in June 2019 to 74 by March 2021. At the same time, drill ship demand has also come down – from a high of 73 contracted/committed rigs in May 2019 – to 60 in March 2021.
Despite the recent utilisation uptick, day rates have generally not followed suit, but there have been a few isolated instances of noticeable increases such as Maersk’s just over US$210,000 fixture for Korea National Oil Company (KNOC) for an upcoming well off South Korea, and Transocean’s recent US$215,000 fixture for BHP in the US Gulf of Mexico.
However, when looking at overall ’clean’ fixtures during the past year (that is the base rate sans integrated services, mobilisation costs, and other add-ons) the average new rate fixture since February 2020 is just over US$187,000, contrasted against the 2019 average of just over US$182,000. The general rule of thumb is that utilisation must hit 85% for substantial rate improvement to occur (this number used to be 90%), and at just a notch below 82%, we are closing in on that mark. With the Brent crude price settling above US$60 for much of the first quarter of this year, there is cautious optimism (boy, if I had a nickel for every time I have heard that phrase!) among rig owners for the remainder of this year and into 2022, which has been somewhat substantiated with reports of some operators accelerating drilling programmes to take advantage of low rig rates while they can.
Early contract terminations and suspensions have also been prominent in the rig market during the past year, although they have slowed down considerably in recent months. Fortunately for drill-ship owners, this segment has emerged less scathed compared to semi-submersibles (semis) and jack-ups. Only eight contracts have been early terminated since 1 March 2020 and none since mid-December of last year. Nevertheless, rig owners lost over US$350M of revenue from seven of the eight terminations (no day rate was known for the other fixture). One of the eight terminations, which accounted for US$150M of the total, was due to an operational incident and not the oil price decline or Covid-19 pandemic, as per the other cancellations.
Bankruptcy and consolidation
Drilling contractor Chapter 11 bankruptcy filings have garnered much of the market’s attention so far this year. Noble Drilling, Valaris, Diamond Offshore and Pacific Drilling, which together own nearly 30% of the existing drill-ship fleet (29 of 99), have gone through or are going through the process, as are Seadrill Ltd subsidiaries Seadrill Partners and AOD Drilling. In the case of Seadrill Partners, a recent agreement will end up in an arrangement seldom seen in the rig market – that is a rival rig owner taking over management services. The court recently approved Vantage Drilling to manage four of the eight units, while it is believed that agreements for the remaining four units will be in place in May. Rumours are that Diamond Offshore and Odfjell could be involved in that deal.
With the bankruptcy filings, the inevitable rumours of consolidation; particularly regarding Noble Drilling, Valaris, Diamond Offshore and Pacific Drilling, have been swirling since at least three of the companies are said to have some common debt holders. Noble Drilling will acquire Pacific Drilling in an all-stock deal that will close in April. The combination will result in two Pacific drill ships being retired ’expeditiously’. Whether any other deals take place remains to be seen, but it is possible that the changing landscape could mark the end of some of the biggest names in the history of the offshore rig market, joining the likes of Rowan, ENSCO and GlobalSantaFe.
Tendering for drill ships positive
On the more positive side, the aforementioned recovery in oil prices so far this year is already having a positive impact on the drill-ship segment. In looking at outstanding requirements where a drill ship is believed to be the preferred rig type, there are 55 drilling programmes that have a 2021 start date and 152 in total. As of the time of writing, 21 of the 55 are currently in the pre-tender or active tender stage, so there is no shortage of upcoming new work. Overall, 38 of the 152 total drill-ship requirements are in some form of tendering. The table below details these requirements by region.
As seen in the table, the bulk of current drill-ship demand is in the so-called ‘Golden Triangle’ area, which comprises the Gulf of Mexico (US and Mexico), South America (not just Brazil anymore), and Africa (west, south, and east coasts). These regions account for 44 of the 55 requirements scheduled to begin this year and 118 of the 152 total. Between Africa and Brazil, there is 83.6 rig years, spanning some 30,523 days of work potentially up for grabs. Inevitably, some 2021 start dates will be pushed into 2022 or even 2023. The Gulf of Guinea in particular is expected to continue to struggle with Covid-related logistical challenges.
The outlook for 2021
Over 2021, RigLogix expects drill-ship supply to fall by around eight units from the 2020 average fleet size of 83.5. Since January 2020, six drill ships have been removed from the fleet (five in 2020 and one so far this year), but according to RigOutlook data, there are nearly 30 drill ships listed as potential retirement candidates. Over 50% of those have been stacked for two years or longer and most have expired special periodic survey dates. Given the prohibitive cost of reactivation, estimated to be anywhere from US$50M to as much as US$100M, it should be assumed that only a handful (at most) of these units will ever work again. Newbuild rigs eventually will have a greater impact on supply, but not by a lot this year. At present, only four of the 17 units under construction have a 2021 delivery date and RigLogix expects likely deliveries this year to include Transocean’s Deepwater Atlas and Deepwater Titan, both of which have contracts in the US Gulf of Mexico. All things considered, RigLogix believes it is reasonable to expect our net attrition projection of eight units will be realised this year.
All in all, RigLogix expects drill-ship demand in 2021 to increase on average by as many as 10 units to around 65, based on open requirements. This projection is supported by both Westwood Global Energy’s Wildcat database, which shows that the number of high impact exploration and appraisal (E&A) wells drilled offshore could be 17% to 22% higher than the 2020 total, and the SubseaLogix database, which expects 250 subsea tree installations in 2021 – a 19% increase year-on-year.
As utilisation improves, the balance of buying power will inevitably start to shift, and while anecdotal evidence of current bidding levels indicate that rig owners believe now is the time to push pricing, those efforts to date have only been moderately successful, constrained by some managers continuing to contract rigs at breakeven levels (or even below).
Nevertheless, RigLogix expects several upcoming fixtures to eclipse the previously noted US$187,000 clean rate average, with the psychological ceiling of US$200,000 to be more routinely broken shortly thereafter. RigLogix also expects that some fixtures for work starting late this year or in 2022 to be well above that mark and a beacon of better times to come for the battered and beleaguered deepwater drilling market.
|Region||Total requirements||Total days||In pre-tender/active|
|Africa - West||54||15,333||16|
|South America - Brazil||25||11,445||8|
|Africa - Other||17||3,745||7|
|North America - US GOM||11||2,520||8|
|Asia - southeast||11||2,062||6|
|South America - other and Caribbean||11||680||2|
|North America - Mexico||5||440||3|
|Europe - North Sea||2||60||0|
|Middle East - Red Sea||1||365||0|