Drill ship activity is taking off in the US Gulf of Mexico despite Biden administration policies, writes Esgian’s Hans Jacob Bassoe
After only a few weeks in office, US President Biden moved to suspend new oil and gas leasing rounds on federal lands and waters. The decision created a commotion in several US states with concern it would result in the demise of offshore oil & gas exploration drilling activities. However, fast-forward six months, and the reality has been quite different with recent offshore drill ship activity taking off.
The US Gulf of Mexico (GoM) appears to be leading the offshore drilling market recovery, but the beginning of the year showed a slightly different picture. This year kicked off quite dramatically for US oil and gas companies and offshore drillers, as the Biden administration moved to combat climate change by implementing a moratorium on oil and gas leasing sales on federal lands and in offshore waters. It was thought that this move would only exacerbate lack of demand for deep-water rigs in the region. Bassoe Rig Analytics shows that the US GoM has experienced a decreasing trend in backlog, and since early 2018 the total backlog among jack-ups, semisubs and drill ships has fallen by almost 50% in the period. Therefore, the Biden administration’s news was not exactly welcomed by those involved in the offshore rig industry.
The land of opportunity
Despite the moratorium (which has since been lifted), it seems the US GoM market has just outright ignored the rhetoric, as the region has responded quite differently than what was expected just six months ago. The negative backlog trend has stopped, and once again the region appears to have become the land of opportunity.
While the year began slowly, drilling rig contracting has really soared in the past month. Contracts awarded in Q1 of this year were typically short-term exploration campaigns with a work duration between 30 and 60 days. But as the oil price increased, so has the appetite for offshore drilling. So far this year, total backlog added (about 9 years) is already close to the total years added during the full year of 2020 (10.7 years). There are still more awards to come too, with Bassoe Rig Analytics estimating that more than 5 years of tendered and planned backlog could also be added this year.
Modern drillship demand
The reignition of the US GoM rig market has been driven by deep-water demand, where particularly modern MPD capable drill ships have been on the top of operators’ wish lists. With recent fixtures, 7th Generation drill ships have been in highest demand with six out of seven drill ships fixed this year being in this class. This has led the region to secure some of the highest dayrates fixed so far this year (globally), with recent rates coming in at around US$250,000 per day for MPD capable drill ships and a premium is added for when MPD is required. While the premium for MPD wells might vary, the dayrates seen in the market have been close to US$300,000 per day. With the current demand outlook, we can expect to see the region become tight in the first half of 2022 and, therefore, operators are likely to look elsewhere for drill ships with rumours already circulating of units from other regions being offered on long-term work in the US GoM.
Although the debate on drilling permitting in the US remains, it seems that the US GoM will continue to play an important role in the US oil and gas industry, at the very least in the near term. According to the US EIA, crude oil production is estimated to increase in both 2021 and 2022 from 1.65 million b/d to 1.75 million b/d (2022) as several new projects will begin production. Also, new discoveries are still being made by the likes of Shell with its giant Leopard oil discovery in Alaminos Canyon block 691 earlier this year. The US GoM is driven by independent O&G companies, therefore, with a stable and an increasing oil price which we have been seeing so far this year, we can expect activity to continue to grow in the region.