CATEGORIZED | 2010, May/June

ODS-Petrodata: Jackup market oversupplied, current forecast sees 86-unit surplus by Q4 2011

Posted on 30 April 2010

By Linda Hsieh, managing editor

A differentiation between dayrates received by the newbuild jackups and the older units emerged in the market as newbuilds began to get accepted. Gavin Strachan, ODS-Petrodata, believes this differentiation will be emphasized as time goes on.

A differentiation between dayrates received by the newbuild jackups and the older units emerged in the market as newbuilds began to get accepted. Gavin Strachan, ODS-Petrodata, believes this differentiation will be emphasized as time goes on.

Even when the truth is ugly, sometimes it still has to be said. For Gavin Strachan, principal with ODS-Petrodata, the ugly truth is that the worldwide jackup market is unquestionably oversupplied at the moment. Moreover, the number of surplus units will only increase over the next few years, unless some scrapping takes place.

According to ODS-Petrodata, there is currently a worldwide jackup demand of 323 units but a total supply of 458. After taking out 75 old/stacked rigs and three newbuilds that might not make it out of the shipyard, that leaves a current surplus of 57 units. By the end of 2011, demand is forecasted to bump up to 340 units while total supply will increase to 504 jackups. The company expects to see a surplus of 86 jackups for Q4 2011.

“We’ve been saying for the last three to four years that it is likely this market will be overbuilt, and don’t build anymore,” Mr Strachan said.

He does qualify his comments by adding that the jackup market is oversupplied only under current oil and gas prices. “But if the oil price goes up well above $100 a barrel, there could well be demand for more jackups,” he said.

Of course, whether the global economy can sustain oil prices “well above $100” is another question. “It can dampen the world economy, which then means that the oil price gets depressed, which means the oil companies can’t afford to drill that year,” Mr Strachan said.

THE BIG DIVIDE

A total of 921 offshore rigs are expected in the worldwide supply by 2012, with drillships seeing the biggest percentage gain.

A total of 921 offshore rigs are expected in the worldwide supply by 2012, with drillships seeing the biggest percentage gain.

As bigger, higher-capability, modern jackups have come out of shipyards over the past several years and operators have gained experience on them, a divide has appeared separating the old versus new. “We are seeing a divergence in the market between the older 1980-built units and the newbuilds,” Mr Strachan said. “It’s a combination of cantilever extension, strong engines and mud pumps, high derrick capacity and high variable deck load that’s differentiating these newbuild rigs. And operators have gotten used to them.”

For operators who are drilling long, deviated wells, the higher-capacity equipment on the newbuilds can be critical to their wells’ success. “And for some operators, they like the large cantilevers because it means they don’t need to get as close to their platforms as they used to,” Mr Strachan said.

This divide between old and new is perhaps most evident in terms of the dayrates the rigs have been able to secure.

The graph above shows fixtures for 300-ft independent-leg, cantilever jackups since 1999. When the newbuilds were being introduced in the first half of the 2000s, “you can see they weren’t always receiving an enormous premium. Then, when newbuilds began to get accepted, you were seeing a differentiation in the market,” Mr Strachan said.

“I think the differentiation between the dayrates will be emphasized” as time goes on, he said. A 1980s-built jackup might achieve dayrates of $75,000 to $85,000, depending on local markets, he said; whereas a newbuild could receive rates of $105,000 to $150,000.

But before people starting writing off the older rigs, Mr Strachan pointed out one surprising fact: The oldest independent-leg, cantilever jackups, those built in 1979 and earlier, have a higher utilization rate than the rate for all IC jackups. There are 68 total such pre-1979 jackups in the world’s fleet now, and 56 of those were working as of late March. That makes for an 82% utilization rate, compared with 77% for IC jackups in all age categories (286 units of 373 are currently contracted).

There are still 68 IC jackups built in 1979 or earlier in the rig supply today, and they appear to be enjoying a relatively high utilization rate.

There are still 68 IC jackups built in 1979 or earlier in the rig supply today, and they appear to be enjoying a relatively high utilization rate.

“It’s very interesting,” Mr Strachan said. “It surprised me.”

The reason for this could be that the main customers for these older units are national oil companies: Pemex, ONGC, Saudi Aramco, CNOOC, Petrobras and Zadco (UAE).

“A national oil company is, for political reasons, about helping indigenous products and companies. Therefore, they’re going to be slow to change from using older rigs to newer rigs. And they’re using older rigs because either they own them themselves, or they are in the ownership of local drilling contractors.”

NOCs are also more willing to sign longer-term contracts for jackups “because they know they need to do a certain amount of work … and they know they will have requirements for several years for particular rig types,” Mr Strachan said.

In fact, term contracts is a major reason why the Middle East continues to be such an attractive and active jackup market, despite the global drilling slump. There are approximately 25 stacked rigs in the region now, though Mr Strachan is optimistic about that market’s recovery, dependent on rig demand in Iran. In fact, he said, there’s currently a question mark hanging over 10 offshore rigs being built for that country in China. If those rigs’ construction are terminated, that would mean a total of up to 13 jackup newbuilds can be taken out of the supply equation.

ROAD TO RECOVERY?

Besides the Middle East, other jackup markets are beginning to recover as well, including the UK, Asia Pacific and India, Mr Strachan said. “And West Africa, because it’s quite a localized market, has recovered,” he said. ODS-Petrodata is forecasting a stable demand for jackups in West Africa through 2011, at 17 to 18 units.

The story in the US Gulf of Mexico shallow water is less favorable, however. “At the moment it’s oversupplied, and I don’t see that correcting itself in the short term,” Mr Strachan said. “The rigs there are mostly mat jackups – they can’t go anywhere else. Mexicans are saying they don’t really want them… And onshore shale gas is where operators will tend to spend their money now… I am pessimistic about the fortunes of the US Gulf jackup market.”

He did agree that ultra-deep gas drilling, such as programs being carried out by McMoRan Exploration, does help that market, but how much? “Whether Davy Jones or Blackbeard, it’s going to be very expensive to produce. These are long wells to drill at high pressure, so that will undoubtedly push demand for higher-spec jackups. But just how fast will McMoRan push these (developments) given the amount of gas that is now coming from shales onshore?”

The US Gulf jackup market also isn’t getting any boost from the relatively stable oil price, around $75/bbl, although that has certainly been good news for drilling activity in most other markets.

“Most people who follow this market seem to agree that the oil price has hit a sweet spot,” Mr Strachan said. That means it’s high enough to allow operators to invest in exploration and existing infrastructure and pay dividends to stockholders. “It also seems to be a price that the world economy can support without turning it down again,” he said.

TO STACK OR NOT TO STACK?

Mr Strachan believes that worldwide dayrates are not going to fall far from current levels – if only “because they’re far enough down already.”

Additionally, contractors appear to be opting to pull rigs out rather than work at low rates or on short-term contracts. “Compared with previous downturns, contractors are stacking their rigs rather keeping them working. They’re being much more pragmatic compared with how they used to be,” he said. “And Transocean is leading the way in this particular style of rig management.”

And, yes, coldstacking still seems to be the preferred option over scrapping a rig in this industry. “Nobody, or very few, want to get rid of their jackups. They coldstack them rather than scrap them. That’s always been the case and I suspect always will be the case,” Mr Strachan said.

Certainly there is a cost to coldstacking, as well as to bringing a rig out of coldstack, depending on rig type and location. “There used to be a rule of thumb, say five years ago … suggesting you need to spend $1 million per rig per six months of coldstack to bring the rig out again. That now seems remarkably low, and, just as a guess, I would say you’re talking three times more than that now,” Mr Strachan said.

And how long might a drilling contractor hold onto a coldstacked rig before finally sending it off for good? He believes it’s all about perception. “What are the expectations of the market? What does it look like will happen? We may have jobs for all of these jackups if the oil or natural gas price goes up to a certain level where it makes sense to drill accumulations adjacent to existing platforms.”

For rigs that may not be stacked but are just plain old, the decision of scrapping will be made by weighing the dayrates the rig can potentially achieve in the market against the cost of refurbishing it, he said.

The oldest rig still in the offshore fleet today was built in 1963, and it only recently came off of a contract; additionally, there are four more rigs built in the 1960s still in the supply pool. “Many of the 1970s-built rigs are very well made. They originally had a life expectancy of 20 to 25 years, which was based on the life expectancy ships used to have. Because it’s expensive to build a rig, it makes sense to keep on investing in a rig so its longevity is increased,” Mr Strachan said.

DEEPWATER: FEW WRINKLES

Compared with the jackup market, the floater market appears to be relatively trouble-free, Mr Strachan said.

The only visible wrinkle is that there will be several deepwater units available for subletting. “This makes it quite opaque to decide what is happening there,” he said. “The question is, will the original operator subsidize the rate to the operator he’s subcontracting the rig to? History has shown that he has to do so in a weak market. But operators tend to be reluctant to charge more than their original dayrate.”

“If the market rates are higher, then they should charge the higher dayrate. But in practice, they tend not to,” he added.

Although there have been fewer deepwater contracts signed in 2009 and 2010 compared with the preceding years, Mr Strachan doesn’t believe that’s truly a sign of trouble for floating rigs. “Most of the operators have the rigs they require already in position. I don’t think you can imply from this that the market is going down. It’s not. It’s just where we are at this stage in the market.”

“There may be a slight oversupply (of floaters) in 2012-2013, but not too much to worry about,” he continued. “We believe there will be a shortage of rigs from 2015 onwards.”

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