Home / 2018 / With dayrates still low, industry may have to look to consolidation to cut costs, accelerate rig retirements

With dayrates still low, industry may have to look to consolidation to cut costs, accelerate rig retirements

Newbuild deliveries may exert pressure on jackup market in 2018, but operators likely to maintain preference for high-performing rigs with recent track records

By Linda Hsieh, Managing Editor

Ihab Toma, CEO, Vantage Drilling

Ihab Toma, CEO, Vantage Drilling

Ihab Toma is CEO of Vantage Drilling.

Looking at the global offshore drilling market today, what do you see as the most critical challenges facing this business?

It’s utilization, and it’s oversupply. For the past couple of years, the big challenge had been lack of rig demand, but that is starting to come back. However, we still have an oversupply of drilling rigs, and that will continue to put pressure on dayrates. Therefore, at this point, it’s very difficult for us to do much except cut more costs to generate enough margins to survive under this kind of suppressed dayrate environment.

Have drilling contractors already cut costs to the bone?

I can’t speak for everybody, but at Vantage, we have. For example, we’ve cut down significantly on our shore base. In fact, we are spending less than half of what we used to spend three years ago while operating the same number of rigs. Also, by taking very good care of our rigs while they were stacked, we’ve managed to reactivate them at lower costs. We’ve reactivated four rigs so far at well below estimates.

Industrywide, the big opportunity for further cost reductions lies in the fact that the industry doesn’t need that many companies. I believe we have two or three times the number of companies we really need. And each company has its own G&A and support costs. Having more consolidation would help to cut down on those expenses, which are really the only remaining expenses that we can tap.

Do you think we’ll be seeing a lot more mergers and acquisitions in the coming year?

I think the industry needs to see more, but whether we are going to see more is a different question, and one I cannot answer. I do believe that more consolidation would help our industry, not only in terms of cost reduction, but it could also help to accelerate the retirement of older rigs from the global fleet.

You mentioned that you see rig demand starting to come back. Are you seeing that particularly in the Middle East and Asia or all around?

The shallow-water market touched bottom about a year ago and has been going up. I expect to see it continue that trend. For deepwater, we have yet to see any improvements, although I know that many people are hoping to see the market bottom out in 2018. Geographically speaking, yes, the top regions are the Middle East and Southeast Asia, but we’re also starting to see activity come back in West Africa and definitely in the North Sea. India is also fairly stable.

I understand that Vantage’s jackup fleet is 100% contracted. How concerned are you about all the newbuild jackups that are scheduled to be delivered in 2018?

Operators prefer proven rigs, and there is a big difference between a rig that is just being finished at a shipyard and a rig that has made it to the market and has been qualified for a bid by an established driller. A lot of the tenders that we’re seeing now require that if a rig was built after 2013, that it has drilled at least two wells before it can be qualified to bid. Of course, new rigs will put some pressure on oversupply, but I believe that operators prefer modern rigs that have been active and have a recent track record of drilling. 

vantage

Vantage Drilling’s Aquamarine Driller is working for Carigali-PTTEP International in the Malaysia/Thailand joint development area. The global shallow-water drilling market has been improving ever since it touched bottom in 2016, with the Middle East and Southeast Asia proving to be the strongest markets. However, activity is also starting to come back in West Africa and the North Sea, as well as in India.

So is the biggest impact of the rig oversupply still on dayrates then?

Most definitely. Three years ago, most people were talking about the bifurcation of dayrates for the new jackups versus the older ones. But now, that difference in dayrates has been significantly reduced. The bifurcation is now showing up in utilization rates. The utilization of modern jackups is in the mid-70s, while the utilization of older jackups is in the 50s. I believe that difference in utilization will translate into a dayrate improvement for the modern jackups once we reach around 85% utilization, which I hope we could see in 2018.

What about on the deepwater side? Do you see any improvements on the horizon?

Deepwater has yet to hit bottom. When we start to see new demand rise higher than the number of rigs coming off of contract, stacked rigs will have to be reactivated. And reactivation of a deepwater rig is not cheap, so that cost will have to be reflected in dayrates. Unlike with jackups, I believe the industry will see higher dayrates as soon as you have to reactivate some of the stacked deepwater rigs.

A drilling contractor might see the first couple of reactivations as investments, but soon after that they will have to demand a dayrate that justifies the reactivation.

There are also much longer lead times when tendering for deepwater projects, so that gives us more clarity on the market. We already know most of the 2018 deepwater development projects. Once operators start to approve projects for 2019 and 2020, bidding could start as early as 2018, and that could lead to an uptick in dayrates.

I really believe that 2018 could be the year where we start to see dayrate improvements for 2019 or 2020 work.

Would you say that in this market, drilling contractors are competing on uptime and efficiency rather than on the specs of their rigs?

I think the way to prove the efficiency of your rigs is not by showing customers the rig specs but by showing them the rig’s recent track record, in terms of safety performance, efficiency of operations and uptime. Those are the things that they’re looking for when they are selecting rigs.

So upgrades with things like MPD equipment or a second BOP stack are not boosting a rig’s competitive edge?

Well, we do see more tenders requesting MPD or riser gas handling equipment, but we have yet to see if MPD is really needed because it’s a must or if they are requesting it just because they can. Because even if the rig comes with MPD equipment, it will cost them $20,000 to $25,000 a day extra to run an MPD system. At current margins for drilling contractors, the operator will likely have to pay for this under a separate contract. I don’t see them actually using it if they don’t need it.

As for a second BOP stack, I think that probably makes a much bigger difference in a place like the Gulf of Mexico, where you have more between-well maintenance tasks, but not in the rest of the world.

Vantage has implemented a new safety-focused vision, “A Perfect Day, Every Day,” which includes the development of a new QHSE strategy that revolves around hazard awareness, leading indicators, systems simplification and new leadership training for offshore supervisors.

Vantage has implemented a new safety-focused vision, “A Perfect Day, Every Day,” which includes the development of a new QHSE strategy that revolves around hazard awareness, leading indicators, systems simplification and new leadership training for offshore supervisors.

What kinds of newer business models are you seeing in the industry?

In the past, drilling contractors were more reluctant to take responsibility for things like the ROV, the cement unit or casing running. Because if you take responsibility for something that’s not yours and it goes down, you might have to take downtime on the whole rig. I think that’s now being addressed through contracts. Even though we are being asked to take on extra responsibilities, we are not always being asked to link the uptime of the two together.

I think the industry also has to adjust to a new mindset when it comes to risk sharing. Today, drilling contractors are improving well efficiency significantly, but the faster we construct wells, the faster we put ourselves out of business. We should be paid more for drilling a 50-day well in 25 days, not the other way around like now as we get paid by the day. But to make changes to the traditional business model, both sides will have to be willing to share the risks.

I must say, however, that I am pessimistic on the industry’s ability to really get out of the old business models.

We’ve talked a lot about performance and cost reductions. Is the industry too worried about survival to forge ahead on safety?

Absolutely not; certainly not at Vantage. In fact, over the past year and a half, we’ve implemented additional safety initiatives under a new safety-focused vision. It’s called “A Perfect Day, Every Day,” and it calls for no downtime, no safety incidents and a fully satisfied client. It’s effective because it’s simple and easy for our crews to understand.

Under this new vision, we’ve developed a new QHSE strategy that revolves around the four pillars of hazard awareness, focus on leading indicators, systems simplification and our new Perfect Day leadership training for our offshore supervisors. We’re already seeing some very good results from this offshore leadership training, with much better job planning, supervision and hazard awareness.

As an industry, I think that we have come so far in improving our safety performance, and we should be proud of what we have achieved. We still have more to do, but we all want the same thing, and that is for everybody to be able to go home safely to their families. That is the goal of every drilling contractor, no matter who it is. DC

Click here to view DC’s video interview with Ihab Toma.

About The Author

Linda Hsieh is a graduate of the journalism program at the University of Texas at Austin, where she also completed the Business Foundations program at the U.T. McCombs School of Business and minored in Asian Studies. She has been writing for Drilling Contractor since 2005.

    

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