As debt covenants come due, offshore drilling contractors may be forced to push harder for higher dayrates
By Linda Hsieh, Editor & Publisher
Offshore drillers can expect to see a better market in 2020, but it won’t be the kind of dramatic recovery that the industry is hoping to see. “It will be an improvement over 2019, just not dramatically,” said Cinnamon Edralin, Senior Offshore Rig Market Analyst for IHS Markit.
Globally, IHS Markit expects demand to increase by about 18%, or about 90 rigs, over this year. That translates into approximately 561 units – 400 jackups, 86 semis and 75 drillships, according to Ms Edralin. More than half of that increase is expected to come from the jackup segment.
Key hotspots for jackups will continue to be the Middle East, Mexico and Southeast Asia, she said, while South America is the region to watch for floater potential. Brazil, for example, is expected to be picking up additional rigs. So far, Petrobras has been sticking to domestic Brazilian-owned rigs, but international drilling contractors may get an opportunity to step in next year.
Excitement also continues around opportunities in countries like Guyana and neighboring Suriname. In September, ExxonMobil announced yet another discovery offshore Guyana, at the Tripletail-1 well in the Turbot area of the Stabroek Block. The operator already has three drillships working in Guyana. One is the Noble Tom Madden drillship, which will drill the Uaru-1 well, approximately 6 miles east of the Liza field, after completing its work at Tripletail. The Stena Carron drillship is drilling the Range-2 well, also on Stabroek, and will then move to conduct a well test at Yellowtail-1. The Noble Bob Douglas drillship is completing development drilling operations for the Liza Phase 1 project, scheduled to start up by early 2020 and will produce up to 120,000 barrels of oil per day.
In addition to these three rigs, ExxonMobil has also said that it’s bringing in the Noble Don Taylor drillship to Guyana.
Elsewhere in South America, Colombia and Argentina are also making renewed efforts to boost their hydrocarbon production, Ms Edralin said. Shell, for example, signed two E&P contracts this year with the Colombian government for two blocks in the Caribbean Sea. Several other companies, including ExxonMobil, are also investing in this region. In Argentina, the government this year awarded exploration permits to companies like ExxonMobil, Total and YPF to explore 18 offshore areas.
There is also more positivity in the US Gulf of Mexico, where Ms Edralin said the market is finally approaching a balance between rig supply and demand. “A lot of floaters left the Gulf of Mexico over the past two years, so we don’t have much idle capacity. We still have a small number of rigs rolling off contract between now and the end of this year. If those rigs can secure follow-on work for a meaningful period of time – for a year or more – then we’ll suddenly be in a potential shortage… We’re getting pretty close to switching over from an operator’s market to the drilling contractor’s market.”
However, that switch is not likely to actually happen until 2021, she clarified, as most of the work from operators appear to be short duration only. “Some operators are saying they might have the work, but they don’t want to commit to it all upfront,” Ms Edralin explained. “So you’ll probably see them take the rig for one or two wells, then take it another one or two wells after that. The rig will probably wind up staying contracted for the whole year, but you won’t know that at the beginning of the year. There’s still a lot of caution in the market.”
Looking at the global rig market as a whole, Ms Edralin said that while dayrates are rising, they are doing so very slowly, simply because there is still so much oversupply. However, going into 2020, she cautioned that some drilling contractors will likely come under increasing pressure to push for higher dayrates.
“The heavy loads of debt among the rig contractors – they’re coming up. They were able to push it off somewhat during the downturn, but as the debt covenants come due, they need to have money to pay it down,” she said. “It’s going to be difficult from here on out. They’ve been pushed into a corner, and they really have to be firmer on pushing dayrates and not just work at operating costs. We’ve started to see them do that more in the past quarter, and that will likely continue in 2020.”
While reducing the rig oversupply in the market would help with this effort, Ms Edralin noted that the pace of rig retirements has dropped off significantly this year. As of September, only 19 rigs had been removed from the global drilling fleet this year – five drillships, four semis and 10 jackups. There will likely only be one or two more for the rest of this year, she added. In contrast, 63 rigs were removed from the fleet in 2018.
Rig retirements are likely slowing down because the low-hanging fruits have been picked, she said. “There may also be concerns by the rig contractors that they might be taking too much of their physical assets off their valuation books.”
In the meantime, the industry is watching ARO Drilling – the joint venture between Saudi Aramco and Valaris – on the two newbuild jackup orders that have been in the pipeline for a while but yet to materialize. If ordered, the rigs will be built in Saudi Arabia at International Maritime Industries’ new yard in Ras Al Khair. Other than this, the only newbuild order that has been officially announced this year is Awilco Drilling’s new CS60 harsh-environment semisubmersible. The rig, which will be able to drill in the Barents Sea, is scheduled for delivery from Singapore’s Keppel FELS yard in 2022.
Other additions to the rig fleet will likely come from rig reactivations rather than newbuilds, Ms Edralin said. One example is Pacific Drilling’s Pacific Khamsin, which had been stacked since the end of 2015 under what the company calls “smart stack.” The drillship was reactivated earlier this year in preparation for a contract in the Gulf of Mexico for two firm wells and two optional wells, to start in November 2019. Another reactivation announced this year has been Diamond Offshore’s Ocean Onyx, a moored semisubmersible originally built in the 1970s and upgraded in 2014. The rig is now undergoing reactivation and upgrades for a contract in Australia for six firm wells and five optional wells. DC
This article includes reporting by DC Contributor Emily Lincke.