Rystad: Rig work on decline in 2017

OE Staff Nov 7, 2016

As the industry heads into the third year of the downturn, market fundamentals for the deepwater segment continue to fight strong headwinds, Rystad Energy says. But, is 2018 the light at the end of the tunnel for the floating rig market?

Utilization for the global offshore floating rig fleet will exit 2016 near 50%. This compares to 73% at year-end 2015.

Near-term market conditions remain challenging, as many of the tenders currently in the market are for short programs versus a small handful of multi-year tenders. By the middle of 2017, floater utilization could dip to 44% (assuming no new contract fixtures with early 2017 start dates).

Based on Rystad Energy mapping of additional demand to materialize in 2017, the company thinks 2017 average utilization will reach 53%.

As seen in the chart, the pace of contracting activity for floating rigs has slowed dramatically:

Q3 2016 saw only 10 new floating rig contracts signed, which compares to a previous five-year average of 40. Due to the limited number of outstanding tenders, Rystad says it does not expect this to increase materially before the end of the year. Also note how the below chart demonstrates that rates achieved in these contracts have plummeted from rates in the high-$500,000/d, down to $150,000/d in Q3 2016. This average is close to operating costs for many of these units and we suspect that certain contracts have been entered into at negative cash margins.

Chart 1 shows average dayrates and number of contracts by quarter. For the past two years, average rig rates and contracting volumes have been trending downwards. Realized dayrates and contract volumes have decreased substantially as compared to the period before oil prices started to fall during the summer of 2014. Chart from Rystad.

Eighteen floating rigs have seen early termination notices so far in 2016. Three rigs receiving termination notices from Petrobras have received temporary relief from a Brazilian court in the form of an injunction. However, these rigs are currently on standby. According to research by Rystad Energy, between seven and 10 rigs have been identified with contracts that could be at risk of cancellation.

Regardless of further contract terminations, 2017 will continue to be challenging for the floating rig market with any improvement not likely until 2018.

Cost compression across the entire supply chain and greater drilling efficiencies are setting the stage for an uptick in FIDs. Couple this with an expected rebound in the commodity price environment and the stage is indeed set for a recovery of floater demand beyond 2017. Data from RigCube, based on Rystad Energy’s base-case oil price forecast, suggests an increase in demand for floating rigs of 8.75% CAGR for 2018 through 2020. Pairing data from Rystad Energy’s UCube database, we show that ~37 projects could reach FID status during 2017, supporting the company’s view of increasing demand for floating rigs starting in 2018.

As noted in the map below, the regions that will see the greatest amount of growth in floater activity are East Africa followed by the Mediterranean and the Gulf of Mexico.