In a sign that national oil companies aren’t giving up their nation-building efforts anytime soon, the near-shore, jack-up rig market is experiencing a swell of business that’s lifting fortunes and impressing seasoned rig hands.
The global number of contracted jack-up rigs has gradually increased and has grown by 13 percent in just over a year, or from 311 rigs in January 2017 to 349 rigs in March 2019, says Shelf Drilling’s management team.
“There has been a significant increase in tendering activity in 2018 compared to 2017 and 2016, which has the potential to result in a continued increase in the global number of contracted rigs,” says Shelf Drilling chief exec, David Mullen.
“We have noted a particular increase in marketing and tendering activity in the Middle East and West Africa, and the oil and gas companies in these regions have indicated that they will increase their activity in 2019 and beyond,” he says.
Shelf Drilling controls all of what was deep water rig contractor, Transocean’s, former shallow-water jack-up fleet. With long-standing contacts among national and international oil companies, Shelf is well-placed to harvest the nearshore oil and gas reserves still so crucial to socioeconomic development.
Up for grabs, as well, are the drilling campaigns shelved after oil’s 2014 price collapse. Oil “stabilizing” at over $60 per barrel is just right to earn big on the low-cost business model of shallow-water jack-ups of around, say, 33 years of age.
Shelf, “the largest jack-up rig operator in the world by number of active rigs”, is firmly rooted in the Middle Eastern, Indian and resurgent West African oil provinces. While their rigs are earning an average $79,000 a day, down from the $124,000 of 2014, more of the company’s 38 jack-ups, including a premium rig bought in 2018, are finding work.
Shallow water represents 18 percent of total liquids production in the world and 70 percent of total offshore production. The Middle East — and increasing Thailand and India — are important offloading centers, the company says.
Despite the surge in rig hires, however, day rates are still “historically low”, and Mullen says price competition “among both international and regional jack-up rig contractors” is still fierce. Day rates dropped in 2018.
Still, the company reports signs of “day-rate stabilization” in “a few markets”. Management is optimistic about the improving trends related to the jack-up market: “We believe that the recovery on the day-rate front is only in its early stages.”
“Looking ahead, we believe that 2019 will be a transitional year, as the market continues its recovery with utilization improving across the industry, but that day rates will continue to lag, other than in a few key markets where we are seeing signs of an improvement.”
Shelf has about $935 million in drilling backlog to work through and is still looking for bargains on rigs that others might no longer be able to afford. With 28 of their 33 rigs contracted, or 85 percent (higher than the industry average), company fleet renewal is ongoing, even after spending $600 million to refurbish jack-ups since securing them from Transocean six years ago.
Meanwhile, two newbuilds ordered in 2017 were at work for Chevron in Thailand in 2018. The fundraising done in 2018 raised $216 million that helped buy the high-spec, second-hand, Shelf Drilling Scepter, at a reported 50-percent lower than cost.
Shelf has decades of Transocean and other oil-services experience in its management team, and they’ve guided the company into a unique spot astride Eastern and Middle Eastern markets. The fruits of that positioning include a partnership with Chinese yards to add three jack-ups and lasting ties to customers heavyweights ONGC, Chevron, Abu Dhabi National Oil Co., ExxonMobil, Dubai’s DPE and Eni.
Mullen alone has over 30 years of experience in oil services stretching from Subsea 7 and Ocean Rig to business development at Transocean and a 23-year career at Schlumberger. Experience has led the company to tie its fortunes to nations committed, along with their workforce, to economic growth by hydrocarbons.
“One of our strengths is the high national content we have been able to develop over the years,” a note to shareholders says. “We see this as a key differentiator as it provides long term stability for management and crews, aligns to the focus of the governments and customers, and makes good business sense.”
The company points to operations in Egypt and India, where local content in people has the rig operator, “90 percent nationalized”. Elsewhere, Shelf Drilling is grooming Saudi and Thai “national supervisors and managers” for the long-haul.
The Dubai-based Shelf Drilling markets 17 rigs in the Middle East, 14 of which are contracted. Seven of its eight rigs in India are at work.
But markets (for a company focused on water depths of up to 375 feet) are changing. Thailand, Shelf Drilling says, is gaining rapidly on the Middle East as a current and future source of rig revenues.