Thinning the herd

November 1, 2015

For the offshore floating rig market, the downturn presented the perfect storm: too many rigs, not enough demand, and with some 200 newbuilds set to enter the market over the next decade. Audrey Leon reports.

The Maersk Developer, operating the Hadrian-5 well for ExxonMobil about 200mi offshore in the KC-919 area of the Gulf of Mexico, on 6 July 2011.Photo from Robert Seale/Maersk Drilling.

To say that 2015 has been a bad year for some rig owners would be an understatement. The segment has too many rigs and not enough demand.

Many analysts expect the declines to continue into 2016. Tom Kellock, an analyst for IHS, told OE: “With limited contracting opportunities and more newbuilds joining the fleet, utilization will fall further – unless the rate of attrition accelerates very rapidly.”

Analysts at Rystad Energy reported in June that the offshore drilling industry is on the verge of “the largest ever retirement cycle in history,” with as many as 88 units needing to be taken out between 2015 and 2017. At the time of the report, Rystad Energy said it expected 49 units to be taken out in 2015, a record level not seen since the 1985 oil crisis. Rig owners have to retire an additional 36 units in 2016 to balance the floater demand, the firm said, with demand expected to pick up again in 2017.

Joachim Bjørni, an analyst for Rystad Energy, told OE that the firm expects the downturn to continue and reach bottom in 2016. And many rig providers seem to agree that things will not improve any time soon.

Exploration

The Maersk Integrator, the third of four newbuild jackups to be added to Maersk Drilling’s fleet from 2015-2016, in Amøyfjorden, Norway.  Photo from Maersk Drilling.

On the exploration side, Wood Mackenzie’s Andrew Latham says things aren’t likely to improve there either for some time. “In exploration, we’re almost certainly going to see 30% lower spend over the industry this year, no different in the drilling segment,” he says. “That cut back would be steeper still if there weren’t contracts from 2013 and 2014 that rolled into this year. You’ve lost more than 30% of your demand. And you’ve also got more units. Yes, there have been some taken out, but new ones keep arriving. Construction program has not stopped abruptly.”

Certainly, day rates have a role to play in operators choosing to limit drilling activity to more mature, low risk wells. Despite that trend, the number of discoveries has been decent this year.

“It looks like there’s about 5 billion boe new resource from new discoveries in the 1H 2105,” Latham says. “Experience says this will grow by another third or so, just through better disclosure, better appraisal, etc., but 5 billion for half a year, isn’t bad.”

Latham says, in a typical year, the industry finds approximately 15-20 billion boe in a full year, and he believes the industry is on track to reach at least 15 billion boe by year’s end.

“Now, what makes that an impressive achievement, is because so far we’re seeing fewer wells,” he says.

Latham notes we’re seeing fewer wells mostly due to budget cuts, but also due to a new focus on low risk wells. “The industry is spending less and it’s not renewing rig contracts as quickly as they would have done a year or two ago,” he says.

“Of course, if you drill lower-risk wells, and measure your risk accurately, lo and behold, you get a higher success rate.”

Latham says the Macondo accident and the push for safety in the aftermath has attributed to rig demand in recent years.

“If you go back to pre-Macondo (2009), operators typically took 50 days of rig time per deepwater exploration well,” he says. “Last year, it was more like 80 days.” Latham attributes this to a number of factors such as water depth, the objective and target depths, which are deeper. But, he also says the industry is taking a more cautious approach to deepwater wells, with more testing of the BOPs (blowout preventers), for example. Drilling more low risk wells could reverse the previous high demand for rigs, he says.

“Higher risk frontier wells require more days than a lower risk well in a more mature, established play,” he says. “You spend less time moving on location, and the depth is shallower. Where the geology is better known, you can drill a much plainer, vanilla wells.

“In a frontier setting, you have to have all sorts of contingencies and plans for all sorts of unlikely but possible hazards in the subsurface,” he says.

Rystad analyst Bjørni expressed similar sentiment. “Operators have been communicating that they are focusing on exploration close to existing infrastructure, this will give cheap barrels to develop and increased probability of success.”

Dealing with lowered demand

The Leiv Eiriksson, one of two fifth generation semisubmersible drilling rigs that could be scrapped if no other contracts come along. Photo from Ocean Rig.

With demand for rigs down, and many companies seeking to reduce day rates for currently contracted rigs, there has been a push toward cold stacking or just scrapping rigs entirely.

Cyprus-headquartered Ocean Rig announced in October that if no future work is found for two of its fifth generation ultra-deepwater semisubmersible rigs – the Eirik Raude and Leiv Eiriksson – built in 2002 and 2001, respectively, they could be scrapped.

“The market continues to remain challenging due to the massive spending cuts initiated by the oil companies,” said George Economou, Chairman and CEO, Ocean Rig. “In this environment, cash preservation and liquidity remain our number one priority and we will adjust our available capacity to the new market conditions. For rigs that we cannot secure long-term employment that are coming up for their five-year SPS we will cold stack the units and in the case of the semisubmersible rigs seriously consider all our options including disposal or scrapping.”

Simmons & Co.’s Ian Macpherson said of Ocean Rig’s news at the time, “[the fleet status update] serves as a reminder of just how bleak the demand situation is right now for the offshore drillers, indicating that its two [fifth generation] harsh environment semis are likely to be scrapped, one of its [sixth generation] drillships is likely to be cold stacked, and another [sixth generation] drillship could (we infer) also be heading to cold stack as well following an untimely contract cancellation.”

Bermuda-headquartered Seadrill – which operates one of the largest floater fleet, consisting of 69 rigs comprising drillships, jackups, semisubmersibles and tender rigs – shares a similar outlook on the rig market.

“The outlook for activity beyond 2015 is difficult to judge, but most oil companies are not looking towards adding rig capacity at this point,” the company said in May. “It is likely that capacity utilization will drift lower as the year progresses and a significant number of ultra-deepwater rigs are likely to be stacked by the end of 2015.”

For companies that have either declared bankruptcy or are still swirling around it, 2016 will not be pretty.

Already this year two notable groups have declared bankruptcy: US-based Hercules Offshore and Brazil-based Schahin Group, which filed for bankruptcy in April. Schahin Group, which operates several vessels for embattled Brazilian oil company Petrobras – including the Schahin Cerrado drillship that drilled the giant Libra prospect offshore Brazil – blamed its situation on a tight national and international credit market, making it too difficult to find financing.

The downturn isn’t the only thing hastening the need to jettison dead weight from the global fleet, impending newbuilds are another concern. Bloomberg reported in December 2014 that more than 200 new rigs were due to be delivered in the next six years. And many companies have answered the call to rebalance.

Global rig provider Transocean, with a sizeable fleet of 63 floaters, led the pack in rig scrapping this year, opting to drop 20 of its oldest floaters, with 12 newbuilds due to enter its fleet over the next decade. According to Transocean’s latest fleet status report, the company has stacked 15 rigs and idled 13.

According to data from several firms (Infield, Rystad, and IHS), the area with the lowest utilization are the US GoM and Southeast Asia. Kellock says: “these [regions] are somewhat penalized because both are areas where rig owners cold stack un-needed rigs.”

Houston-based Ensco, which operates a fleet of 75 rigs, has cold stacked two semisubmersibles (ENSCO 8500 and 8501) in the GoM and one jackup, ENSCO 56, cold stacked in Malaysia. This year, the company received a cancellation notice from US oil major ConocoPhillips for the ENSCO DS-9 drillship, which was to start a three-year contract in the GoM. Additionally seven Ensco rigs, a mix of semisubs, drillships and jackups have been held for sale. One newbuild, the ENSCO DS-10 drillship, will be deferred by 18 months.

Arguably having one of the worst years is Hercules Offshore. The company announced a 40% reduction in its workforce, sold four rigs, delayed delivery of newbuilds, and in June, declared bankruptcy. In late July, the company reported a US$89 million loss in its 2Q 2015 results. With much of its jackups based in the hard-hit GoM, Hercules has cold stacked nine rigs as of July 2015, and sold six more jackups that had previously been cold stacked in the region since 2009.

Some of the currently cold stacked jackups in Hercules’ fleet are over 30 years old. For example, the Hercules 120 jackup was built in 1958, and redesigned in 1974 for offshore drilling operations. The Hercules 200 was built in 1979. The Hercules 253, the last on the list, was built in 1982.

Some bright spots

Noble Corp. is one player who has managed to keep its utilization levels high. As of its July fleet status report, only one floater, the Noble Homer Ferrington semisubmersible, out of its fleet of 32, has been cold stacked. The Noble Homer Ferrington, a Friede & Goldman 9500 Pacesetter, was delivered in 1985. Another semisub, Noble Jim Thompson, was retired.

In August, Maersk Drilling, which operates 22 rigs, reported a profit of US$218 million in 2Q 2015, which it attributed to strong operational performance, fleet growth and general cost savings. At the end of 2Q 2015, Maersk Drilling’s forward contract coverage was 83% for the rest of 2015, 61% for 2016 and 32% for 2017. The total revenue backlog by the end 2Q 2015 amounted to $5.3 billion.

Three Maersk rigs were idle during the period. And in July, the company announced it would decommission the Maersk Endurer jackup and recycle the rig in China. Built in 1984, it was one of the oldest in Maersk Drilling’s fleet. Earlier in the year, the company announced it would eliminate 90 positions from its head office in Copenhagen, Denmark. In January, Maersk Drilling took delivery of its third, of four, ultra-harsh environment jackup, XLE-3, from the Keppel FELS shipyard in Singapore. A fourth is due to be delivered from Daewoo Shipbuilding and Marine Engineering (DSME) shipyard in South Korea in 2016. The four jackup rigs represent a total investment of $2.6 billion.

Seadrill currently has 15 rigs under construction comprised of four drillships, three semisubmersibles, and eight jackups. According to the company’s 1Q 2015 report, Seadrill’s order backlog as of May was $8.9 billion, comprised of $7.2 billion for the floater fleet and $1.7 billion for the jackup fleet.

“During [1Q], the market has seen very little new fixture activity and the new contracts that have materialized are at significantly lower day rates,” Seadrill remarked in its most recently quarterly report. “Customer conversations have focused on renegotiation of existing contracts, often in exchange for additional duration.”

And, Seadrill isn’t the only company seeing this trend in renegotiations. Hercules Offshore received a reprieve from Saudi Aramco in June. The operator rescinded its termination notice for the Hercules 261 jackup. The two companies reinstated the five-year contract for the jackup that will run through November 2019.

Perth-based explorer Pura Vida Energy announced in early August that its exploration partner in the Mazagan permit offshore Morocco, Freeport-McMorRan planned to take advantage of the current depressed market. “Rates for deepwater drillships have fallen sharply since the Atwood Achiever was contracted and the operator has canceled the second slot under the rig share agreement in order to contract another vessel to take advantage of the current weakness in market conditions for rigs with the aim to reduce the cost of the second well.”

The ultra-deepwater drillship Atwood Achiever had a contracted day rate of $667,000 on its original fixed contract, which was supposed to end in November 2017.

With most of its rigs facing a day rate change due to cost escalation provisions within contracts, Atwood Oceanics has opted to delay the delivery of one ultra-deepwater drillships the Atwood Admiral, under construction in South Korea, until March 2016. In its fleet status report, the company noted it could choose to delay a second, the Atwood Archer, to June 2017, if necessary.



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