Trouble in deepwater?

December 16, 2013

Deepwater drilling rig contractors are facing an uncertain future, with an increasingly fragmented market favoring those who contract the vessels, according to an analyst.

The comments follow market updates from rig operators including Transocean Ltd, which appear to validate industry concerns about a drop in demand in some areas, including deepwater.

Image: Transocean's Discoverer Enterprise

Ttransocean said its deepwater units would represent more than a third of all those available for hire next year, with 14 Transocean deepwater rigs coming off contract in 2014, out of in total 39 industry-wide.

Ensco Plc will have eight rigs coming available in 2014 and Seadrill five, Transocean told analysts at a meeting in New York, reported Bloomberg.

Thom Payne, an analyst for Douglas Westwood said the comments by Transocean, and others, have been taken by many as a sign of lacklustre demand growth for the once invincible deepwater oil and gas sector.

"But... this is sensationalising one side of the story," he says. "One view is that an estimated 39 deepwater rigs, 22% of the available fleet, are coming off contract in 2014, and will be looking for work. However, utilisation rates are at five-year highs and Douglas Westwood predicts deepwater completions will grow at a CAGR of 20% over the next five years."

According to Seadrill: "The fundamental outlook for the offshore drilling industry remains firm. Exploration and production companies continue to view deep and ultra-deepwater acreage as attractive areas to invest capital. Several oil companies are however encountering a period in which cash flows are challenged and budgets must be re-examined. As a result... we have observed a decline in the overall number of fixtures, lead times and contract duration. Contrasting with 2012... it is clear that the market is adequately supplied currently and may encounter some challenges in 2014."

However, the ultra-deepwater (more then 7500ft water depth) floater segment remained strong, said Seadrill. "There is no remaining 2013 availability for newbuild ultra-deepwater units and the number of 2014 units available, which are not under specific discussions, has been reduced from 10 to 7 over the course of the third quarter. We continue to be confident that these available units will be contracted at dayrates in-line with the current market."

"If we still believe in the fundamentals, then why cautious sound bites from deepwater rig contractors?" says Payne. "One angle is the commoditisation of the offshore supply chain by the E&P companies. Encouraging oversupply is desirable for operators that are understandably reluctant to see their costs continue to rise. It has even been suggested that contracts are being withheld from the market to coincide with anticipated rig deliveries, creating a more favourable environment for end-users."

Indeed, Terry Bonno, Transocean's senior vice president for rig marketing, said there would still be pent-up demand in 2014 for 10-15 rigs in the West African deepwater market alone, where programs were held up by delays.

Long term, Transocean cited predictions for 1250 deepwater wells to be drilled in 2025, compared with about 500 this year. To meet this, there are 110 new rigs under construction, but about 120 were due to be replaced, and Bonno saw potential for 215 additional deepwater rigs to be built.

"Compounding this is the increasing fragmentation facing the deepwater drilling segment – today there are twice as many contractors with active rigs compared to 2002.

"Greater fragmentation inevitably leads to less discipline in the marketplace and an inevitable decoupling of supply from demand; if oil companies can leverage overcapacity to supress pricing in an environment of growing demand then a difficult day may be dawning for deepwater rig contractors."

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