Interview: The past, the present, and the future of floating rig market

Offshore Energy Today has interviewed Liz Tysall Senior Offshore Rig Analyst of Rystad Energy, an energy intelligence group based in Norway. The interview follows a recent report by Rystad on offshore drilling market, floating rigs, in particular.

The interview itself focuses on the floaters market, covering topics such as current conditions in the offshore drilling market, dayrates, contracts, cancellations, M&A, stacking, and offshore opportunities ahead.

OET: It’s no surprise that the oil and gas industry as a whole has been suffering for the past two years due to low oil prices. This has, in turn, spilled over into the offshore drilling market. You’ve recently said that the floater market has yet to see the bottom. Can you elaborate?

Tysall: Oil companies are still reluctant to spend and instead have been in a cash preservation mode. In 2016 there was a decrease in the level of tendering activity for floating rigs. While there has been an uptick in contract opportunities recently, most of these opportunities have commencement dates in the second half of 2017 and into 2018. Until budgets are set for 2017, the offshore drilling segment of the industry will continue to remain in a holding pattern.

OET: By floaters, you mean all semi-subs and drillships, or only the deepwater ones?

Tysall: Yes, all semisubs and drillships.

OET: High-spec units used to command dayrates of more than $600.000 per day. According to Rystad, these have fallen to $150k/d. What exactly is a breakeven dayrate for an average floater? Can you break it down for us?

Tysall: Opex varies among drilling contractors and also between the various asset classes within the floating rig fleet. On average opex has been reduced from near $200,000 per day to around $150,000 per day. In some instances, opex can be as low as $140,000 per day.

Oil firms like busy rigs

OET: How do you comment on the fact that some drilling contractors are willing to go below the breakeven dayrate? What is the rationale behind this?

Tysall: Some drilling contractors would prefer to keep their rigs working and their crews together. We have typically seen lower rates for very short-term contracts and for work that may not require drilling activity such as completion or P&A work. In general, oil companies prefer rigs that have not experienced long periods of idle time between contracts.

OET: Rystad said that in the third quarter 2016 only ten contracts were signed. Who’s won these and on what terms?

Tysall: Atwood, Ensco, and and Transocean were each awarded multiple contracts while Noble, Paragon and Frigstad were awarded one contract each. All reported dayrates have been below the $200,000/day mark.

OET: What about the fourth quarter? What do you expect to see there?

Tysall: Awards in the fourth quarter are shaping up to be on par with the third quarter. To date, North Atlantic Drilling, Pacific Drilling, Stena Drilling, and Transocean have all received contracts. Two of these contracts, for higher specification units, received rates above $200,000/day.

OET: How many competitive floaters are there right now? Do you have info on how many floating drilling rigs have been stacked, either warm or cold, since the downturn started in mid-2014? How many have been scrapped?

Tysall: According to research by Rystad Energy, there are 114 warm and cold stacked floating rigs out of a total fleet of 286 units. Since mid-2014 there have been 71 floating rigs scrapped.

The bigger the contract, the bigger the risk

OET: Several contracts have been cancelled in the third quarter, and you see several more under threat of cancellation?

Tysall: In particular contracts that were signed prior to the downturn with high rates are at risk of termination, or at least, rate re-negotiation – in other words ‘blend and extend’. Not only does this save the oil company the cost of the dayrate but also spread costs.

OET: What about the drillers? Do you maybe see any M&A opportunities in the offshore drilling sector? Big guns eating smaller fish?

Tysall: Talk of M&A has been very quiet. It appears that many drillers are choosing to preserve cash. Some would prefer not to take on a fleet of rigs that are already stacked and with limited near-term contracting opportunities.

OET: You said you expected the floaters market to see some improvement in 2018. You make this assumption based on what?

Tysall: This is based on information from Rystad Energy’s Ucube and RigCube databases on which upcoming projects will be sanctioned and our research on planned commencement dates of near-term tender opportunities.

600K dayrates ever again?

What areas, and what big projects are most likely to be in need of offshore drilling rigs in the near future?

Tysall: Based on information from Rystad Energy’s field-by-field analysis, East Africa and the Mediterranean will certainly be active. An uptick in activity in Brazil and Mexico is also expected.

OET: Who do you see winning those contracts?

Tysall: Oil companies will continue to look for cost savings across the supply chain and those drilling contractors that can offer, not only highly-efficient drilling rigs, but are able to partner with their clients and innovate will end up the winners.

OET: Do you see offshore drilling ever going back to $600k/d? What would need to happen to have those rates back?

Tysall: Could rates get back as high as $600k/d – it is possible but not likely. However, as the saying goes: ‘Never Say Never’. Rig utilization rates would have to be back above 80%, oil prices would have to rise and demand outpace supply.