Westwood: 2023 shaping up to be a busy year for offshore rigs with further boost in day rates

As rig activity stood out in multiple regions during 2022, Westwood Global Energy, an energy market research and consultancy firm, believes that there is no reason to expect anything different in 2023 while forecasting global marketed offshore rig utilisation to average 95 per cent this year with day rates getting a further increase.

Westwood outlined on Thursday, 26 January 2023, that offshore rig activity – for both jack-ups and floating rigs – was robust in several key regions of the world during 2022. Due to this, the global marketed jack-up utilisation increased from 87 per cent in January to 91 per cent in December 2022.

Furthermore, 367 of 423 marketed units were contracted or committed for work in January while the numbers increased to 398 of 437 marketed units contracted or committed for work in December 2022. The energy market research firm also pointed out that utilisation was above 90 per cent from July through December 2022.

According to Westwood, the Middle East garnered all the jack-up attention last year thanks to major rig fleet growth for Advanced Energy Systems (ADES) and Arabian Drilling, coupled with over 60 new contract awards from Saudi Aramco and ADNOC Offshore. This resulted in a substantial number of long idled and stranded newbuild jack-ups finding work in the form of minimum three to five-year contracts, most of which will start this year. Several currently working units were also signed to similar multi-year extensions.

Aside from the Middle East, state-run operators ONGC in India, Pemex in Mexico and CNOOC in China extended contracts for jack-ups already working in those regions. Meanwhile, jack-up utilisation in the North Sea increased by 18 per cent between January and October 2022, hitting 97 per cent before the typical winter decline late in the year, added Westwood. In addition, Southeast Asia saw a 2022 rebound as well. Marketed utilisation was up by 14 per cent for the year, ending at 88 per cent in December 2022.

Moreover, jack-up day rates have increased in every geographic area, with most growing by double digits, as underscored by Westwood. In the Middle East, rates for new fixtures eclipsed $100,000 late in the year, while several deals were done in the $78,000-$85,000 range earlier in 2022.

In a similar fashion, Southeast Asia’s rates in early 2022 were generally fixed in the mid $70,000s, but by the end of the year were as high as $134,000, with several others over $100,000. Additionally, day rates in the North Sea took the same path, ranging from $75,000-$85,000 in early 2022 to almost $137,000 for a fixture in December 2022.

Westwood explains that it expects jack-up utilisation to remain robust in 2023, as there will likely be additional contract awards in the Middle East, albeit probably not at the same pace as seen in 2022. The company emphasises that outstanding rig requirements in Southeast Asia and West Africa will help result in a continued tight supply/demand balance in those regions. Similarly, contract extensions currently taking place in Mexico will keep utilisation there robust, predicts Westwood.

However, activity in the North Sea, another area where marketed jack-up utilisation was above 90 per cent for at least half of 2022 is “a bit questionable,” points out Westwood while elaborating that the 2022-implemented UK windfall tax has several operators reconsidering previously planned drilling programmes, and some have already indicated they will cancel specific campaigns. As a result, some rig owners have begun marketing jack-ups into other regions, making it probable that additional rigs will leave the area this year.

Despite the potential North Sea issues, the global marketed utilisation is believed to increase from the 90 per cent average in 2022 to around 95 per cent this year, based on Westwood’s predictions. Given that level of utilisation, the company believes that rig owners will undoubtedly continue to push day rates upward.

Regarding the floating rig fleet – semi-submersibles (semi-subs) and drillships – Westwood reported that marketed utilisation ranged from 80 per cent to 90 per cent for all of 2022, settling just under the latter in December 2022.

Despite this, the company pointed out that there was a stark difference between the two rig types, as drillship utilisation averaged 93 per cent for the year, while average semi-sub utilisation was some 11 per cent lower, at 82 per cent. Nevertheless, overall demand for the year increased from 135 units in January to 143 in December 2022, while marketed supply increased by a net of one, ending the year at 162.

Even though rig demand rose in several regions, the U.S. Gulf of Mexico and South America both stood out, says Westwood’s research. In the U.S. Gulf, marketed utilisation was 100 per cent from February through December 2022, while South America’s marketed utilisation ranged from 94 per cent to 97 per cent for the entire year. Elsewhere, marketed drillship utilisation in Africa increased by 10 per cent in 2022, although it was not accomplished by rising demand. For the year, marketed supply declined by three units and demand fell by one, resulting in higher utilisation, said the energy market research firm.

On the opposite end of the scale, marketed utilisation in Southeast Asia fell by 16 per cent for the year, however, the average number of contracted/committed units dropped by just two units, while the average marketed supply declined by just under one. Finally, marketed semi-sub utilisation in the North Sea saw a slight improvement last year, with marketed utilisation going from 77 per cent in January to 81 per cent in December 2022. Supply was relatively unchanged, and demand increased by just one during the year, added Westwood.

According to the company, rig reactivations for long-idled, cold-stacked units, mostly drillships, began in 2021 and continued last year. As a result, the average drillship marketed supply increased by four. On the other hand, the average net semi-submersible marketed supply fell by three, although that decline was the smallest in the past seven to eight years. Only six semi-subs were retired in 2022, compared to 142 from 2014-2021, an average of nearly 18 per year while no drillships were removed from the fleet last year.

As explained by Westwood, 94 of 131 contract awards – mutually agreed new contracts and options – were for work in the North Sea and the so-called golden triangle, which is the Gulf of Mexico (U.S. and Mexico), South America and West Africa during the year. Elsewhere, the Far East, Southeast Asia and Australia combined for another 28 fixtures.

In line with the increase in day rates for jack-ups, the day rates for new drillship fixtures were substantially improved in 2022 from the prior year. After an average fixture rate of $232,555 in 2021, the number jumped to $359,852 in 2022, and for the final four months of the year, the average increased to $388,842. As has been reported, a number of deals in 2022 were fixed at over $400,000, with the highest reaching $462,000 for a contract offshore Brazil. Regionally, the U.S. Gulf of Mexico and South America were the trendsetters in the rate increases.

When it comes to semi-submersibles, there were 74 new fixtures in 2022. While rates early in the year – excluding the North Sea – were generally in the $200,000-$250,000 range, by August they were routinely over $300,000, with one in Brazil eclipsing $400,000.

However, late in the year, there were two awards for work in Brazil that fell back to the $245,000-$290,000 range, but both were for workover only programmes. Westwood added that there were outliers on both ends, with some Southeast Asia fixtures well below the rest of the market.

Westwood claims that there is no reason to believe the focus in 2023 will not be in the same regions, as outstanding rig requirements will result in continued rig demand for exploration drilling, with long-term field development programmes also adding multi-year contracts. There are currently 73 rig requirements globally that are in some form of rig inquiry.

The golden triangle area accounts for 23 of these, while the North Sea totals 16. The company says that another 21 requirements are on the books in Southeast Asia, the Far East and Australia, and operators are looking for rigs for 10 Mediterranean/Black Sea programmes.

Based on Westwood’s research, 83 of the 162 active floating rigs currently have no availability in 2023 and of the remaining 64 contracted units with a 2023 available date, 28 will run until November or December. Twelve of the 64 have options that, if exercised, will extend availability into 2024 or later.

Bearing all this in mind, Westwood says that the numbers are evidence of a rig fleet with decreasing availability in 2023. To that end, most recent floating rig tenders have specified a 2024 start date, but there are some limited windows of opportunity for operators in some regions that have just one or two wells to drill.

Looking out at the remainder of 2023, Westwood underlines that marketed drillship supply and demand will remain tight and utilisation will continue in the 95 per cent plus region while rig demand in the golden triangle will keep the fleets currently working there and some incremental demand will be created. Additionally, areas like the Mediterranean, where recent large discoveries have been made, could push some more drilling plans forward, states Westwood.

In regards to semi-submersible usage, the firm adds that it will continue to be prominent in the North Sea, although the same issue noted for jack-ups, that is operators deciding not to pursue some drilling plans due to the UK windfall tax, could have a negative impact. The energy market research player also expects activity in Norway to rebound from disappointing 2022 levels in the second half of the year.

Elsewhere, utilisation in South America will remain at or near 100 per cent, and Westwood believes increases in activity will take place in Southeast Asia and Australia. The global marketed semi-sub utilisation for the year is projected to average 94 per cent. While the company is confident in its assessment that the current trajectory of day rates will continue their upward path, it still says that whether this will be maintained at a similar pace as in 2022 remains to be seen.

The energy market research provider outlines that most questions surrounding floating rig day rates are centred around when they will reach $500,000, mainly for drillships with anecdotal evidence suggesting that bids at that rate have already been submitted. Still, so far, no awards have been made.

The number could be reached in the form of a multi-year deal where $500,000 comes after the first year. However, Westwood concludes that no matter which way one looks at it, 2023 should be a busy year for rigs.