An article about deepwater drilling rig utilization

A Closer Look at Worldwide Deepwater Drilling
by Trey Cowan
Rigzone Staff 4/4/2011
URL: http://www.rigzone.com/news/article.asp?a_id=105784

Given that oil prices remain constructive, we may see some tightening for deepwater rig fixtures in the coming months. Crude futures averaged nearly $103 for the month of March. That is up nearly 15 percent from February’s average of $90 per barrel.

While there is some slack created by uncertainties in the Middle East and North African markets, the bottom line is that the current price environment creates ample operator-incentive to increase budgets in any region where drilling is feasible.

Currently, there are 206 rigs under contract out of a total supply of 261 floaters, which amounts to 78 percent utilization across the globe. Even though utilization has not been ideal, dayrates for floaters are beginning to improve.

However, we note that there is some bifurcation as drillships and rigs capable of working in the deepest environments pull the average up. In the past year average dayrates for drillships have climbed from $390k/day to approximately $430k/day. Conversely, semisubmersible dayrates have held steady at approximately $360k/day.

Over the past five years, drillships have commanded a 6 percent premium relative to dayrates for semisubmersibles. During March 2010, the disparity between the two mirrored the 6 percent average. Since then, the gap has widened and is currently at a 23 percent premium. Standby rates, for rigs waiting on location in the Gulf of Mexico, are exacerbating the situation. Nine of the twelve rigs waiting on location in the GOM are semisubmersibles.

While the overall mix of floaters favors semisubmersibles, which account for three-quarters of the fleet, the mix among ultra-deepwater assets is more equitable. Of the 92 rigs capable of operating in water depths of 7,500’ or greater, the mix is 55 (semis) to 45 percent (drillships).

In the next three years we expect 60 newbuild ultra-deepwater rigs to enter the market. Considering that only 20 of these newbuilds are semisubmersibles, the mix will have reversed itself to favoring drillships (53%/47%) by the end of 2013.

Utilization is slowly falling while dayrates are only slightly increasing. Why on earth are so many drilling contractors building so many new drillships and semis on spec? What are they predicting will happen in the next 5 years? Even at a $500k dayrate, a $700M drillships takes several years to recover the capital investment.

Sixty new rigs in the next 3 years! To me, this building boom seems to be just that, a boom and we know what usually happens when there are booms…they are followed by busts.

[QUOTE=c.captain;48569]Utilization is slowly falling while dayrates are only slightly increasing. Why on earth are so many drilling contractors building so many new drillships and semis on spec? What are they predicting will happen in the next 5 years? Even at a $500k dayrate, a $700M drillships takes several years to recover the capital investment.

Sixty new rigs in the next 3 years! To me, this building boom seems to be just that, a boom and we know what usually happens when there are booms…they are followed by busts.[/QUOTE]

I’ll give a little insight into the current newbuild situation, excuse me if I am telling you something you might already know.
Right now the Far East shipyard are flush with cash and want to weather the downturn in the world economy. In many cases the shipyards are actually lending the money to the drillship companies to build their new drillships. They figure oil prices are still high, they can keep their work force intact and their design engineers from leaving until the business picks up. Creative shipbuilding financing is not that unusual, for years Caterpillar has been financing the supply boat builders and before them Detroit did it.
On the other hand the drillship owner thinks he’s getting good financing at a good rate and he can always sell out at a later date.
However, those of us who remember the history of the ship building industry are a little worried. We remember the boom and bust of the 80’s and even worse before that.

Regardless of how these newbuilds are financed, it all comes down to who will contract all these new rigs/vessels and for what rates? Maybe with increasing oil prices there will be a surge in exploration activity but there is still a huge capacity coming into the market in a short period of time. If there are 60 newbuilds hitting the water in the next 3 years how will all that capacity be absorbed by the majors and independants? Remember that the majority of these newbuilds are being built on speculation and that is where the danger lies. To my knowledge, there has never been this level of spec building since the late 70’s and we all know what happened by the mid 80’s but then there wasn’t a China and India looming large on the horizon. Time will tell.