Vol. 227 No. 12

Newbuild report

Another rig construction cycle is running its course

Offshore, newbuilds reflect strong market outside the GOM

Thomas E. Marsh, ODS-Petrodata, Houston

The industry is in the midst of an offshore rig construction cycle that is being fueled by high oil prices, strong rig demand and relatively easy access to investment capital. As the chart indicates (Fig. 3), this is roughly the sixth rig construction cycle that the offshore oil and gas industry has seen since its inception in 1949.

Offshore rig construction cycles have always begun with an increase in rig demand and fleet utilization, and have always been followed by a drop in fleet utilization and a subsequent slide in day rates.

In the offshore industry’s earliest years, rig construction was driven by the discovery of recoverable hydrocarbons under the sea (primarily in the GOM), and the advent of technologies to extract those hydrocarbons. Expansion of the GOM exploration effort in the 1960s led to more new rig construction, and floating rig construction received its biggest boost from the first commercially successful North Sea drilling programs of the 1970s, which coincided with the first major OPEC-inspired oil price rise.

The big rig construction boom of the late 1970s and early 1980s was fueled by overly-optimistic oil demand and price forecasts, and easy access to capital. Some equipment was built by investors and speculators that had not necessarily participated in the industry previously. The subsequent collapse of oil prices left banks and government loan guarantee agencies among the owners of the largest offshore rig fleets. Indeed, in the face of rig fleet utilization rates below 50%, new rig construction tapered off to the point that no new rigs were delivered in 1994, 1996 and 1997, and only three were delivered in 1995.

There followed a deepwater rig construction cycle in the late 1990s that was fueled by rising energy demand, advancing deepwater exploration and production technologies and the realization on the part of oil and gas companies that the offshore arena held perhaps the best hope for new, large discoveries in areas that were relatively stable from a geopolitical and business climate standpoint.

The deepwater rig construction cycle of the 1990s ended in 2001, and the market for deepwater rigs was in fact over-supplied for some time. Then as we know every time we head to the gas pump, oil prices and offshore rig demand soared, with many rig market segments experiencing 100% utilization. With capital easily accessible again, investors and speculators turned their focus once more to new rig construction, as did to a lesser extent “traditional” rig owners (meaning those that had weathered the turbulent 1990s).

And that has brought us to where we are today, with more rigs on order than at any time in two decades. Will history repeat itself, with this cycle followed by falling utilization and sliding day rates, fueled by an over-supply of rigs? It is possible this could happen within the jackup market, according to ODS-Petrodata’s latest rig market forecast, although much will depend on the number of older rigs that are retired in the coming years.

On the other hand, the deepwater rig fleet appears able to absorb the looming boost in floating rig supply, although, in contrast to the jackup market where orders have slowed dramatically in recent months, new orders for both drillships and semisubmersibles are still being announced on a regular basis.

However, the unpredictable (no matter what anyone says) variable remains oil prices, and to some extent US natural gas prices. Any significant, sustained decline in these would put many of the new rig investments at risk.