NEWBUILD REPORT

High oil prices continue to fuel the offshore rig construction boom

Semisubmersible demand is strong, but jackup owners face a more challenging environment.

Thomas E. Marsh, ODS-Petrodata, Houston

The boom in offshore rig construction continues, despite evidence that, in the jackup market, supply will exceed demand, and owners may have to scramble a little more than they expected to keep all of their rigs working.

The current offshore rig construction cycle began in earnest in 2005. In the four years preceding, a total of 18 offshore rigs were ordered. In 2005, the number jumped to 48. Last year, 58 new mobile offshore drilling units were ordered, and year-to-date rig owners and investors have ordered 55 rigs, including jackups, semisubmersibles and drillships, Fig. 1.

The 166 mobile offshore rigs ordered since the beginning of 2005 will represent about a 29% increase in fleet size, once all rigs are delivered. Can the fleet absorb this excess capacity? Yes and no.

According to data compiled for ODS-Petrodata’s World Rig Forecast - Short Term Trends report, the floating rig market will be undersupplied by about a dozen rigs in 2008 and a half dozen in 2009, even though 31 semisubmersibles and 13 drillships will be delivered between now and the end of 2009. Of these 44 rigs, only five do not have firm contract commitments upon delivery. Unless the boom turns to bust, demand for floating rigs will continue to outstrip supply for the foreseeable future.

On the other hand, jackup owners face a different scenario. Rig owners will take delivery of 67 new jackups between now and the end of 2009, and at least another 14 will follow after that. An average surplus of more than 10 rigs is forecast for 2008, and based on the available data, that average more than doubles in 2009.

That jackup managers are facing a more challenging environment than their floating rig colleagues is illustrated by a recent analysis published in ODS-Petrodata’s Offshore Rig Monthly newsletter. During 2006, jackup owners were able to secure work for new rigs an average seven months before delivery; the average time between a contract fixture and rig delivery is now being measured in weeks. Of the 67 jackups scheduled for delivery over the next two years, 49 do not have firm contract commitments.

Therefore, it is not inconceivable that during the current construction cycle a jackup owner might have to take delivery of a new rig with no work in hand for the unit. However, the boom is not likely to turn to bust, as long as oil prices remain at or near their present lofty levels, and every new rig will find work. That work may not be on the terms that owners were expecting when the rigs were ordered, but there will still be money to be made.

Outside the GOM jackup market (which remains in the doldrums), day rates remain strong. For example, recent contract rates for independent-leg cantilever jackups rated at 300 ft or greater have ranged from $145,000 to $225,000 in international markets. Semisubmersibles rated over 3,000 ft have been garnering day rates ranging from $320,000 to $530,000, while owners of drillships in the same water depth category have seen rates ranging from $405,000 to $600,000 in recent months.

So, the boom continues for now. However, it seems likely that the pace of new offshore rig orders will slow in 2008, as the industry absorbs the significant new capacity coming onstream in 2008 and 2009.