Deepwater Statistical Report

In July 2008, the deepwater rig market was looking rosy. The rapid run-up in oil and gas prices resulted in a rush of Final Investment Decisions (FIDs) as previously marginal deepwater projects suddenly became economically viable. Although initially tentative, the growth in the rig sector gradually gained momentum as upstream operators jockeyed to contract new-build capacity for their ambitious deepwater drilling campaigns. By September 2008, around 100 new deepwater rigs (semis and drillships) were under construction or planned, a historically unprecedented level of construction.

However, just when $200/bbl looked in sight, the unstoppable finally stopped. Since July, the oil price has fallen over $100/bbl, from its high of $147/bbl, to $40/bbl (December 15, 2008), significantly lower than the current marginal development cost for deepwater and close to the cash cost. Although in the short term this will not unduly concern deepwater operators - primarily because of the long investment horizons required - a prolonged period of low oil prices will invariably lead to a marked slowdown of deepwater FIDs.

Wood Mackenzie’s new deepwater rigs study suggests that under our low price, $40/bbl (long term, real in 2009 terms) scenario there would be a material reduction in deepwater demand, even adjusting for inevitable capital cost deflation. Our assessment suggests that by 2015 over 50% of demand for deepwater services will be deferred or destroyed at $40/bbl compared with $120/bbl.

Although around 25% or more of the currently planned rigs may be cancelled through a combination of demand destruction and/or the inability to raise finance, rig contractors still potentially face significant oversupply. However, the long-term contracts and high day rates of newbuild rigs will ensure they will be used. We forecast that the biggest impact will be on mid-water rigs, which will be down-rated to compete with the already crowded jack-up sector.