Offshore in Depth

I have been reluctant to write about the status of offshore drilling contractors for the past year or so because there seemed to be enough bad news being written about them, and I did not want to add to the collective misery. But after cost-cutting, restructuring, consolidation, rig retirements and now, stabilization of oil prices, there might finally be some light at the end of the tunnel. Still, unlike land drillers working in tight oil plays, offshore contractors still face some lean times ahead. 

Currently, the top five floater contractors have 138 semisubmersibles and drillships available, of which 47% are contracted, according to Rystad. The broader industry seems to be faring better, with IHS Petrodata reporting higher utilization rates in August for ultra-deepwater (UDW) rigs (74% of 128 rigs are utilized) and jackups (69% of 465 rigs are utilized), excluding cold-stacked and unavailable units. 

Cost-cutting improves economics. Since the oil price declined in 2014, operating companies have focused on cutting both opex and capex. They have pressured service companies and equipment suppliers to lower their prices, leading to overall opex reductions of around 20%. One of the biggest contributors to the savings has been the reduction in dayrates for offshore rigs. IHS Markit reported that the worldwide average dayrate for a deepwater semisubmersible (operating at greater than 7,500 ft) was $180,000 in April 2017, compared to $450,000 in May 2014. Drillship dayrates experienced an even greater decline, to $200,000 in April 2017, down from $520,000 in May 2014. Individual contractors may have better terms, but the offshore contracting industry, as a whole, is suffering.

Operators also have emphasized standardization of production facilities, and have moved ahead on developing step-out fields with subsea wells that can tie into existing infrastructure, so that many Gulf of Mexico fields have break-even oil prices of around $40/bbl, which could prompt more drilling activity.

Consolidation and restructuring. Offshore contracting is a capital intensive business, so running one of these companies involves managing debt as much or more than managing drilling operations. Virtually every offshore rig contractor has gone through internal restructuring, and many companies (Seadrill, Pacific Drilling, Hercules, Paragon, Ocean Rig, and Vantage, to name six) have entered some form of bankruptcy. Downsizing included retiring rigs and making several rounds of layoffs. 

Since 2010, there has also been a strategic realignment of drilling contractors to focus on their core competencies. In 2012, Transocean sold 37 jackups to Middle East contractor Shelf Drilling, and it spun off the rest of its jackup fleet to Borr Drilling in May of this year. In August, Transocean announced its intent to purchase Norwegian contractor Songa and its fleet of harsh-environment floaters. 

In 2014, when only the newest rigs were winning contracts, Noble spun off its older rigs to form Paragon Offshore, which subsequently fell on hard times during the downturn and needed bankruptcy protection. Seadrill took a controlling interest in Sevan Drilling and North Atlantic drilling but still struggled to maintain strong financial footing, and thus, it also filed for bankruptcy. 

In October 2017, Ensco completed its acquisition of Atwood Oceanics, adding six ultra-deepwater floaters, and five high-specification jackups, bringing the combined fleet to 63 rigs. Founded in 1968, Atwood struggled to survive prior to the acquisition, though it attempted to do so by idling rigs and reducing staff by 60%. 

Rowan Companies, leveraging its strength in jackup drilling, formed a joint-venture agreement with Saudi Aramco, that operates five Rowan rigs and two Saudi rigs, with potential plans for as many as 20 newbuild jackups. 

Rig retirements. Rig utilization rates have been helped by the retirement of older, less capable units. IHS Markit estimates that 91 floaters and 33 competitive jackup rigs have been retired since third-quarter 2014. Transocean alone has already retired 33 floating rigs, and in September, it announced the pending retirement of six more of its older units. Expiring contracts on around 25 aging floaters and 60 older jackups by the end of 2018 could lead to their being scrapped, as well. 

Oil price stabilization. With the oil price stabilized in the $50-$55/bbl range, the sense of panic has dissipated. Operators have renewed confidence that their investments will pay off, and offshore contractors are making the case to the investment community that offshore projects are again competitive with onshore tight oil development. This remains a matter of debate, but it’s a more valid argument than it was 18 months ago. 

Challenges remain. While offshore rig utilization rates have edged up a few points in 2017, contractors still face considerable challenges. McKinsey & Company estimates that global deepwater exploration investment fell from $38 billion in 2014 to $19 billion in 2016. This reduction will limit the pipeline for new offshore field development. There has also been a paucity of FIDs for major deepwater developments, with only two approved for the Gulf of Mexico from 2015 to 2016. 

Still, fulfilling the energy demand will require offshore exploration, which accounted for 69% of the oil and gas volumes discovered from 2006 to 2017. And as Diamond Offshore recently pointed out in an analyst presentation, new offshore discoveries will need to contribute 12.4 MMbopd by 2025—nearly as much as unconventional shale output— to make up for production declines in existing fields. That means there should be work for jackups and floaters for at least the next eight years.  

About the Authors

Ron Bitto

Contributing Editor

Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM