Driven by Golden Triangle demand, drillship recovery eclipses jackups
Some 7th-generation drillships in Gulf of Mexico already seeing dayrates move past $300,000; additional gains are likely in 2022
By Teresa Wilkie, Esgian
The jackup market usually bounces back faster after a downturn than deepwater does. Short-cycle, shallow-water projects with more predictable economics and strong national oil company (NOC) demand make jackup rigs attractive as a first step in the market’s recovery.
But not this time.
The drillship and semisubmersible segments have witnessed a combined increase in competitive utilization of 14% since September 2020, with drillships particularly standing out with a rise of 23% during the period. In comparison, the jackup segment dropped to its lowest point of around 68% last year and is currently sitting at 72%, totaling a rise of just 4% so far this year.
Lower supply kick-starting utilization
The reduction in active and marketed supply is having a big impact on floater utilization this time around. As can be seen in Figure 1, Esgian Rig Service records 67 semisubmersibles and drillships that have been removed from the fleet between 2018 and 2021. In comparison, just 11 newbuild floating rigs were delivered in the same period.
Additionally, there has been increased cold stacking of idle assets, which has led to further shrinking of competitive, ready-to-drill floater supply. This has solidified the deepwater rig recovery.
There has also been plenty of attrition on the jackup side, with 94 units removed from the fleet in the same period. However, the jackup fleet is vast in comparison to the floater fleet (510 jackups versus 224 floaters in total remaining), not to mention much more fragmented in terms of ownership. There needs to be a lot more attrition or a bigger surge in demand (or a combination of the two) to get the same gains witnessed in the deepwater rig segment of late.
There are further rig retirements expected in the coming years, with several of the larger drillers already discussing the future of their older assets and specifically those that have been stacked long term. Meanwhile, Esgian Rig Service has identified nearly 50 drillships and semisubmersibles that could be retirement candidates in the next two to three years according to their age, their backlog (or lack thereof), the length of time they have been cold stacked, and the likely financial commitment it would take to bring these units back to work.
Furthermore, the much-anticipated rise in rig owner consolidation is also likely to amplify attrition of older and excess units over the coming years. So far this year, we have only recorded one M&A transaction with the Noble Corp and Pacific Drilling deal, which resulted in the scrapping of two idle drillships that were just 10 and 11 years old.
Rig owners will have to live up to their pledges to remain disciplined in terms of bringing additional supply back into the market through reactivations and newbuild deliveries, if they are to maintain utilization and dayrate recovery momentum next year. Most drillers are currently stating that they will not reactivate rigs unless they can secure long-term deals with attractive dayrates that will offset the cost of reactivations, which can typically cost between $30 million to $50 million (or more, depending on the length of the stacked period). However, Valaris has already announced plans this year to reactivate three of its stacked drillships for projects in the Golden Triangle, and Saipem has bareboat chartered a newbuild drillship from Samsung Heavy Industries, which will also be put to work in the US Gulf of Mexico. We believe these rigs are being brought back to the market for specific, long-term campaigns that make economic sense.
The resurrection of the Golden Triangle
Demand is also playing a big part in the floater recovery, with the Golden Triangle, consisting of South America (predominantly led by Brazil and its NOC Petrobras), the US Gulf of Mexico and West Africa, now experiencing a resurrection in terms of drilling activity.
So far this year, over 70 years of floating rig backlog have been awarded, which is already more than the 67 years awarded during the entire year of 2020. And, as is highlighted by Figure 2, the Golden Triangle has provided over 70% of this backlog. Higher and more stable commodity prices, coupled with lower project costs, have once again stirred up oil companies’ drilling appetites in these deepwater areas.
Figure 2 also highlights another stark truth: Demand for drillships is far outweighing that of semisubmersibles. Only the conventional areas of the North Sea and Oceania are showing continued strong demand for these assets due to their harsh-environment specifications. Operators are demonstrating a prominent preference for ultra-deepwater, seventh-generation, high-specification drillships. In areas like the US Gulf of Mexico and Brazil, they are now in short supply.
Another sign that we are now in a floating rig upcycle is that tendering for new rig projects, in addition to new awards, is on the rise. We believe tendering levels are now on par with what we witnessed pre-COVID. Additionally, more contract options are being declared on already awarded deals, which is another indication of the market picking up.
Operator-requested upgrades mounting
Drilling contractors are stating that another sign of an improving market for them is that operators are now entertaining paying for rig mobilizations, which has not been the case for a few years. Operators are also requesting and becoming more willing to pay for project-specific rig upgrades.
Some of these recent upgrades include fuel-reducing/emission-reducing technologies, such as what will be carried out on Seadrill’s seventh-generation drillship West Saturn, prior to starting a long-term development drilling campaign with Equinor offshore Brazil. The rig’s fuel consumption is expected to be reduced by 10-15% through the introduction of a combined hydrogen and methanol injection system, along with other energy efficiency upgrades. Emissions of CO2 are expected to reduce by 10-15%, and nitrous oxide (NOx) by 30-80%.
The number of rigs with emission-reducing technologies or upgrades, such as closed-bus technology, selective catalytic reduction systems, energy efficiency software, hybrid power, shore-power compatibility, etc, has surged over the past few years. Esgian Rig Service records over 20 floaters in the market that have emission-reduction capabilities. This is a trend we believe will only amplify in the coming years as the importance of cutting CO2 emissions increases.
Another recent upgrade request was made by TotalEnergies for the Valaris DS-11 drillship prior to starting the long-term North Platte campaign (pending FID) in the US Gulf of Mexico. The unit will undergo significant upgrades, including the installation of a 20,000-psi blowout preventer. The rig owner reported that a substantial part of these upgrade costs and associated equipment purchases will be collected prior to mobilizing the rig for the drilling program in summer 2024.
Drillship utilization forecast to exceed 85% in the coming year
Looking ahead, the divergence between the semisubmersible and drillship market recoveries is expected to continue, although utilization for both types will move higher during 2022.
For the semisubmersible segment, the UK and Norway are expected to be the biggest areas of demand for harsh-environment units, while South America and Asia Pacific will drive benign semisubmersible demand. There are currently six newbuild semisubmersibles under construction, all of which we expect will eventually be delivered. However, potentially one or two may be delivered in the year ahead.
Competitive utilization for semisubmersibles, which does not account for non-marketed units such as most cold-stacked rigs, was sitting at 63% as of late September. If all outstanding demand comes to fruition, semisubmersible demand could reach a high of 78 units and competitive utilization will reach the 77% mark by the end of next year.
Meanwhile, in the drillship segment, the Golden Triangle will continue to be the biggest driver of demand. Petrobras in Brazil has several outstanding tenders for long-term rig campaigns as it continues to ramp up its operations. Currently there is only one available floater in region, and we anticipate more rigs will be moved into Brazil in the coming months to fulfil this demand. Guyana, Suriname and Trinidad are also driving additional demand within South America, and we regard the former two to be especially likely areas for growth in the coming years.
The US Gulf of Mexico, meanwhile, has witnessed a surge of drillship demand, with competitive utilization expected to surpass 90% before the close of this year. Several contracts in this region have required special services/specifications, such as managed pressure drilling or rigs with 20,000-psi BOPs, both of which add hefty premiums to dayrates.
West Africa has been slower to recover in comparison to Brazil and the US Gulf of Mexico, with utilization just above 40% as of late September, mainly due to a slower rollout of COVID-19 vaccinations, travel and other logistical issues, as well as the Canary Islands being a popular stacking area for idle floaters. However, there has already been over 10 years of backlog awarded in the region this year. This trend is likely to continue as we are recording more long-term drillship tenders offshore Angola, Nigeria and Ghana, as the region plays catch up after years of muted activity.
There are currently 18 drillships under construction, and three are so far confirmed for delivery in the coming year, including Transocean’s two 20K newbuilds. Additionally, rumors suggest we may see one or two more join the active fleet next year in addition to those already confirmed.
As shown in Figure 3, if all outstanding demand goes ahead, drillship utilization could hit a high of 86% over the next year, which is a level where we would typically start to see dayrates moving substantially higher.
Combined floater utilization has recovered by 10% over the past year, and we believe it will be sitting at around 80% by the end of 2022 if commodity prices remain at attractive levels.
Seventh-generation drillships: tight supply, dayrates moving higher
The seventh-generation drillship segment has seen the biggest gains in dayrates so far this year, specifically in the US Gulf of Mexico, where supply is becoming very tight. Some fixtures have now been recorded over $300,000/day in this region, and there may be room for rates to move higher over the coming year. However, seventh-generation drillship fixtures elsewhere, in areas with lower utilization, are still typically in the $190,000 to $230,000 range, but Esgian Rig Service forecasts rates will increase further next year as supply tightens.
The sixth-generation drillship division has seen more variable dayrates, due to competition from the more modern and desired seventh-gen units. Lately we have seen a divergence in those rates, which indicates that these older rigs are competing at a discount. Dayrates have been typically recorded in the $170,000 to $200,000 arena this year but may move higher once the seventh-gen market begins to sell out.
Meanwhile, sixth-generation (non-harsh environment) semisubmersibles have seen dayrates follow a positive trend of late, but growth has been slow as the asset class continues to compete heavily with drillships, which is keeping dayrate growth subdued. Harsh-environment semisubmersibles, on the other hand, generally do not face much competition from other asset classes and, because of their operational uniqueness, tend to command rates above $300,000/day for modern, high-spec units usually working in Norwegian waters. We believe there is more room for these rates to grow but anticipate that the most drastic growth will not happen until 2023, when more demand is expected to come to fruition in Norwegian waters due to tax incentives put in place by the government last year.
A sustainable rig market for the future
All signs appear to be pointing to the beginning of an upcycle for the floating drilling rig market, and 2022 is shaping up to be a better year for rig owners, especially now that most have recently exited Chapter 11 proceedings with clean balance sheets and leaner fleets. It appears that the time for consolidation is now, and a few game-changing deals may be just around the corner, while further investment in “green” rig assets is expected as the energy transition gains traction.
It is now up to deepwater drilling contractors, in partnership with suppliers, clients, investors and regulatory bodies, to understand and avoid repeating past mistakes, especially in terms of the supply/demand balance, and to anticipate future trends to help prepare for a more profitable and sustainable rig industry for the future. DC
