Asia Pacific rig market: Distressed and oversupplied

Rig demand, dayrates still trending down, although Thailand and India have fared better while Indonesia is eyed as next high-growth candidate

By Alex Endress, Editorial Coordinator

Demand for drilling rigs in the Asia Pacific has remained stagnant, and perhaps even decreased, over the past year. “We’ve seen jackups, in particular, struggle to find work after coming off contract,” said Yun Yun Teo, IHS Petrodata Principal Analyst for Rigs, Asia Pacific. The average number of jackups on contract in Southeast Asia, which remains dominated by shallow-water drilling, was 44.5 in 2015, and that number fell to just 25.9 in 2016, according to IHS Petrodata. “Some have moved to other regions to find work. Despite that, drilling contractors have trouble finding work. It’s a sign of how bad things are.”

 

Jackup dayrates have continued to fall in the region, as well – down from a range of $80,000-120,000 in 2015 to $75,000 by December 2016. “The jackup market has continued to slide in Southeast Asia, and 2017 is not expected to be an improvement,” Ms Teo said, citing sustained low oil prices and an oversupply of offshore rigs as the primary drivers. As of December, only 18 jackups were working and 44 others were stacked – the majority of them coldstacked. “It wouldn’t be a surprise to see a very slight uptick in tenders during the winter budget season over last year, but probably not a significant enough increase to help alleviate the oversupply of rigs in the Asia Pacific,” she said.

On top of the existing oversupply, there are still 103 newbuild jackups, 30 drillships and 16 semisubmersibles sitting in various shipyards worldwide, including in Southeast Asia, South Korea and China. Ms Teo said she expects most, if not all, of these deliveries will be pushed to 2018. “It is possible a handful may be delivered in 2017, but not many,” Ms Teo said. “To put things in perspective, 65 jackups were scheduled to be delivered to the world in 2015. But at the end of that year, only 14 units were delivered.”

Some of these rigs might never get delivered to the market, she said. “A lot of the established drilling contractors say they would rather build their own rigs than take ownership of another rig that wasn’t built with the company’s oversight. They have questions on quality and maintenance of the rigs.”

Facing difficult times, South Korean yards are now undergoing restructuring, Ms Teo said. In particular, Daewoo Shipbuilding and Marine Engineering (DSME), Hyundai Heavy Industries and Samsung Heavy Industries could each undergo a merger by the end of 2017. Singapore-based Sembcorp and Keppel FELS, also challenged in this environment, are working to diversify their business in the marine segment and in rig servicing. “Keppel’s acquisition of LeTourneau in 2016 was one example of this,” Ms Teo said.

Aside from a significant increase in oil prices, the only way supply and demand for jackups can be balanced is if the industry decommissions more rigs, she said. Globally, 11 jackups were retired in 2015 and 14 in 2016. “It is hoped that more retirements will take place to balance the market. There are definitely a lot of 30-year-old candidates out there – at least a couple hundred globally.”

Growth in Indonesia

Although drilling activity in Southeast Asia remains muted as in other regions of the market, Indonesia is being eyed as a high-potential growth market. In the second half of 2016, Jakarta-based Pertamina Hulu Energi (PHE), a subsidiary of Pertamina Upstream, issued 30 new drilling services tenders, including one jackup rig tender. The tenders are for both exploration and development drilling offshore Indonesia for Pertamina Hulu Energi West Madura Offshore, a PHE subsidiary. The jackup rig tender called for independent-legged 3,000-hp jackups with 450-ft leg lengths that can drill to 25,000 ft. The operator also requested 10,000-psi BOPs, 7,500-psi circulating systems and a minimum of three mud pumps.

In 2017, PHE expects to hire at least three jackups and around four additional land rigs, according to Erwindo Tanjung, VP Drilling and Well Services of Pertamina Hulu Energi West Madura Offshore. That would signal a healthy increase in activity for the company since it canceled multiple rig contracts in 2015 and 2016. In Q1 2015, PHE had six jackups and four onshore rigs working in Indonesia. By early 2016, however, the company had no jackups working and only one onshore rig. “The main reason it was uneconomical to have the rigs was because the oil price was down while the operating costs remained at the same level,” Mr Erwindo said.

The newly issued tenders aims to help the operator reduce costs by 40%, compared with tenders issued in 2014. “Our new tender requirements will allow us to reduce the operating costs with optimized logistics and reducing unnecessary requirements on equipment and processes,” he explained. “We had reduced drilling activity significantly last year, but we expect to increase activity in 2017, 2018 and 2019 because of the government’s goal to increase production.”

Long term, Indonesia must increase production to meet growing demand – the country currently imports approximately 350,000 bbl/day for oil. Pertamina Upstream produced an average of 313,000 bbl/day of oil in 2016, but the company is targeting a 6.4% production increase in 2017 to improve domestic energy demands. To support this, Pertamina has allocated a $6.67 billion upstream CAPEX budget for 2017.

This means the company will be able to increase the number of wells drilled compared with 2016. No offshore wells were drilled in 2016, but PHE is planning a minimum of three offshore exploration wells and eight offshore development wells in 2017. An increase is also being planned for onshore wells, an increase from one exploration well in 2016 to two exploration wells this year.

Restructuring to remain competitive 

Besides dealing with low oil prices and a global rig oversupply, many drilling contractors are having to deal with a large amount of debt on their balance sheets, as well, during this downturn. “Everyone got overly enthusiastic in building rigs and incurred a large amount of debt, perhaps forgetting the lessons of the past,” said Bill Thomson, Vice President Marketing and Business Development at Vantage Drilling International. “We are in a cyclical industry. When the oil price went down, investments by oil companies stopped, drilling stopped, and dayrates came crashing down. With the number of rigs that were built, debt that was incurred and the price of oil falling so significantly, it became a perfect storm. Many service companies are struggling and looking at ways to manage their debt.”

Vantage has faced similar challenges. “Vantage was not immune to this. We reached a point where it became clear that the amount of debt we had, the interest and debt payments related to that debt and the market outlook combined, would overwhelm us,” Mr Thomson said. “When you start looking at the principal and interest on the debt you have to pay, what revenue you will generate and what cash you have, you quickly see a limited future. That was the situation we found ourselves in during late 2015 and that many service contractors find themselves in now. We were fortunate to recognize the issue early and deal with it in a decisive manner.”

In December 2015, Vantage Drilling agreed to a restructuring deal with major stakeholders and entered into a Chapter 11 process to ratify that agreement. “The outcome was that we exchanged a considerable portion of our debt for equity, significantly reduced our interest paying debt and increased the cash on our balance sheet. Therefore, as a management team, we can focus on the future and on ensuring we maintain our good reputation for providing safe and efficient service to our customers.”

After having only one of their four jackups working in January 2016, Vantage now has three jackups under contract in the Middle East and Asia. The Aquamarine Driller is working for Carigali-PTTEPI Operating Company (CPOC) in the joint development zone between Thailand and Malaysia. The Emerald Driller is working for Total offshore Qatar, and the Topaz Driller is mobilizing for Ophir in Thailand. “Upon completion of the restructuring, we put the Emerald to work with Total for an 18-month contract, a clear sign that our customers have confidence in the ability of Vantage to see through this downturn.”

Additionally, Vantage has one drillship – the Tungsten Explorer – drilling for Total in the Congo until Q4 2018. The company also has two other drillships – the Platinum Explorer and the Titanium Explorer – as well as another jackup, the Sapphire Driller, in West Africa. “Rates are not where they were before, but we are bidding these vessels aggressively and with clear focus to get them working.”

Jackups that had started working in 2014 at $120,000/day are still rolling off of those contract.  Now, rates can be half of that, and international contractors are competing against many qualified local contractors, especially in Asia. These companies often have a strong local presence and robust cost structures, and there is still a preference for local drilling contractors in some areas of Southeast Asia. “For instance, in Malaysia, the two local drilling contractors are doing well-winning work. There is work available in Asia for contractors with good reputations and the correct cost structure. For example, Indonesia has lots of outstanding opportunities, and many drilling contractors are looking for ways to work in Indonesia. Indonesia could and should be an area for growth in the coming years.”

Vantage’s strategy, according to Mr Thomson, is to keep idle rigs warm-stacked and ready for deployment. This is different from some contractors that immediately put their rigs in cold-stacked mode when they see fewer opportunities. Vantage has one jackup and two drillships warm-stacked.

“When we warm-stack our rigs, we keep all the technical crews, key drilling personnel and management living onboard to keep the vessel systems hot, run the critical equipment on a regular basis and perform the regular maintenance,” Mr Thomson said. “Not only does this approach preserve the equipment and rig, but it also preserves the talent and experience of the crews on those vessels.  This makes it much simpler and less risky to take the rig from stacked condition to operating.

“In this market, once a rig goes cold, it most likely won’t be working for the next two to three years,” Mr Thomson continued. “The risks and costs of reactivating the equipment and re-training the crews mean most drilling contractors, who may be facing their own debt problems, will likely wait until the market is balanced and dayrates are going up before considering bringing a cold-stacked rig back out.”

Rig scrapping is not an option for Vantage, Mr Thomson added, simply because all of the company’s rigs were recently built. However, like most of the industry, the company is not planning any newbuilds either. “Our focus is maintaining our stellar safety performance, getting our existing rigs back to work on long-term contracts and to continue to reduce costs and maintain a strong balance sheet. However, when the time and opportunity are right, we would consider growing the fleet.”

Jackups now competing with tender rigs

Tender assist rigs have traditionally filled a niche in the drilling market for operators looking to drill in shallow-water depths at lower costs than jackups. However, in 2016, jackup dayrates in Southeast Asia fell so low that jackups in effect started competing with tender assist units.

“In the pre-2014 market, there was quite a difference between tender assist rigs and jackups. But now, jackups have become extremely competitive in terms of dayrates. This makes it challenging for tender assist rigs  – barges – to remain a more economical solution for operators,” said Louay Laham, Group Head of Fleet Support at SapuraKencana Drilling (SK Drilling). Mr Laham also serves as Chairman of the IADC Southeast Asia Chapter.

While tender barges can reach maximum water depths of 600 ft, most operators in Southeast Asia don’t always need to operate in such depths. This make jackups the more economical option. Jackup dayrates are now as low as $50,000-$60,000 in Southeast Asia, the same range for tender rigs, according to Mr Laham.

SK Drilling currently maintains an approximately 50% utilization rate for its fleet, favoring heavily toward its semi-tender assist rigs. Eight of the company’s 16 tender assist rigs are working – four in Malaysia, three in Thailand and one in Brunei. However, four of the company’s semi-tender assist rigs are cold-stacked. Semi-tender rigs can operate in up to 6,500-ft water depths, but there are currently fewer opportunities for these rigs because many operators have de-emphasized deepwater drilling in the midst of low oil prices, Mr Laham said.

By year-end 2017, Mr Laham said he expects SK Drilling’s fleet utilization to decrease further. “Many of our rigs began long-term contracts in 2013, 2014 and 2015, and they’re now coming to an end,” he said. “In most cases, rigs are getting stacked after they roll off contracts, so we are expecting a lower utilization rate for 2017. For now, we expect to cold-stack these rigs.” In terms of rig decommissions, Mr Laham said the company has disposed of two 30-year-old tender assist rigs since 2014 and will evaluate one or more decommissioning candidate in 2017.

While no newbuilds are planned at this time, Mr Laham added that SK Drilling would consider acquiring tender rigs that have been built but not delivered; all of these are currently in Chinese shipyards. That is contingent on rig demand increasing, of course. “With the market as it is today, the plan is not to buy any of these rigs, but if we have sufficient opportunities in 2017 or 2018, we might consider those options.”

Higher breakeven economics

Although the drilling industry worldwide has been negatively impacted by low oil prices, Shelf Drilling CEO David Mullen says rig demand has been most profoundly distressed in Asia. “The destruction in demand is due to the fact that the breakeven economics for a large number of the oil accumulations in Asia is higher than the prevailing oil price for most of 2016,” he said. “The breakeven economics of oil in Southeast Asia is substantially higher than in the Middle East, where activity has held up reasonably well. With oil prices below $50 for most of 2016, activity in the region all but dried up. The only bright spot in Southeast Asia was Thailand, where the activity was substantially sustained through 2016. The activity in Thailand is principally to supply gas to the local market.”

The Dubai-based company has a record of doing factory-type well construction in the Gulf of Thailand (GoT). In 2014, Chevron worked with Shelf Drilling to design two highly customized newbuild jackups to optimize well construction in the GoT. The newbuilds are based on the Marathon LeTourneau Super 116E design and were each granted five-year contracts. The construction project for these rigs has been a collaborative effort involving Chevron, Shelf Drilling and the Lamprell Shipyard in Sharjah, United Arab Emirates.

The first newbuild rig – Shelf Drilling Chaophraya (SDC), started its contract with Chevron in December 2016. The second – Shelf Drilling Krathong (SDK) – is scheduled to start in mid-2017.

Shelf Drilling is also busy in India, where the company has eight jackups. One is working for Shell on a 380-day contract, and seven others are working for ONGC under three-year contracts. “In Southeast Asia, rigs have been in the $50,000 to $70,000 range, but the market is a little bit lower in India,” Mr Mullen explained, noting that dayrates in India have been halved since the downturn began in 2014.

He noted that a preference for local contractors in many Southeast Asian countries – combined with the destruction in demand  –have driven many rigs into India and Middle East. That has driven up competition while driving down rates in those areas. “Naturally, the oil and gas companies in India are taking advantage of the lower rig prices and lower oilfield service prices to boost their activity. It’s an opportunistic time to lessen India’s dependence upon imports. Today, India imports about 80% of its energy needs, so they are very motivated to see a larger share of that production come domestically rather than through imports.” Shelf Drilling had nine rigs working in India in late 2016 – that is the highest ever by a drilling contractor there, according to Mr Mullen.

Similar to India, the countries of Indonesia, Thailand, Vietnam and Malaysia are all likely to begin ramping up drilling activities in the near future to make up for shortfalls in their domestic production. “These countries need to shore up production, or there will be significant shortages,” Mr Mullen said. “A number of countries in Southeast Asia have in recent years turned from being a net exporter to a net importer.”

While Indonesia and Malaysia may gain more interest in the short term, activity levels are unlikely to spike soon in Myanmar, However, interest is certain to grow in the long term because of the country’s high-quality reservoirs, he said. “2017 is probably too early for Myanmar, but if you look further out, it has potentially good prospects, and it’s attracted the interest of a number of international operators.”

India keeping busy

Amid sagging drilling activity levels around the world, India has remained one of the busier hubs throughout the downturn. One main driver has been the country’s dependence on petroleum imports, which has been increasing as its transportation and industrial sectors mature. Over the past five years, India has consistently ranked within the top five net crude importing countries. The gap between domestic oil demand and supply has widened, as well. According to the US Energy Information Administration (EIA), India’s petroleum demand was 4.1 million bbl/day in 2015, while domestic liquids production was only about 1 million bbl/day.

In March 2015, the Indian government announced a pledge to reduce the country’s domestic imports by 10% within seven years. “As a national oil company, there is always pressure to increase production because India has usually been an import-dependent nation,” Shashi Shanker, Director of Technology & Field Services at ONGC, said. “That’s the reason we have gone into frontier areas, including deepwater and high-pressure, high-temperature (HPHT) plays, even at these low oil prices.”

Mr Shanker estimates that, even now, higher-cost HPHT and deepwater developments still make up approximately 30% of ONGC’s portfolio.

For the fiscal year ending March 2017, ONGC plans to have drilled 500 wells in India. This represents an increase of approximately 100 wells over the last fiscal year, Mr Shanker said. However, the company’s drilling spend has remained steady at about $2.4 billion, he pointed out. “We have been able to drill more wells with the same amount of money because we have been able to hire more rigs for a lower cost, and we have been working on increasing operational efficiency.”

The cost of equipment and services, including rigs, has fallen by as much as 60%, he noted. In India, ONGC currently has 67 onshore drilling rigs and 38 offshore drilling rigs – 33 jackups and five floaters. The company also has 77 workover rigs. By year-end 2017, the company plans to have five additional rigs working in India, all floaters.

The company is also making better use of data analytics to increase efficiency. “People were not very concerned with invisible lost time during the time of $100-plus oil, but now we are very concerned,” Mr Shanker said. “We have started using data mining and analytics where every activity is very closely analyzed, and we take the contractors into confidence and ask them to improve  where possible.”

One example is slip-to-slip connection time. In early 2016, ONGC measured the slip-to-slip time on three drillships and found that there was as much as a 70% variation from unit to unit. “The reason was because different practices were being followed, from one driller to another driller and from one company to another company,” Mr Shanker said. After completing microanalyses on the lost time, ONGC developed a set of benchmarks and standard practices for all of its drilling contractors and oilfield service companies. This allowed the operator to increase its monthly footage drilled by 20%, he said.

Another cost-reduction strategy has been bundling of services, including MWD, mud services, cementing services, well testing services and even helicopter and boat services. Mr Shanker noted that drilling contractors have been “a bit reluctant to take on that type of exposure, especially in the deepwater front.” However, ONGC prefers bundling services as they believe it has helped the company to reduce services costs by about 20% to 30% on a per-well basis.

Australia’s new normal

Optimism is growing onshore Australia as operators are learning to adjust to the new lower oil prices. This means they are planning drilling budgets in line with the new normal, and this is actually leading to stability and the hiring of more rigs by the oil companies, said Luke Smith, General Manager for Easternwell Energy. Mr Smith also serves as Onshore Chairman of the IADC Australasia Chapter.

“The feeling is a lot more positive now than what it was. Although things haven’t improved greatly, we have become more comfortable with the position that we’re in,” he said.

Easternwell, a company with four drilling rigs and 24 workover rigs, currently has two drilling rigs working under ad-hoc contracts and 16 workover rigs, mostly under long-term contracts. These rigs are operating in Queensland, South Australia and Barrow Island off Western Australia. Dayrates have fallen by approximately 20-30% since 2014.

“With that in mind, operators are still very focused on driving costs down. This will be an ongoing focus through 2017, as well, regardless of the oil price,” Mr Smith said. This means drilling contractors must further analyze operations to find additional opportunities to cut spending.

“Much of the responsibility to reduce costs has been placed on the drilling contractors,” he explained. “Australia grew very fast. Labor rates and manpower costs across industry had grown significantly before the downturn. Thus, it was hit very hard in 2014,” he said. “I think operators will be weary about that happening again and will try to avoid it this time around – instead keeping the costs low and avoiding the risks involved with big market fluctuations.”

To do this, contractors in this region have been narrowing their operations down to their core businesses of rig services and human labor. “One of the big differences we have here as opposed to the North American model is that our costs are typically inclusive of a lot of third-party services we tend to deliver, such as camp, vehicles, rig-move trucking services, drill string tubulars and fuel,” Mr Smith said. By cutting out some of these peripheral services, contractors have been able to focus on better operational execution. “We’re moving more toward the American model.”

A growing area of concern for drilling contractors in Australia, Mr Smith added, is the health of the region’s oilfield services sector. Several service companies have already left Australia in the past year, he said, including Tesco, Trican and Ranger Oiltools. Others have shut down regional offices and workshops, including Weir Oil and Gas, Cudd Energy Services and Gearhart Industries. “The larger companies have kept footholds here, but we’ve lost quite a few of the smaller players, and there are far fewer options these days,” he said. “Because of that, we’ve also lost a lot of personnel from the industry, which will be hard to get back at this point. That’s been the real negative impact here in Australia.” DC