With total global well demand down to half of what it was a year ago, the contracted rig supply continues to suffer as drilling contractors cold-stack or scrap retired rigs for cash and E&Ps slow spending amid tough market conditions.
But attrition could help balance the oversupplied floating rig market.
Noble Corp. (NYSE: NE) and Rowan Cos. Inc. (NYSE: RDC) both saw Freeport-McMoRan Oil & Gas Ltd. bow out of drilling contracts for drillships during second-quarter 2016. In its earnings release July 26, Freeport-McMoRan, which restructured its oil and gas business, said it agreed to pay a total of $755 million plus potential contingent consideration depending on future oil prices for three terminated drilling contracts.
While some rigs have been left without work, others have been sent to their death.
Just last week U.K.-based Ensco Plc (NYSE: ESV) said it sold two semisubmersibles, two drillships and two other rigs for scrap value. The global deepwater drilling sector will probably see more drilling contractors scrap or retire some of the rigs they have pulled, according to Leslie Cook, senior research consultant for Quest Offshore Resources.
“There are plenty of rigs that are cold-stacked that are 30 or 40 years old. They are dying on the vine,” Cook said. “They will never come back to work, certainly not back to their glory days.”
Figures from the advisory and consulting firm show the estimated contracted rig demand for 2016 is forecast at 124 units. Of these units, roughly 80%, or 98 units, are needed for drilling wells. The 2016 forecast contracted floating rig supply is 143 units, representing an oversupply of 19 units, Cook said. The outlook shows drilling supply exceeding demand through 2016.
In addition to the 52 rigs idled in the first half of 2016, 31 additional rigs could roll off contract in the second half, according to Quest.
High attrition is expected to ease the excess drilling supply, bringing a supply and demand balance in 2017.
“I think what we’ll see next year is less attrition but not a whole lot of rigs coming back quite yet,” she said. “Obviously, this is not good news if you are a drilling contractor.”
The firm does not expect more rigs to return to the market until closer to 2019-2020.
Of the 353 total floating rigs in Quest’s database, 50% of the supply is with six contractors—Transocean, Seadrill, Diamond Offshore, Ensco, Noble Drilling and Ocean Rig. Average utilization among these six companies is about 57%, Cook said.
The average day rates for all rig types are trending down, she added, as rigs at the higher end of rate range begin to roll off contract with new contracts (leading-edge) down 25%-40%.
Currently, about 84% of the existing fleet has been delivered with the remaining 16% in shipyards or being delayed or canceled.
But the news was not all bleak for global deepwater drilling. There are some silver linings, Cook said.
Heading into second-half 2016, supply and demand is balanced at about 25 rigs for the Africa-Mediterranean region. More than 430 new wells, including 135 exploration/appraisal wells, are forecast through 2020 for the region.
“Africa is really a sleeping giant. The growth potential there is exponential at the right commodity price,” Cook said, noting 21 discoveries were made here in the last 18 months with new play openings in Senegal, Mauritania, Ivory Coast, and also in the Black Sea.
Offshore North America more than 365 new wells are forecast through 2020. Drilling opportunities exist in ultra-deepwater Mexico along with brownfield opportunities in the Gulf of Mexico and frontier potential offshore Nova Scotia, the Bahamas and Cuba, she said.
“Asia is a long-term gas proposition while oil potential has yet to be realized. … North Sea maturity breeds longevity and with a little luck of the Irish new plays to come,” Cook continued. “South America is your pre-salt prize combined with exciting new plays outside of Brazil” from companies such as ExxonMobil (NYSE: XOM) offshore Guyana.
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