The global deepwater service sector may see choppiness near term as a rising tide of new rig additions flows toward the market while flattening rates for fixtures in the previously high-flying global ultra-deepwater (UDW) market add to impressions on Wall Street that a potential short-term oversupply situation is at hand.

No doubt Wall Street investors are looking at the 30 newbuild UDW units scheduled for global delivery over the next two years, many without contracts. In total, more than 60 floaters are headed to global markets through 2015, including 16 in the second half of 2013 and another 14 in the first half of 2014. The pace of new orders has picked up in 2013 with 17 floaters and 46 jacksups through mid-year, according to Tudor Pickering Holt & Co. That said, Wall Street worries about oversupply may be premature, even as offshore drillers have generally under-performed peers in the oilfield services equity index year-to-date 2013.

Newbuilds continue to eat away at an expanding future inventory one new contract at a time. Furthermore, the industry is expected to witness several additional fixtures over the next 60 days as the traditional summer contract season matures. The issue is how the market bifurcates in the future between older, less capable units and newer, higher spec units as operators high-grade equipment, absorbing newbuild capacity while older capacity sees softer rates and lower utilization.

Demand for higher spec newbuilds is present. Rowan Companies found work for the third of its four newbuild drillships in August after inking a three-year contract for the Rowan Reliance, a DP-3 compliant drillship capable of drilling in 3,658 m (12,000 ft) of water and currently under construction at Hyundai Heavy Industries (HHI) in Ulsan, South Korea. The rig will begin work in the US Gulf of Mexico (GoM) for Cobalt International Energy in January 2015 at US $579,000 per day ($602,000 including mobilization). The Rowan Reliance award follows a separate GoM contract from Anadarko Petroleum Corp. for its sister drillship, the Rowan Resolute, in June 2013. That rig also topped $600,000 per day, including mobilization.

However, Rowan still has one uncontracted UDW drillship, the Rowan Relentless, under construction in Korea with a March 2015 delivery date. Apparently non-plussed about Wall Street oversupply worries, the offshore driller extended an option with HHI to order one more drillship through the end of the 3Q 2013. Of the four Rowan drillships under construction at Korea’s HHI, three have received contracts following the early August Cobalt award. Cobalt drilled the North Platte Lower Inboard Tertiary discovery well in December 2012 and is currently running a 13,468 sq-km (5,200 sq-mile) 3-D seismic survey before it begins its appraisal program following the North Platte success.

Tightness in the deepwater market longer term is evident in the two contract extensions Chevron Corp. provided Transocean Ltd. for drillships, including a four-year extension for the Discoverer Clear Leader, and a five-year extension for the Discoverer Inspiration. Both are working the US GoM. Under the contract extensions, rates will rise substantially with the Clear Leader commanding $590,000, a $29,000 per day increase once the contract extension takes hold in September 2014, and the Discoverer Inspiration fetching $580,000 versus $521,000 previously when the extension begins in 1Q 2015.

Demand for UDW drillships appears strongest in West Africa and the deepwater GoM.

The question down-market is whether the international jackup sector is nearing saturation and thus a potential bifurcation between the new high spec units and older commodity units.

The Southeast Asia market has been a source of rising demand while rig rates and demand are rising for higher spec jackups in the North Sea and Saudi Arabia.

However, with more than 80 uncontracted newbuilds under construction, the investment community has gotten nervous in recent months. Roughly 34 of those are scheduled for delivery worldwide by year-end 2013, though the delivery pace slows in 2014. Globally, jackup utilization is at 85%, according to Barclay’s Capital Research, including a rebound to 92% in the post-Macondo GoM. Evidence of a strong market in the GoM is found in a move to term contracts versus the normal well-to-well arrangements that characterized the sector in the past.

Otherwise worries of market saturation on Wall Street involve disregarding continued demand in the North Sea, which is likely to remain tight through 2015, and the Middle East where Saudi Arabia is still on track to move its jack up employment from 43 currently to a potential 60 units by year-end 2014.

Strength in the deepwater market is beginning to flow through to the manufacturing sector as well. Dril-Quip Inc. suggested in its 2Q earnings that the pace of subsea wellhead systems is nearing pre-Macondo levels in the GoM while globally, the company saw a sharp jump in backlog to $1.137 billion, compared to $697 million in the same quarter one year ago. Dril-Quip’s backlog topped $1 billion for the first time in 1Q 2013.

Contact the author, Richard Mason, at