After setting an all-time activity high with 409 rigs contracted in the summer of 2014, jackup demand plunged 25% to 308 units in 2016. With 100 newbuilds either completed and not delivered, or yet to be completed with delivery scheduled during the next few years and only 63 units retired in the downturn, the jackup market remains oversupplied resulting in low utilization levels and depressed rates.
Effective Supply Is Less Than The Surface Statistics Imply
As of mid-Q2 2017, global jackup utilization is at 56%. However, backing the cold-stacked units out of the denominator shows that marketed utilization is at 63%. The jackup fleet stands at 521 with 11% being cold stacked, 33% ready/warm stacked.
This distinction is important because many of the cold stacked jackups will likely never work again. Dayrates will have to exceed levels foreseeable in the medium-term to justify their reactivation cost.
Let’s take a data-driven look at some factors that are likely to keep cold-stacked rigs out of service:
- Age. With plenty of new jackups available, old jackups face an inherent barrier to re-entry. The average age of the cold stacked fleet is 33 years and 92% are more than 15 years old.
- Surveys. In the downturn, contractors deferred surveys on idle rigs to save costs. Many drilling contractors also deferred the maintenance necessary to keep rigs in class, which will add millions to the cost of re-activation. While the 5-year SPS for a jackup may cost less than $1 million, maintenance and repairs can cost upwards of $20 million depending on the condition of the rig. Once a rig falls out of class it may not be able to be grandfathered in under the rules in which it was originally classed thereby adding additional costs to bring the rig up to current standards. The percentage of units with expired special periodic surveys (SPS) is 20% while 40% of cold stacked units have surveys coming up during 2017 and 2018.
Demand Showing Signs of Life, But Still Depressed
Based on contract fixture data from Rystad Energy’s RigCube, Figure 1 shows the development in contracting activity from Q2 2016 to Q2 2017 for competitive rigs. We see that contracting activity picked up in the first two quarters of 2017, excluding June, with 58 new mutual contract fixtures. This is a 35% increase compared to the first six months of 2016 with 43 new mutual contract fixtures. Tendering activity peaked between Q1 2012 and Q1 2013 with the number of fixtures for new mutual contracts averaging 77 per quarter during that period.
The (blue) line in Figure 1 shows the trend of average contract duration for fixtures during the quarter. Durations for contracts signed during the first six months of 2016 averaged 18.1 months as compared to the first half of 2017 where the average duration shrank to 7.1 months. This is a 61% decrease in average contract durations for the first part of 2017.
Seventy-one percent of new mutual contracts signed in first half of 2017 are intra-year contracts. In other words, only 17 of the units contracted during the first six months of 2017 have a contract extending beyond 2017. As compared to the first six months of 2016, this is a drop of 29 percentagepointswhen only 42% of the contracts were intra-year contracts.
While the backlog added for the first six months of 2016 totals 65 rig years, the first six months of 2017 were significantly lower, with approximately 34 rigs years of backlog. Rystad Energy’s forecast calls for a slight uptick in jackup demand. However, it will still be a very competitive market for the rig owners with units rolling off contract this year.
One housekeeping note: the numbers above do not include the 10-year contracts awarded to the West Elara and West Linus in the North Sea earlier in 2017. While these are important contract wins, they are the exception rather than the rule.
During the first six months of 2017, 64% of rigs receiving contracts had been idle an average of 10 months prior to landing work. This compares to 7 months in the year-ago period during 2016. Slow approval processes, “re-tendering” and revisions to the scope of work have added to the time it takes to secure a contract.
More Rig Retirements Needed Before This Market Can Heal
While contracting activity appears to be on an upswing, the data shows a market still in a trough as only a small number of contracts are long term. In order to begin to move out of the trough, contract durations need to improve. Otherwise, jackup contractors could find themselves on a “short-term” contract treadmill.
Many of the newbuilds stranded in the shipyards will face an even tougher time securing work as operators are reluctant to hire a rig without an operational track-record unless the rig is owned by an established drilling contractor.
For the oversupply situation to begin to correct itself, a minimum of 110 more jackups must be retired from existing supply.