The outlook for the floater market, before the substantial oil price drop, reflects a short-term oversupply due to a massive fleet increase combined with lowered demand growth rates.
In September 2014 we saw market fundamentals suggesting a recovery for the floater market by late 2016, shown by the implied utilization increase post-2016 (Figure 1).
With the past month’s oil price fall to around 80 USD/bbl, a key question remains pivotal for the industry; how will this drop affect the market balance ahead, and what happens to the anticipated market recovery?- The September demand and supply scenario with a Brent price of 105 USD/bbl – Late 2016 Recovery
The floater demand has seen an average annual growth rate of 9% from 2010-2013. However, due to existing market conditions with E&P companies delaying and cancelling projects, we expect a slowdown in the floater demand growth to 4% from 2013-2016. On the supply side we do not see the same slowdown as numerous floater newbuild deliveries are expected during the same period. The result is a period, where implied gross utilization decreases (Figure 1) and we see challenging market conditions for drillers with limited contract coverage. Reaching late 2016 however, fundamentals point towards a market recovery with average annual demand growth rates again reaching 9% towards 2020. The rig demand growth recovery is supported by the necessity of offshore drilling to bring new volumes into an economy which still grows its oil consumption, and where offshore is still an important contributor.Figure 1 shows the September demand and supply scenario for floating drilling units from 2005-2020.The shaded area indicates the expected demand based on the September forward curve. The black line indicates the expected supply given current newbuild visibility.- The Sustained $80 Oil Price Scenario – Oversupply Could Lead to Attrition
If the oil price stabilizes at 80 USD/bbl, we anticipate halved short- and long-term average annual demand growth rates compared to the September scenario; 2% during 2013-2016, and 4% for 2016-2020 respectively. In the sustained $80 Oil Price Scenario, the short term effects will be related to an immediate drop /sustained low level of exploration drilling. Medium- to long- term we anticipate high breakeven projects (those with breakeven prices above 80 USD/bbl) to be delayed or cancelled, of which 50% of the floater demand at risk is located in deepwater areas of Brazil and West Africa.
The effects of the above mentioned development in floater demand will create further downwards pressure on implied gross utilization: from an anticipated utilization of around 80-90% in our September view, to a utilization level of around 70-75% (Figure 2). Adding to this, and as a direct reaction to falling utilization levels, we could see increased fleet attrition. This would in turn help the recovery of the market and reduce the negative effects of the lower oil price on utilization levels. However, little doubt remains that a sustained $80 oil price will have significant negative effects on the markets, and that drillers will have to be even more patient in their wait for better days.Figure 2 shows demand and supply for floating drilling units in the $80 Oil Price Scenario during 2005-2020.The solid shaded area indicates expected demand in an 80 USD/bbl scenario, while the patterned area indicates the demand at risk at breakeven oil price above the 80 USD/bbl threshold. The black line indicates the expected supply given current newbuild visibility.
Rystad Energy continuously monitors future drilling programs associated with exploration and development drilling. The perspectives presented above reflect our insight into the floater market and are available in RigCube