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Offshore sanctioning activity experienced a small uptick in 2017, particularly for projects requiring a floating rig. Many projects which saw multiple delays are finally getting a green light. 37-rig years’ worth of demand were sanctioned in 2017, which is 50% higher than the 24 rig years of demand approved during 2016. An additional 18 years of rig demand may receive FID prior to year-end with Sepia and Libra pilot in Brazil representing a large share of this remaining demand. Two notable reasons for the increase in sanctioning during 2017 are project re-engineering, which lowered breakeven prices, and improved cash flow for E&P companies. Looking forward, Rystad Energy estimates just under 100 rig years of demand potentially reaching FID in 2018.
To reach FID, operators have had to bring down costs in order to move the project forward in the current price environment. For many projects, this often means re-engineering, whether by project re-scaling, improving supply chain cost efficiencies, drilling efficiencies, and in some cases taking advantage of near-field development opportunities. For offshore oilfields with sanctioning expected during the next 5 years, the average breakeven price is US ~$40/bbl for offshore shelf and US $50-55/bbl for Midwater and Deepwater. A key component in making projects viable has been the massive pricing pressure in the oilfield service sector.
In conjunction with the decline in development costs, available capital has been going up. E&P companies are seeing an increase in total generated free cash flow (FCF) from existing projects, which is expected to grow noticeably within the next three years. We estimate FCF to increase 39% from 2017 to 2018 and 6% from 2018 to 2019 (*companies with only onshore production are taken out of the selection). With costs coming down and anticipating an increase in oil prices, E&P companies will finally be able to realize larger field development projects.
Looking into the future, Figure 1 shows the aggregated floating rig demand for the greenfield developments sanctioned and expected to be sanctioned in 2016-2018. Rystad Energy expects almost 90% of the floater projects sanctioned next year to have a breakeven price below US $60/bbl. Research from Rystad Energy’s UCube indicates that shale projects, which have yet to be sanctioned, have an average breakeven price of US $50/bbl, indicating the growing competitiveness of offshore as structural pricing for shale increases. Next, we will look at where the future rig demand lies.
As Figure 2 shows, Western Europe, South America and East/West Africa will be the main regions for new project developments. In Europe, large field developments like Johan Castberg and Snorre 2040 together with eleven smaller developments in Norway will come up for approval next year. In East Africa, Eni approved FID for Coral LNG earlier this year, while Anadarko is preparing the way for Golfinho and Atum in Mozambique next year. In South America, Libra pilot is expected to reach FID later this year, while Libra 2, Buzios V and Echidna are planned for next year. Rig demand resulting from 2018 FID approvals will result in the majority of the drilling activity occurring between late 2019 through 2021.
It will be several years before supply and demand come into balance. Currently, floating rig utilization stands at 43%. By mid-2018, floating rig utilization will be 35% given no new contract awards, cancellations or rig attrition. This leaves plenty of rigs available to participate in upcoming tenders and only small pockets of tightening demand in certain regions.
Overall, the average lead-time for new mutual contracts for floating rigs during 2017 is five months. While contracts with a duration of one year or more have an average lead-time of eight months, these long-term contracts account for only a small portion of the contracts awarded during 2017. Project re-scaling has had an impact on contract durations, and with floating rig utilization at all-time lows, operators do not see the need to lock in rigs on long-term contracts.
In summary, Rystad Energy expects floating rig utilization to continue to be depressed. However, as operators restructure project costs, previously delayed projects could gain traction and translate into future rig demand.