October 2020

 

Brazil on path to recovery as retirements pick up pace in the global floater fleet 

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After a combination of low oil prices, corruption scandals and general stagnation in the economy, Brazil went from being the world’s largest deepwater drilling market – with a record high demand of 78 semi-submersibles and drillships in 2012 – and proceeded to shrink to a low of only 13 active rigs in October 2019. Part of this is explained by improvements in drilling efficiency leading to wells being drilled faster, thereby reducing the overall need for rigs. Now, in 2020, the Brazilian drilling market is beginning to recover and activity levels are improving. Along with Guyana and Suriname, two key areas for exploration and new commercial discoveries in South America, Brazil is poised to once again become a key region for benign deepwater drilling.

The Covid-19 outbreak and the oil price crash this year reduced global floater demand by more than 30 rigs since February, and total utilization dropped down to 46% (57% marketed utilization) with some markets more affected than others. Brazil is one of the few markets experiencing an increase in rig demand. Not so in West Africa and the US Gulf of Mexico, where demand has dropped significantly, as shown in Figure 1. In fact, West Africa is experiencing the greatest loss of contracted rigs – down to just three in August versus 10 in February. Activity in Brazil has remained stable, helped by the fact that breakeven prices for projects there have fallen and most of the activity for 2020 and 2021 is already locked in through firm rig contracts signed before the pandemic.

Capacity attrition can set the stage for a comeback in utilization and play a key role as the offshore drilling industry seeks to shore up its finances. This is a course of action that could ultimately lead to increased pricing power on the driller side, eventually helping the global floater fleet to get back on track.

Many of the 154 floaters scrapped since the last downturn share common characteristics, as summarized in Figure 2. Early in the cycle, the only units to be retired were semisubs, while rig owners now see the need to start scrapping drillships as well. Most of the semisubs that were retired at the outset were the oldest, least capable units. Increased operator preference for high specification drillships in benign markets also led to more scrapping in the benign semisub segment of the floater market.

Units that were cold stacked relatively early on during the previous downturn will now be some of the first rigs to be retired in this downturn. Rig owners have been waiting for a recovery that never really materialized – there are 18 units that have remained cold stacked since 2016. Reactivation costs can range between $20 million and $35 million for a rig that has been warm-stacked for a relatively short period of time, to between $40 million and $100 million for rigs that have been cold-stacked for longer periods. Given current rates and contract durations, it is unlikely most of these cold-stacked units will ever return to work. The market hit a peak in 2014 with 104 cold-stacked units, whereas the current number stands at 59 rigs. The harsh-environment market, despite having to endure tough times, has fared better than the benign market since 2014. During this period fewer harsh-environment rigs have been removed from the fleet and these units have on average been older at retirement than the benign environment rigs.

When evaluating future scrapping candidates, several common characteristics are used as a starting point to determine a rig’s potential for retirement. Additionally, company-specific information is considered, such as fleet size, financial health and contractor type (whether marketed locally or internationally). Several rig-specific characteristics are taken into account, with particular emphasis on whether a unit is MPD-ready (equipped for managed pressure drilling), has an upcoming special periodic survey (SPS), or has been idle for a lengthy period of time. Based on these selection criteria, our assessment is that up to 62 floaters could be retired by the end of 2023 (see Figure 3). The potential exists for the world’s largest floater company, Transocean, to retire as many as 15 units over the next three years, followed by Seadrill with 14 rigs and Noble Drilling with six.

We anticipate a rise in mergers and acquisitions among rig players as many of them emerge from on-going restructuring initiatives, and this could again result in more attrition. A reduction in the number of drilling contractors through consolidation will imply a cut in the number of bidders competing in many rig tenders. Still, in order to regain pricing power, rig supply needs to be tightened further.