May 2017

The jackup market: activity picking up, rates remain depressed

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After historical highs in 2014, jackup demand plunged by 25% from 409 units in 2014, to 308 units in 2016. With 72 newbuilds scheduled to come into the market in the next few years and only 63 units retired since 2014, the jackup market is in the midst of an oversupply situation, resulting in low utilization levels and depressed rates.

Rystad Energy forecasts a small increase in jackup demand this year, compared to 2016 levels. In line with this view, we have seen increased tendering activity during the first quarter of 2017.

Based on contract fixture data from Rystad Energy’s RigCube, Figure 1 shows the development in contracting activity from Q1 2016 to Q1 2017 for competitive rigs. We see that contracting activity picked up in the first quarter of 2017, with 36 new mutual contract fixtures. This is a 50% increase from the previous quarter and a 33% increase compared to the first quarter of 2016. Tendering activity is still low compared to the peak period between Q1 2012 and Q1 2013, when the number of fixtures for new mutual contracts averaged 77 quarterly.

The blue line in Figure 1 shows the trend of average contract duration per quarter. Durations for contracts signed in Q1 2016 averaged 19 months as compared to Q1 2017 with an average duration of 6 months. This is a 68% decrease in average contract duration for the first quarter of 2017. Eighty-three percent of new mutual contracts signed in Q1 2017 are intra-year contracts. In other words, only six of the units contracted in Q1 2017 will have a contract extending past 2017. This is a large drop compared to Q1 2016, when intra-year contracts accounted for only 42%. While the total backlog for the first quarter of 2016 added up to 25 rig years, Q1 2017 was significantly lower with approximately 18 rig years of backlog. While our forecast calls for a slight uptick in jackup demand, it will still be a very competitive market for the rig owners with units rolling off contract this year.

Taking a deeper look at contracting activity for the competitive fleet during Q1 2017 (sublet, exercised options and new mutual contracts), we see that 33% of the units were already under contract at the time they received additional work. The other 67% of rigs awarded work in Q1 2017 were not under contract at the time of fixture, and on average, had been idle for 11 months. This compares with Q1 2016, where 35% of the jackups receiving new work were already contracted, while the remaining units had, on average, been idle for 7 months. Aside from the “lower for longer” environment and operators “re-tendering”, slow approval processes and revisions to the scope of work required only add to the time it takes to secure a contract.

Over the last decade, the Middle East has been the largest market for jackup rigs. Looking at the first quarter of 2017, 30% of the awarded contracts are for work in the Middle East. Saudi Aramco is out in the market with a multi-rig requirement for incremental units as well as renewal against existing units with a start date during Q1 2018 and a duration between three and five years. Elsewhere in the region, Dubai Petroleum is also out with a requirement for term work against the renewal of two incumbent rigs. During Q1 2017, Southeast Asia and North America were slightly behind the Middle East in awarded contracts, with 25% and 22%, respectively. In Q1 2016, tendering was dominated by the Middle East (38%), with South Asia (15%) a distant second.

Figure 2 shows the development in rig rates per quarter in the last year. In order to understand the global trend in rig rates, North Sea jackup rates have been excluded from the quarterly averages. Declining rates persisted throughout Q3 2016, however during the last quarter of 2016, rates appear to be flattening out and even showed signs of a resurgence in Q1 2017 with contracting activity increasing. Rig rates averaged near $69,000/day during Q1 2017, compared to the peak period for jackup rates, between Q1 2013 and Q3 2014, when rig rates averaged $142,000/day. A situation that can still be seen as depressing for the drillers.

Towards 2020, Rystad Energy believes that jackup demand will increase, with an anticipated yearly average growth of 4%. However, the oversupply of existing units in the market, an expected influx of newbuilds and the short-term nature of contracts, contribute to our opinion that rig rates will remain at low levels going forward.