The drilling industry is moving into 2016 in a state of hiatus. It seems that almost everyone, except the drillers themselves, are convinced that the only way to balance the rig market is to undertake mass scrapping of older units. However, despite a rash of retirements in the first half of the year, there has
been nothing scrapped in the last three months.
The floater sector has, at least, made a start, with forty-four units, mostly from Transocean and Diamond, being sent to the knackers yard this year but consensus of opinion from analysts is that another one hundred units need to go the same route. There are currently around twenty-seven floaters over the age of thirty five idle and around forty of the same age with contracts expiring in 2016. These would have to be obvious candidates for the scrapyard. Bear in mind there are still forty-two floaters currently under construction which will enter the market over the next two years and this is not counting those for Sete Brasil which may or may not amount to another fifteen UDW units.
But it is the jackup sector that has been somewhat tardy in scrapping rigs with only five, out of an estimated worldwide fleet of around five hundred and twenty-six units, which have gone to the scrapyard in 2015. Currently there are around sixty idle jackups that are over the age of thirty years and another ninety of the same age that come off contract in 2016. The current chartered overall fleet amounts only to 61% utilisation with around one hundred and eighteen idle jackups and sixty-three cold stacked, the latter surely being the first candidates to go to the scrapyard. The number of idle rigs will swell alarmingly when the one hundred and twenty five jackups currently under construction hit the market in 2016 and 2017. Something has to give.
Drilling companies have done a great job in reducing stacking fees; an estimated average of $20,000 a day to ready stack a jackup and $5,000 a day to cold stack one, but don’t forget the $1 million to be spent on the preservation of a cold stacked unit if it is to be done properly. I am sure there will be some cold stacked rigs that have skimped on this but this only make re-activation more costly. The fact that they have got the stacking costs down to almost manageable numbers has likely been one of the reasons why the number of scrapped jackups has been minimal. That and a reluctance to write off rigs that still have a book value. Remember though that re-activation, even if the rig has been properly preserved, requires significant capital expenditure to bring it back into class and a long term contract at a good rate, say $140,000, would be required to justify such expenditure on re-certification. The chances of such a lucrative contract in the foreseeable future would seem very remote especially as operators are going to look first at “hot” rigs and not those that have been cold stacked for some time.
At present 2016 does not look any better than 2015 and could be worse. We can expect more competitive jackups to go idle and an increasing number of the currently warm stacked units going into cold stack as opportunities continue to be sparse and the number of rigs competing for those opportunities grows. A recent press report stated that up to fifty jackups were offered in response to a market survey for work in Myanmar.
The South East Asia jackup market in particular is in dire straits; the worst region worldwide for idle rigs except for the US Gulf. There are now thirty-four idle units (including six cold stacked) and only thirty-three currently contracted with five of these coming off contract by end January 2016. It is worth noting that only sixteen out of a regional marketed fleet of sixty-seven jackups are “standard” 300ft rated rigs that were built in the 1980’s or earlier thus the region has a high percentage of premium rigs of which twenty are currently out of work. To make matters worse NOC’s and regional operators have been limiting the number of rigs that qualify to tender on their drilling programs. For example recent tenders in Thailand were restricted to rigs that had previous experience of working in Thailand, in Malaysia Petronas has decreed that Malaysian owned rigs should be chartered before any internationally owned unit, in Indonesia a few tenders have restricted bidders to those with rigs that are already in Indonesian waters and all work in Vietnam will go first to domestic player PV Drilling before anyone else gets an opportunity. It is fair to say that if the operators did not put in such restrictions they would be overwhelmed by the number of rigs offered such as what happened on recent tenders by ONGC in India.
Given these restrictive practices the International drillers in the region have been looking to relocate their rigs to other regions, with nine jackups having moved this year to greener pastures in the Middle East and India where there is a more buoyant market. More are surely to follow as opportunities arise outside of the region and regional drillers continue to be first choice for any work, such as it is, in this region. The paucity of opportunities in the first half of 2016 is alarming.
The elephant in the room is of course the jackups still under construction. We did have our very first cancellation recently when Marco Polo dumped their BMC 400 class jackup under construction at PPL a few days before it was due to be delivered but apart from this any news of the one hundred and twenty five jackups still under construction has been eerily scarce. Over 50% of these have been ordered by inexperienced financial speculators. Sixteen of these speculative units were originally scheduled to be delivered before the end of 2015 with another nine due out in the first quarter of 2016 but none have not yet materialized into the market. The Chinese shipyards who are building the majority of these spec units have been quite accommodating with regard to owners delaying acceptance but the true hard fact is that there is no prospects for them and nor will there be any buyers until they become distressed assets – and they cannot keep postponing delivery dates indefinitely. As most of the speculators only have 5%-10% down it will be the shipyards trying to find buyers as it is inevitable that the owners will walk away, losing their deposit.
Much speculation has surrounded what will happen to these speculative jackups assuming they are not accepted by their original owners. There are sixty-six of them. The shipyard could just cold stack them until the market improves or the Chinese Government, who are backing the shipyard, may hand them over to COSL or form a new drilling company.
But this week another possible solution was broached when it was announced that John Fredriksen is seeking to acquire distressed new builds under the wing of a new company called Sandbox. An interesting move since it would be in direct competition with his own drilling company Seadrill.
In summary we have reached a critical point for jackups as the number of idle rigs continues to increase, opportunities are few and far between even into 2017 and the number of completed new build rigs waiting in the wings grow larger every month. Something has to give, scrapping has to begin in earnest and even relatively new premium rigs will go into cold stack. By not retiring rigs the downturn will be extended as the market would remain severely overcrowded.