Recovery in offshore drilling demand nowhere in sight

Supply-wise, delays and cancellations of newbuilds are rising; many of the over 30 units slated for 2015 delivery will join the operating fleet along with the 60 slated for 2016


AS oil and gas companies extend exploration and production budget cuts from 2015 to 2016, offshore drilling demand recovery is nowhere in sight, prompting analysts to warn of the proliferation of newbuild rig order cancellations especially in the jack-up segment, where a sizeable percentage of outstanding orders have been placed on speculative basis.

International offshore and marine brokerage house Clarksons Platou in its October 2015 report declared that "yard delays (will) proliferate (and) cancellations are increasingly emerging".

The report highlighted floaters as more exposed compared to jack-ups, but risks for the latter have also surfaced after Marco Polo Marine announced in November a unilateral cancellation of a US$214.3 million jack-up rig with Sembcorp Marine's PPL Shipyard.

As Ian Craven of Icarus Consultants pointed out to The Business Times, of the over 120 jack-up rigs under construction, "more than 50 are on order from owners with no rig operating experience".

Marco Polo has denied that it was seeking early release from the contract with PPL Shipyard, citing cracks on the three jack-up legs as material defects supporting the rig order cancellation.

But as with Marco Polo, many aspiring rig owners have placed only 10 per cent deposits to effect the newbuild jack-up orders, especially for those commissioned with Chinese yards, and Mr Craven sees very little holding them back from putting their yet-to-be-delivered rigs for resale or simply walk away from the contracts.

One factor working against the resale possibility is a drastic reduction in offshore drilling contracting activity, which also means less investor interest in second-hand rigs.

Mr Craven, who has spent most of his 40-year career with renowned offshore drilling contractors including Atwood Oceanics, Pride and Ensco, described exploration drilling "as pretty much dead".

"Oil and gas companies have announced slashes to their capital expenditures for 2016 to the tune of 25 per cent and the indications are 2017 will be about the same or more drastic if the oil price keeps slipping," the industry veteran observed.

His projection is that drilling will not pick up for new field developments until 2018, although activity on existing fields could continue "where lifting costs are low".

Many industry players have argued that activity has held out in shallow waters, although as the Clarksons Platou report showed, the decline in jack-up rig day rates in some sectors have outpaced deep-water floaters. In West Africa, jack-up rig day rates for the first nine months were down as much as 47.6 per cent year on year.

The report also flagged a 16.5 per cent decline in jack-up fleet utilisation to 75 per cent in September, not too far off from the 78 per cent fleet utilisation for floaters. Declines in day rates and fleet utilisation were also observed even in the Middle East, a region flagged by most in the industry as the remaining bright spot.

Mr Craven said that contrary to popular belief, Saudi Arabia is primarily renewing contracts on rigs that have already been working in the country. Net rig count additions in the Middle East were in fact, contributed by Abu Dhabi, where three to four jack-ups were added in the last few months, and Qatar, where another couple of jack-ups were contracted. Premium jack-up rigs - defined as 350-footers built in this century - have been contracted in the region at about US$120,000 per day, down from US$160,000 a year ago, he observed.

By contrast, recent premium jack-up contracts in Asia were fixed at US$80,000. As more newbuilds ordered on speculation in China and Singapore enter the market in the next two years, Mr Craven expects the jack-up day rate in Asia to fall to as low as US$70,000.

The decline in 2015 may have been mitigated by delayed newbuild rig deliveries. Only 35 per cent of the scheduled deliveries or 15 jack-ups have been delivered so far over the first nine months of 2015, according to Clarksons Platou.

"The floater delivery rate is higher and through September, 65 per cent of scheduled deliveries have arrived," the brokerage said.

Many jack-up rig deliveries, however, will flow over to 2016, suggesting that a large number of the over 30 units scheduled for 2015 delivery will join the operating fleet along with 60 others scheduled for 2016. The supply glut will build up next year, with rig owners and operators struggling to secure contracts ahead of the scheduled deliveries.

Rig builders such as Keppel Offshore & Marine and Sembcorp Marine will face either increasing inquiries to defer deliveries or take ownership, at least temporarily of the rigs, Clarksons Platou opined.

The second arrangement was exercised under a standstill agreement between SembMarine's Jurong Shipyard and Seadrill's North Atlantic Drilling Limited (NADL) unveiled in early December. The agreement provides for Sembmarine to take a majority 77 per cent ownership control of the West Rigel deep-water semi-submersible rig and Jurong Shipyard the right to market the rig for resale. West Rigel is due for delivery this quarter.

Seadrill has earlier cancelled the newbuild contract with Hyundai Heavy Industries for the semi-submersible rig, West Mira, citing a delay in the rig delivery. Mr Craven flagged the cancellations of three other floater rigs originally on order in South Korea from Ocean Rig, Vantage Drilling and Fred Olsen's Dolphin Drilling.

Analysts have argued that yards based in Singapore would be less exposed to newbuild cancellations stemming from delayed deliveries. But as oil and gas magazine Upstream reported, SembMarine was not spared the teething problems during the construction of the first hull at its Jurong Shipyard for a seven-drillship order placed by Sete Brasil.

The yard group did not respond to a request for comment on its rig delivery schedule through the end of 2015, but according to Clarksons Platou, the first Sete Brasil drillship will be delivered in the second quarter of 2016 against the earlier reported date in mid-2015.

Keppel's BrasFELS yard in Brazil is building six semi-submersible rigs, one for Urca Drilling and five for Sete Brasil, the Clarksons Platou report said.

Sete Brasil stands as the largest single client at present for deep-water rigs being built at SembMarine and Keppel O&M and this subjects the two yard groups to contract cancellation risks linked to geopolitical tensions in the Latin American country.

The ongoing anti-corruption probe in Brazil has reportedly spilled over to Keppel O&M and SembMarine's local yard operations. The settlement for the Sete Brasil rigs will also be exposed to political uncertainty on the impeachment of President Dilma Rousseff and Brazil's fiscal shake-up amid a plunging real, CIMB Research noted.

Beyond Brazil, the two yard groups also face more deferrals or cancellations on jack-up rig orders either commissioned by newly established rig owners or Mexico-focused clients, translating to potential profit reversals for the first half of 2016, one analyst said. Keppel O&M had in its Q3 results flagged six jack-ups due for delivery in Q3, out of which only one placed by Arabian Drilling Co has been confirmed as delivered. The status of five others - three from Grupo R and one each from FTS Derricks and Parden Holdings - remains outstanding at the time of writing.

SembMarine in its Q3 results guided on lower margin recognition for rig-building projects resulting from "customer deferment requests for jack-up rigs" being built at PPL Shipyard. Besides the disputed Marco Polo jack-up, PPL has in Q4 two rigs due to be delivered to a unit of Temasek Holdings-invested Oro Negro. PPL also has two jack-up rigs commissioned by Malaysia-based aspiring offshore drilling contractor, Perisai Petroleum for delivery in 2016.

Keppel O&M chief executive YY Chow maintained that the yard group "has not received any request for cancellations" although "the deliveries of a few drilling rigs have been deferred". "Keppel has a S$10 billion net order book, which provides visibility into 2020."

Keppel O&M is preparing to meet the challenges by "rightsizing operations and resources, investing prudently and building new capacities". These include acquiring the LeTourneau rig designs - which expands Keppel O&M's clout especially in the jack-up segment - and developing in-house liftboat designs for maintenance of shallow water oil and gas fields. Keppel O&M is also designing potential solutions for plug-and-abandonment of subsea wells, a gap that the yard group has identified in the offshore sector, Mr Chow said.

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