2024 offshore drilling outlook: Westwood’s top three predictions for rig market

The offshore drilling market has been reaping the benefits of the ongoing upcycle, as rising demand and tightening supply brought higher day rates and fleet utilization in 2023. Will this trend continue in 2024? Westwood Global Energy, an energy market research and consultancy firm, has outlined its top three predictions for the year ahead, which indicate that a further utilization boost and increased day rate fixtures are on the horizon.

According to Teresa Wilkie, Westwood’s Research Director – RigLogix, 2023 has brought a further 3% increase in globally marketed utilization versus 2022, a demand increase of 29 rigs, a 7% uptick in average contract duration, 16 further reactivations and newbuild deliveries, along with floating rig day rates exceeding the so-called ‘magical’ $500,000 mark. What is coming in 2024?

Wilkie outlines that Westwood’s overall outlook for the offshore rig market remains highly optimistic, albeit with the potential for more availability during the first half of 2024. Aside from the current warm-stacked supply with no future work in place – including 27 jack-ups, three drillships, and eight semi-submersibles – there are another 18 jack-ups, four drillships, and five semi-subs that are currently working and set to roll off-hire in 1Q 2024, but these figures do not include rigs that have contract options available.

When it comes to semi-subs in the UK and Norway, the work in the winter period tends to slow down as operators try to avoid weather-related downtime, however, Westwood’s Research Director – RigLogix notes that drillships are also showing more potential availability than has been recorded since September 2021. Wilkie thinks it is likely that most, if not all, of these drillships with upcoming availability are being bid on new opportunities and some are likely close to securing new deals.

In the jack-up segment, Westwood’s research shows that the majority of rigs with upcoming availability are located in Mexico, the Middle East, or Southeast Asia and several are likely to be awarded extensions with incumbent operators. On an overall basis, this is expected to be a short-term fluctuation until operators firm up their 2024 budgets and drilling plans.

With many now making bigger commitments for longer-duration contracts, it can take more time to choose the most suitable rig and execute a deal. Currently, RigLogix records a total of 22 tenders, pre-tenders, or direct negotiations out in the market with a start date in 2024 that have a firm duration of two to five years, and many of these come with several more years of options attached to them.

Wilkie explains that the figure increases to 46 pieces of work with some that could last as long as ten years if those with start dates in 2025 and 2026 are included. The energy market research and consultancy firm predicts further growth in demand and utilization in 2024 with India, Southeast Asia, South America, and West Africa all expected to be important drivers behind further expansion, leading to demand growth of up to 36 rigs year-on-year and a 3% increase in global marketed utilization.

Westwood does not expect a wave of new construction orders in 2024, as drillers continue to focus on financial prudence but further supply will likely be added through reactivations and newbuild rig deliveries, which offers a more economically practical option in the short term. With the anticipated rise in demand, and despite higher availability expectations in 1H 2024, marketed utilization is forecast to reach as high as 96%, resulting in a limited choice of rigs for new deals.

Wilkie points out that this could lead to more sublet activity and/or potential delays to planned campaigns if additional units are not added to the active supply. The number of reactivations and newbuild deliveries decreased by 64% last year in comparison to 2022, which is mostly due to national oil companies (NOCs) in the Middle East having sated their near-term jack-up appetites after a contracting feast as part of a bid to ramp up domestic supply and production.

Furthermore, even though floating rig reactivations and deliveries decreased year-on-year, this was mostly attributed to Brazil’s Petrobras cutting its award activity by 50% after a slew of long-term deals made in 2022. The trend is expected to be short-lived with Petrobras in the market for several long-term floater tenders that should result in three to four further rigs on their books.

Meanwhile, Wilkie underlines that ONGC may need up to six more jack-ups next year, and an increase is anticipated in jack-up activity in Southeast Asia along with a floating rig demand in West Africa. Westwood emphasizes that companies such as Valaris and Borr Drilling have already announced plans to take delivery of newbuild rigs, some of which have been delayed in yards for a decade.

With this at the forefront, Wilkie predicts that newbuilds and stranded assets may continue to be highly sought after in the new year, due to their modern and high-tech caliber, as there are still 16 jack-ups, five semi-subs and 11 drillships in shipyards with no contracts yet in place. Specifically, there are 86 cold stacked rigs in total, of which 39 have been idle for over five years, only eight have a five-year special periodic survey (SPS) in place and 40 are already over 40 years old.

Based on Westwood’s analysis, approximately 14 jack-ups, 12 drillships, and 12 semi-subs could be reactivation candidates, but inflation and supply chain constraints have brought longer shipyard times and higher costs associated with restarting a rig, thus, this is not an easy or quick fix for supply concerns.

As just two rigs were removed from the market, 2023 recorded the lower attrition. Westwood is under the impression that this will likely continue in 2024 too, as rig owners hold onto older units in hopes they may eventually be put back to work, especially since little to no new rigs are being built.

Wilkie underscores that 2023 will be remembered for continued increases in day rates for jack-ups, semi-subs, and drillships – with the latter two floating rig types witnessing day rates, excluding additional services such as MPD or mobilization, at or above $500,000 per day. However, Westwood’s Research Director – RigLogix is convinced that this is unlikely to be the norm for long-term contracts starting in 2024.

While the majority of fixtures in 2023 with day rates that fell between $480,000 to $500,000 per day were for relatively short-term deals – such as one to two wells or 30 to 200 days –  or ones that do not begin until 2025 onwards, Westwood expects a continued variance in floater day rates in 2024 with some long-term deals that could still be fixed in at the mid-to-high $300,000s as well as short-term deals that will further exceed those leading rates already witnessed last year.

While the jack-up segment has seen a contract fixed with a day rate of $180,000 for work off Australia and two contracts fixed at over $165,000 per day for work in Southeast Asia, Westwood anticipates more upward movement in 2024 in line with the forecast tight market, but a likely continued range of rates based on term, location, and technical specifications.

“Ultimately, with the ever-tightening supply/demand balance, costly reactivation and new construction economics as well as inflationary pressures, Westwood expects rates to continue their northward trajectory in 2024 across the board. With that in mind, we predict that operators will continue locking in rigs earlier for their contracts in a bid to secure the right assets at as low a price as possible,” concluded Wilkie.