Bassoe: Pay now or pay later – the art of rig stacking and reactivation

With over 70 ultra deepwater floating rigs stacked and waiting for contracts and over 20 newbuilds sitting virtually complete at shipyards under deferred delivery agreements, offshore rig reactivation risk stands in the way of market recovery, writes David Carter Shinn, a partner at Bassoe Offshore, a Norwegian rig brokerage agency.

By David Carter Shinn

The best way to preserve and maintain an offshore rig is to operate it.  But in this market, many rigs do not have drilling contracts and are forced to be placed in some form of stacked mode which allows owners to reduce operational costs.  The degree of stacking normally depends on how ready the owner wants the rig to be when – or if – the rig needs to start drilling again.

The goal with stacking is to find the right balance between reducing current costs and limiting future expenditures.  Owners want to spend as little as possible, but at the same time try to avoid incurring higher activation costs when the rig finally goes back to work because it wasn’t maintained properly.

Warm stacked vs. cold stacked

Warm stacked rigs are, in theory, supposed to be maintained almost as if they were on contract.  All machinery and systems are run regularly and checked, and the rigs have a reduced, but adequate, crew onboard.  Assuming warm stacking is executed properly, rigs can be brought back into service relatively quickly.  Depending on the type of rig and its location, daily operational costs for warm stacking are usually around one third of what they are when the rig is in operation.

Cold stacked rigs, on the other hand, are virtually abandoned, and preservation becomes the focus.  While daily operational costs for cold stacking are a much smaller fraction of the cost of full operations, extensive preservation programs require a significant up-front investment.  If preservation procedures are not sufficiently implemented before a rig is put into cold stacked mode, the lack of preventative maintenance and operation of generators, station keeping systems (for floaters), marine ballast systems, safety systems, and jacking systems (for jack-ups) creates a major deferred time and cost risk to owners if the rig has to be put in service again.

For old jack-ups and floating rigs, the preservation risks of cold stacking are of little concern to owners.  Most of these rigs will never return to work again anyway.  For newer rigs, especially high spec jack-ups and 6th and 7th generation ultra-deepwater semisubmersibles and drillships, reactivation issues pose a real threat to an owner’s ability to perform when the market recovers.

But this doesn’t mean that warm stacking is a better way to maintain a rig.  Over short periods of time, warm stacking is appropriate as a partial operation of equipment maintains the rig’s condition and reactivation time is shorter.  The problem is that over longer periods of time, maintenance activity on the rig tends to decrease and equipment (which has not been chosen to be preserved) starts to deteriorate.  In effect, long term “warm stacked” rigs may turn into poorly preserved cold stacked rigs.  Low maintenance and little preservation is the worst formula for rig stacking.

Finding the balance

As current ultra deepwater market utilization is at extreme lows and the outlook for new contracts is bleak, rigs have been and will continue to be stacked for long periods of time.  Warm stacking drillships and semisubs is expensive, and can run into the $40,000–60,000 range per day compared to operating costs when drilling of around $150,000 per day.  These costs – combined with the financial costs of sitting on assets that cost over $600 million to build – create a challenging situation for owners as rigs remain idle over time.

Many owners, like Transocean, Ensco, and Pacific Drilling, have implemented “smart” stacking methodologies which try to achieve more costs efficiencies during stacking while limiting future risk exposure upon reactivation.  This type of stacking includes putting rigs in the same location to be able to share crew, running reduced, but sufficient maintenance programs on equipment, and preserving certain equipment.

Ensco has previously said that smart stacking a drillship costs $15,000 per day compared to  $40,000 for warm stacking.  Smart stacking requires an upfront cost of around $5 million and is expected to limit reactivation time to 90–120 days and costs to around $30 million. Nevertheless, stacking of high spec floating rigs is still a new concept for owners, and although methods are still being developed to optimize the process, the consequences of long term stacking are still relatively unknown.

Time will tell

Established drilling contractors who have good methodologies in place will be better positioned than those who don’t.  Among the highest risk rigs are those owned by financial investors or shipyards who have taken control over newbuild rigs from owners who have defaulted.  These rigs could be laid up for a significant period of time and in effect will be cold stacked with limited preservation and maintenance as yards try to keep expenditures down.  The result of this could be serious equipment failures and a hyperbolic cost curve upon reactivation.

While owners look for ways to reduce stacking costs and thus remain competitive when the market recovers, we have yet to see the outcome of their efforts.  Reactivation costs for floating rigs may be the single biggest unknown element in the offshore rig market today, and the longer the market downturn lasts, the more significant this element becomes.

Offshore Energy Today has shared the article above with permission from the author. You can read the original post at Bassoe.no

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Offshore Energy Today.