More floaters scrapped in one year than in previous two decades

  • Exploration & Production

Offshore drillers have scrapped forty-four floating drilling rigs in a little over a year, due to a combination of persisting low oil prices, reduced drilling activity, and oversupply in the rig market.

The numbers above were revealed this week by Seadrill, one of the largest providers of ultra-deepwater drilling rigs, who expects the challenging market situation for drillers in 2016 as well.
In its report, Seadrill said that the 44 rigs scrapped over the past 14 months, represent more retirements than over the past 20 years combined.

According to Seadrill, scrapping spree will most likely continue as older and less capable drilling rigs that are coming off contracts in the near term, will have a difficult time securing new work. Why? Because the older units will be priced out of the market by newer, more capable rigs.

“Significant cold stacking activity would represent a positive development in the market…”

Drilling rigs that are 15 or 20 years old require significant capital investments to remain part of the active fleet and very few rig owners will find economic justification to keep these old assets working, Seadrill explained.

When a rig is out of work, the owner has three options: warm stacking, cold stacking, or scrapyard.

Warm stacking means a rig will be idle, but with crew on board, ready for quick redeployment; cold stacking is done when the owner thinks a rig will be unable to get a meaningful contract for a considerable amount of time.

Seadrill is rooting for more cold stacking: “Significant cold stacking activity would represent a positive development in the market, effectively reducing marketed supply and helping to stabilize utilization and pricing until a more fundamental recovery is in place.”

The driller also highlighted the fact that under the current market condition, it will be challenging to return a cold stacked rig to the market: “Cold stacked units will generally require an improvement in dayrates sufficient to overcome reactivation costs before they are reintroduced into marketed supply.“

However, Seadrill doesn’t see much improvement in the drilling market conditions, at least in the near term, as oil companies are slashing their drilling budgets and pressing drillers to lower dayrates.

In addition, there is an issue of the already mentioned oversupply, in a market that currently doesn’t need any more rigs.

“A significant number of these newbuild orders have been delayed or cancelled and we expect this trend to continue.”

Currently, Seadrill says, 205 rigs are working, representing 73% marketed utilization. It is estimated that 180-200 rigs are needed in the floater fleet to maintain current decline curves. On the assumption that no new contracts are signed the market is expected to reach this level by Q1 2016.

“After two significant year on year declines, there is some recovery in spending is expected in 2017, but forward visibility continues to be challenged and the timing and extent of the recovery remains uncertain,” the company said.

As for the floater orderbook, the driller says, there are currently approximately 70 units on order, of which 29 are Sete new builds.

“A significant number of these newbuild orders have been delayed or cancelled and we expect this trend to continue. Delayed or cancelled newbuilds will ultimately be added to the fleet, however until an improved market justifies taking deliveries, the vast majority will likely remain in the shipyards,” the company said.

Seadrill expects, between now and 2018, to see an overall contraction in the floater fleet due to delivery delays and scrapping activity.

Offshore Energy Today Staff

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