More rigs exiting North Sea next year, despite semi-sub activity picking up in 2022, says Westwood

Driven by the current energy crisis, the utilisation and award activity for the semi-submersibles working in the North Sea has shown improvement this year. However, Westwood Global Energy, an energy market research and consultancy firm, has outlined that the demand outlook for 2023 is “uninspiring,” as more rigs could head out of the region in search of long-term deals and higher rates.

Following a prolonged lack of demand, especially in the more mature UK sector, the North Sea semi-submersibles supply has shrunk by 36 per cent or by 17 units between January 2015 and November 2022, as revealed by Westwood on Thursday. With higher utilisation witnessed in the spring and summer months and lower utilisation in harsher weather months, the semi-submersible market remains seasonal.

However, this rig segment hit committed utilisation of 90 per cent in July 2022, which is the highest figure recorded since June 2015 within the region, says the energy market research player. With the coming of autumn, demand has subsequently declined and utilisation is now sitting at just 78 per cent, with nine units currently idle, two of which are cold stacked.

Westwood points out that Northwest Europe is lagging behind many other regions in the world, which are now recording consistently committed rig utilisation highs in the 90 per cent arena. As a result, more rigs are leaving or being bid outside the region for new contracts with longer terms and higher day rate potential. The same can be said for the North Sea jack-up segment as well.

In line with this, Island Innovator and Deepsea Bollsta rigs left for new campaigns in Africa earlier this year. Westwood disclosed that rumours suggest a third unit was planned to leave for Africa next year, while another might pick up a campaign in Australia, starting in the second half of 2023.

While the further shrinking of supply will help to buoy utilisation in the near-term, it could pose availability issues further down the line if demand picks up, which Westwood predicts may be the case from early 2024.

Furthermore, there has been an uptick in the North Sea semi-submersible contracted days and year-to-date new contracts total 7,399 rig days – Norway accounting for 5,661 days and the UK for 1,738 days – which is the highest in a year since 2018 (7,592 days) and the third highest since 2012 when 20,993 days of backlog was secured in the region. With less than six weeks left in the year, more fixtures could still be made, and the total may rise further, underlines the energy market research provider.

During the third quarter of 2022, the North Sea semi-submersible market fixed 3,899 days of contract backlog, which is “the highest number of days fixed during a single quarter since 2012.” Westwood underscores that the average contact duration is also on the rise and is currently sitting at 264 days year-to-date, which is also the longest it has been since 2012.

Moreover, the firm explains that recent fixtures have shown upward movement in day rates. This is illustrated by the indications that Transocean Norge could earn an average day rate of $408,000 under a new deal with Wintershall Dea and OMV in Norway – assuming all project approvals are given – while market sources suggest a recent fixture for Transocean Barents in the UK sector will be above $300,000 per day, emphasises Westwood.

On the other hand, 37 per cent of the backlog awarded so far this year will not begin until at least 2024 and the current visible outstanding demand for the North Sea semi-submersibles in 2023 “doesn’t look quite so promising.”

Westwood further elaborates that RigLogix currently records just under 2,000 days of demand outstanding for work likely to be awarded in 2023, consisting of pre-tenders, tenders, and direct negotiations. In addition, there is prospective demand for approximately 2,300 further days of work yet to be tendered.

The company underlines that this outstanding demand equates to a total of just over 4,260 days of potential work, which is almost 64 per cent less than the visible demand outlook for 2024. Additionally, the average contract duration of this outstanding demand is just 171 days, around 43 per cent lower than this year’s current figure.

Westwood’s outlook for 2024 shows that the firm expects to see several new Norwegian developments move ahead because of the tax incentives that the government implemented during 2020. Meanwhile, there are a variety of longer-term UK campaigns likely to start up, consisting of plugging and abandonment (P&A) work as well as development projects.

Based on Westwood’s research, there are four semi-submersibles in the region that currently have free and clear availability, but as previously mentioned, two of these are expected to mobilise for work in new regions and the other two are rumoured to be in the running for new deals in the UK. The company also adds that there are four additional units that could become available during 2023 – if extensions or new work are not secured – along with a handful of other units that could move into the North Sea from China, Canada, and other regions should the demand call for it.

Bearing this in mind, Westwood concludes that the market fundamentals within this segment are showing potential for a tighter market, but likely not until 2024, unless further demand for 2023 emerges. This will depend on other factors, such as the response to the additional hike in windfall tax on UK oil and gas profits, as well as the Norwegian government’s plans to phase out its tax relief package that was introduced as part of its response to the Covid-19 crisis in 2020.

Teresa Wilkie, Research Director – RigLogix, stated: “Until the market constricts, Westwood believes drilling contractors will continue to assess opportunities for their harsh-environment assets in other regions where longer term and more fruitful opportunities are appearing, which poses a few questions: once out of the market, how long will it take for these rigs to return to the North Sea?

“If demand does indeed continue to grow from 2024 onwards, will there be enough supply to cover it? And just how much will operators be willing to pay to secure drilling assets for their campaigns in a considerably tighter market?”