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Offshore rig utilisation rate even higher than reported as market continues to tighten, Westwood says

Amid escalating concerns about energy security due to the Ukrainian crisis, Westwood Global Energy, an energy intelligence provider, has revealed that the offshore rig utilisation is expected to continue its upward traction and is already up to 18 per cent higher than typically reported. Increased demand within this tightening market is expected to spur a further rise in day rates.

As reported by Westwood on Monday, utilisation is one of the key barometers used to gauge the health of the offshore rig market, as it identifies what percentage of the usable fleet is available versus what is not. Despite the displayed excitement over the past year regarding rapidly increasing offshore rig utilisation and day rates, Westwood believes that the true extent of this tightening market is still not always accurately represented across the industry due to several ways in which offshore rig utilisation can be observed.

The energy intelligence provider explains that a commonly used method, which is causing misrepresentation in market outlooks, considers only contracted rig utilisation within the marketed – excluding cold stacked – rig fleet. Therefore, this method looks at how many rigs are currently on hire within a set period but does not consider those non-working rigs that have future contracts in place.

Contracted offshore rig utilisation; Source: Riglogix/Westwood analysis
Contracted offshore rig utilisation; Source: Riglogix/Westwood analysis

When only those rigs are considered, the three main offshore rig segments – jack-ups, semi-submersibles and drillships – all remain under 85 per cent utilised, which is widely regarded as the minimum level needed to spur increases in day rates, reactivations, etc.

In such a scenario, Westwood outlines that jack-ups would appear to be leading the way at 82 per cent utilisation, followed by drillships at around 79 per cent, and semi-subs trailing behind at just 64 per cent after steadily falling away in the last year, before a rally in the past month.

Westwood points out that those utilisation levels are not high enough to cause the type of increases seen recently, as day rates are quickly increasing, rig reactivations have started, and rig sales of units stranded at the shipyards are taking off, thus, all of these are indications of a tight rig market.

In light of this, Westwood explains that true rig availability is much tighter than what is shown by contracted utilisation. Therefore, to get an idea of what is really going on, the company advises looking at those rigs that are currently idle, undergoing reactivation, or other shipyard work but are committed for work in the future and hence not available for hire in the near term.

Consequently, when future committed marketed rigs – as well as currently working and contracted units – are added into the mix, the figures tell a wildly different utilisation tale. Even though semi-subs are still lagging behind jack-ups and drillships in this scenario, utilisation stands at 82 per cent, which is some 18 per cent above the contracted level.

Committed offshore rig utilisation; Source: Riglogix/Westwood analysis
Committed offshore rig utilisation; Source: Riglogix/Westwood analysis

In lieu of this, the jack-up and drillship usage are both up 10 per cent over contracted utilisation. Westwood further states that this method shows a 92 per cent utilisation rate for drillships, representing a nearly sold-out market.

Furthermore, Westwood elaborates that breaking this down further by region or specific rig type – including design, age and capabilities – would see these figures reach even higher levels in some cases. Westwood further adds that this is starkly demonstrated by the U.S. Gulf of Mexico and Brazilian drillship markets, which are both currently fully utilized with all rigs either currently on hire or preparing for future campaigns.

Growing demand spurs day rate increase

As another indicator of a tightening offshore rig market, Westwood outlines that most new rig contracts are being fixed at day rates that are higher than their prior contracts for the first time in several years due to this increasing committed utilisation.

The firm notes that drilling contractors have begun to assess the cold stacked and stranded newbuild fleets to help remedy the sudden supply shortage as active rigs sell out, especially those that meet the technical specifications required for an operator’s campaign. Since many operators are bidding for drilling programmes that are anticipated to start in late 2022 or 2023, Westwood thinks that drilling contractors have the time necessary to reactivate or complete the construction of these rigs, as most rig owners need a reactivation period between six and 12 months.

However, as these rigs are only reactivated for signed, multi-year contracts, rig owners do not have the financial wherewithal to reactivate speculatively, given the costs for such shipyard work. As an example, the energy intelligence provider mentions that floating rig reactivation costs are estimated at $50 million to $100 million.

In the meantime, as tendering and direct negotiations for offshore rigs continue to surge, especially with the renewed focus on energy security following Russia’s invasion of Ukraine, Westwood forecasts that rig availability will be squeezed further and day rates – which have now reached close to $400,000 per day for 7th generation drillships – have the potential to reach highs not witnessed in almost a decade.

The company expects that more of these inactive units will enter the fleet, leading to a further increase in the committed utilisation rate while day rates will inevitably follow.