Strong headwinds ahead for floaters, but recovery could start in 2018

Deepwater offshore drillers are still fighting strong headwinds as the industry heads into the third year of the downturn, however, those who manage to live through 2017, might see the light at the end of the tunnel.

According to Rystad Energy, a Norway-based energy intelligence group, utilization for the global offshore floating rig fleet will exit 2016 near at near 50 percent, a drop from 73% at the end of 2015.

Near-term market conditions remain challenging, as many of the tenders currently in the market are for short programs versus a small handful of multi-year tenders, Rystad said in its report last week.

Things could get event worse in 2017, as Rystad said that by the middle of 2017, floater utilization could dip to 44% assuming no new contract fixtures with early 2017 start dates.

“Based on Rystad Energy mapping of additional demand to materialize in 2017, we think 2017 average utilization will reach 53%,” Rystad said.

Ten contracts in 3Q

The pace of contracting activity for floating rigs has slowed dramatically with the third quarter of 2016 seeing only ten new floating rig contracts signed, which compares to a previous five-year average of 40.

“Due to the limited number of outstanding tenders, we do not expect this to increase materially before the end of the year,” Rystad said.

While those rigs have managed to secure contracts, Rystad points out that dayrates achieved in these contracts have plummeted from rates in the high-$500k/d, down to $150k/d in the third quarter of 2016.

“This average is close to operating costs for many of these units and we suspect that certain contracts have been entered into at negative cash margins,” Rystad said.

Cancellations ahead?

While ten floaters have managed to secure low-dayrate deals in 3Q, so far this year eighteen floating rigs have seen early termination notices so far in 2016.

Three rigs receiving termination notices from Petrobras have received temporary relief from a Brazilian court in the form of an injunction. However, these rigs are currently on standby, Rystad has learned.

Also, apart from these eighteen units, Rystad Energy have identified between 7 and 10 rigs whose contracts could be at risk of cancellation.

“Regardless of further contract terminations, 2017 will continue to be challenging for the floating rig market with any improvement not likely until 2018,” Rystad said.

However, there might be a positive in this story, as cost compression across the entire supply chain and greater drilling efficiencies are setting the stage for an uptick in FIDs, Rystad said.

“Couple this with an expected rebound in the commodity price environment and the stage is indeed set for a recovery of floater demand beyond 2017,” the group anticipates.

Data obtained from Rystad Energy’s base-case oil price forecast, suggests an increase in demand for floating rigs of 8.75% CAGR for 2018 through 2020.

According to Rystad Energy database, we show that approximately 37 projects could reach FID status during 2017, supporting Rystad’s view of increasing demand for floating rigs starting in 2018.

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