Offshore Drillings Rigs Scrapped Due To Dwindling Market Demand
The global offshore drilling rig market took a major hit in 2020, evidenced by mounting debt and the deteriorating balance sheet of rig contractors. The offshore services market did not even fully recover from the previous downturn of 2015 before the unprecedented COVID-19 outbreak and low oil demand made a double impact on the sector, making recovery difficult.
The offshore drilling rig market has been the worst-performing sector this year with more than 40 rig contracts being terminated and rig utilization falling to an all-time low as major oil and gas producers reduced their CAPEX investment and stalled their exploration and development activities.
Optimistic Expectations vs Excruciating Reality
2020 began with general optimism for the offshore industry with the prediction that oil prices would remain between $55 to $60. Lower rig utilization and hence lower rig day-rates were expected to recover with new opportunities underway from South America, Europe and Africa. However, the pandemic-led crisis and the oil supply glut put a dent in optimistic industry expectations.
Post March and April 2020, the offshore industry witnessed a series of contract terminations and suspensions due to COVID-19 and low oil prices. As illustrated above, West Africa was the worst affected region followed by Europe, North America and Asia Pacific.
Bankruptcies and Debt Restructuring on the Way
The offshore drilling market experienced another round of bankruptcies in a span of 4 years due to a historic fall in crude oil prices. Four of the seven major drilling companies — Noble, Seadrill, Diamond Offshore, and Valaris — filed for bankruptcy protection this year, whereas others are looking for alternative funding. In October 2020, Transocean received a de-listing warning from the NYSE as their average closing share price remained below the minimum requisite of $1 per share for 30 consecutive trading days.
Weathering the Storm: How Can Rigs Stay Afloat?
The current order backlogs & contract lease day rates with the drilling firms are not as enticing as it was during the previous downturn. Also, the CAPEX cut of 25%-30% by the O&G producers & bearish sentiments on crude oil prices by BP & Shell, leaves a bleak prospect for the rig contractors to get any appealing contracts in the next couple of years.
The offshore drilling rig market & the day rates are expected to recover in 2022 with a short-term demand increase expected in high activity regions such as South America, US GoM & in the North Sea
Fig. 2: More Offshore semi-subs could see retirement compared to other rig segments
According to Bassoe Offshore; to realize improvements in jack-up rig day rates, an 85% marketed utilization is required, which needs a total of 126 jack-up rigs to be removed from the current global fleet, including 65 of marketed supply.
Moreover for the floater drillship or semi-subs segment, to achieve 85% utilization the market needs to remove a total of 88 units, which also includes 35 active vessels. Besides, rig contractors should also look at implementing other measures such as debt restructuring to weather the storm and stay afloat in the current volatile industry.
Scrapping Drilling Vessels To Right-Size Rig Fleets Can Create Supply-Demand Balance
Several drilling rig contractors have already initiated downsizing their rig fleet by retiring or scrapping high-quality rigs to counter oversupply of rigs in the market. The downsizing will aid contractors to meet their short-term financial obligations in terms of reduced operational expenses and may also allow offshore rig contractors to regain pricing advantage.
In April 2020, Valaris put its competitive rigs on a “preservation-stack” to achieve more than $50 million in annualized cost savings in the second half of 2020. Moreover, Valaris plans to retire three of their sixth generation drillships, four semisubs, and four jack-up rigs, which is expected to save around $30 million in annual stacking cost. At the end of the Q2 2020, 21 of Seadrill’s 35 drilling rigs were idle. In June 2020, Seadrill wrote off the value of its assets by $1.2 billion and plans to scrap around 10 rigs.
This is the stance that the drilling companies need to take to balance the current oversupply of rigs in the market. As identified by Bassoe, over 109 active jack-up rigs are older than 15 years and around 42 floaters are older than 10 years, which could be potential retirement targets.
Suppliers need to expedite their rig retirement pace as ongoing strides may not be enough and the rig day-rates may continue to suffer. However, scrapping many rigs would also be a challenge due to stringent regional regulations and policies tied to the scrapping of such rigs and the limited number of yards and companies that undertake rig scrapping.
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