Bareboat charters: An unexpected solution for the newbuild rigs glut
For decades, most international offshore contractors have built their fleets by taking on financing to acquire rigs or order them from scratch. If they do not have a suitable rig to meet a potential demand, the option to do so by bareboat chartering one - that is, to lease a 'bare' unit without crew or provisions, and to assume responsibility for someone else's asset - is seldom considered. Nor do these firms usually bareboat their rigs to others.
But as offshore financing dried up in the last few years, and contractors struggle to survive while yards pile up with unwanted newbuilds, one trend has become clear of late: more offshore rigs are being put to work on the back of bareboat arrangements. These days, the cart can come before the horse: some firms chase the work first, by offering units they do not own; and only when they win the tender, do they seal the deal and lease the rig to fulfil the contract.
Figure 1: Bareboat charters over the years
The chart above shows the number of rigs on bareboat charter every year over the last three decades. It includes units that may have been bareboat for only part of a year, but most were on contract for at least a year or longer. As the global drilling fleet grew since 1988, the proportion of rigs on bareboat charters has also increased progressively - from 0.2% of the fleet in 1988, to 2.5% in 1998, 3.3% in 2014, and 8.1% in 2020.
It is clear from the chart that the majority of the units with bareboat arrangements are jackups but this is not surprising as floaters are more expensive than jackups, whether to build, maintain, or charter. The terms for bareboat contracts, though, can vary widely. Under some arrangements, the charterer or leasee has to pay a fee only when the rig is working. Some have their units chartered based on a monthly rate, while yet others are under lumpsum agreements.
Sale-and-leaseback deals have also been a feature since the late 2000s. Under these agreements, rig owners would sell and then lease back their rigs from the purchasers - allowing them to free up cash while holding on to the assets they need for operation. In 2019, Singapore yard Keppel FELS delivered newbuild jackups Cantarell III and Cantarell IV to Grupo R, then bought the rigs from the Mexican contractor before leasing them right back for 10 years. This way, though the yard now effectively becomes a lender to a customer who could no longer afford to own the jackups it ordered, it monetised the assets and got the rigs working.
Historical data points show that bareboat fees are usually at least 10% of prevailing drilling day rates. With the rig market in the doldrums, bareboat prices have also fallen as the market bottomed out. Currently, fees for jackups range between USD 10,000 and USD 30,000 per day. Factors like job scope, rig age, state of the unit and other specifications can also affect the price.
Location is another determinant. Early on, the few rigs on bareboat charters worked mostly in Europe or in the Gulf of Mexico. This has changed over the years. In 2020, the top three areas to feature bareboat rigs are Asia-Pacific with 24 units, the Middle East with 19 units, and Mexico with 11. At present, Asia-Pacific is the region with the largest bareboat fleet and the bulk of these units are located in China - in 2020, 17 of the 24 units in Asia were based there.
Building a fleet with bareboat rigs
An interesting facet of the recent increase in bareboat numbers is how newbuilds are driving it. In 2017, just three of the 18 units bareboat worldwide were mobilised straight from a yard. In 2018, it was two. By 2019, this jumped to 24, or well over a third of the 54 units on bareboat charter that year. In 2020, although just seven of the 60 bareboat units worldwide were newbuilds, 35 of them were built within the last four years.
However, it is no coincidence that newbuild bareboat numbers rose so dramatically in 2019 - that was the year SinoOcean was set up. Since the last offshore downturn in 2014, China - the rig-building powerhouse of the last decade - was quickly becoming a graveyard for undelivered rigs. The state-owned entity was conceived to manage offshore assets abandoned by their original buyers, working behind the scenes to seek solutions for orphaned rigs. So far, China's leading offshore rig contractor COSL is the one that has taken on the bulk of Chinese newbuilds via bareboat arrangement. Of the 58 offshore rigs it operates worldwide, at least 22 jackups and semis are managed under bareboat contracts.
There is no doubt bareboat charters are a means for the industry to cope with existing market conditions. It is a certainly a cheaper option than ownership for contractors and other enterprising middlemen to secure rigs. Not to mention the unexpected bonus of bareboat charters having helped to ease the oversupply situation by winnowing the number of undelivered rigs from over 120 units in 2018 to 60 today.
Yun Yun Teo is a data transformation principal for upstream energy at IHS Markit.
Posted 30 April 2021
Follow IHS Markit Energy
- Infographic -- Solar PV recycling: Market overview
- Potential NGL impacts of Enbridge Line 5 shutdown are substantial
- Line 5 shutdown could create a logistical scramble, reducing competitiveness of crude oil producers and refiners
- Whitepaper: Technology innovation underpins the growing role of energy storage in a lower emission and more reliable energy system
- The United States confirms its position as the most attractive market for renewables investment
- Announced wind turbine orders exceeding 48 GW tracked globally in 2020
- 2020’s top wind developers are targeting significant wind capacity development, eyeing an equal split between onshore and offshore projects
- China’s Five-Year Plans’ review and expectation: Natural gas ticks the box for many policy goals
2021 has brought with it many changes: geopolitical tensions linger & continue to have a major effect on global… https://t.co/HWAEUBih4l