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After the long, slow downturn that began in late 2014, this year
was set to be better with many dormant regions resuming exploration
and long-awaited development drilling programmes going ahead. Then
in mid-March a double disaster struck as an oil price crash
coincided with a global pandemic. This double whammy left many
operators hitting the brakes, slashing budgets and deferring those
long-awaited programmes meaning contractors found themselves <span/>receiving dozens of
contract termination notices.
There have been 43 rig contract terminations globally since the
beginning of March this year. Both Northwest Europe and West Africa
have been hit the hardest with 11 terminations apiece. Both regions
have seen a significant hit to their jackup fleets with six
terminations in Northwest Europe and seven in West Africa. Few
regions have been immune from terminations however, with Canada,
the US Gulf of Mexico, Latin America, the Mediterranean, Middle
East, India, Southeast Asia and Australia/New Zealand all seeing
their fair share of cancelled contracts.
Figure 1: Global rig cancellations 2014 - 2020
Ultimately these cancellations give an indication of how
activity levels are set to shape up in the near future both
regionally and globally including which sectors, either region or
rig type, have been hit hardest. The wider effects of this downturn
are yet to be seen, however, contractors already report that
re-bidding exercises for ongoing tenders have been undertaken and
negotiations to reduce rates on ongoing charters are also underway.
A pick-up in supply means sustained downward pressure on day rates
for the foreseeable future unless action is taken to remove yet
more capacity from the fleet. Contract cancellation data is used by
contractors when deciding the future of their fleets. An increase
in supply, especially a dramatic increase, is not sustainable and
so, decisions to retire and scrap older units are being made more
quickly.
In the last downturn, jackups were the first rig segment to be
hit with contract terminations and it is a similar story this time
around, albeit with semis following close behind. This is reflected
in the number of attritions we see in the marketplace. The current
downturn has already resulted in a number of jackups and semis
retired from the fleet with older units, particularly semis,
hitting the scrap yards. Thus far in 2020 a total of 12 semis, five
jackups and four drillships have left the worldwide fleet. While
there is still a significant oversupply, particularly in regions
such as West Africa, removing these older units takes at least some
of the pressure off.
Figure 2: Global rig attrition since 2014
Despite these cancellations there is light at the end of the
tunnel. A number of these programmes have not gone away with
operators stating that there is potential for work to re-emerge at
a later date if the oil price is suitable. Already the market has
seen some decisions to reverse early terminations while yet more
operators, particularly in the deepwater sector, have made the
decision to place rigs on standby to see out the coronavirus
(COVID-19) pandemic rather than cancel outright. The offshore
drilling market has shown that it is resilient and there is
optimism that once the pandemic is over, some of those cancelled
programmes will become reinstated.
Track contract terminations and rig attrition in
RigPoint and
RigBase by IHS Markit.
Sarah McLean is a senior rig analyst at IHS
Markit.
