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Lloyds List: Rig owners ride rising oil demand: ‘THE world cannot get enough oil and, with reserves running down…’

Jerry Frank
Published: Aug 24, 2007

THE world cannot get enough oil and, with reserves running down and overall investment unable to keep up with the sheer scale of demand, there are serious returns to be made for those with the cash and the courage to work the offshore drill rig sector.

Growing international demand, high oil prices and fears over the security and scarcity of supply are a potent mix, which is keeping the world’s drill rig fleet busier than ever and overstretched.

Researchers at international finance house DVB Group believe that these market ingredients, together with huge levels of investment needed in an ageing rig fleet, spell further good news for the offshore sector.

One sure sign that the market fundamentals are good for owners is that average rig day rates in recent years have been climbing steadily, with worldwide average day rates up to $154,599 in April, up 36% from $114,039 per day a year earlier.

‘The offshore drilling world is bustling with activity at virtually unprecedented levels,’ says the DVB shipping division report. ‘Spurred by the elevated oil price and the need to improve reserves, exploration and production activity has been rising rapidly.’

Demand for scarce rig units has also pushed daily rates in Australia well above the world average to $203,443 per day, up from $72,762 per day a year earlier, with rig owners in the North Sea also enjoying almost full employment and strong earnings. DVB highlights that the current offshore fleet in terms of both composition and numbers is ‘amazingly similar’ to the fleet 20 years ago, with 561 rigs in service in 1987 and 548 units today, including 35 drillships then and now, and jack-up rigs making up two-thirds of the fleet.

Newbuild activity is gathering pace to meet demand, with DVB counting 53 jack-up rigs, two drillships and 20 semi-submersibles joining the fleet since 2005.

However, the rate of delivery is still not rapid enough and the industry, with a limited history of working rigs beyond around 26 years of age, is now refurbishing and upgrading older units.

DVB says that there are 100 units due to join the fleet by the end of next year, including 22 jack-up rigs, three drillships and 15 semi-submersibles undergoing conversion and upgrade work.

‘One has to go back to 1982 when the rig count increased in these numbers,’ says DVB. ‘Such fleet growth will strain industry resources and the need for increased efficiency and cost control could see consolidation among industry players.’

The world’s largest offshore driller, Transocean, took the lead in this process back in July, absorbing industry giant GlobalSantaFe in an $18bn deal that added its compatriots shallow-water capacity to Transocean’s deepwater fleet.

With a $51.5bn market value, the enlarged Transocean fleet now controls 15% of the world’s jack-up fleet, or 66 vessels, and 24% of drillships and 31% of semi-submersible capacity.

In these heated conditions, owners such as Transocean have also enjoyed a very busy secondhand market, with DVB reporting that oil company operators last year bought a total of 31 used units.

‘Not since 1999, when 37 rigs changed hands, did as many rig transactions in the secondhand market take place as they did last year,’ adds DVB. However, activity this year has slowed and is unlikely to match activity levels seen in 2006.

These supply and demand pressures, as well as high day rates and good contract terms, have created good market conditions for speculative newbuilds, while the urgency to obtain early delivery slots has led some newbuild orders to yards with limited rig experience.

The jack-up rig sector is replacing veteran rigs at a particularly rapid rate, with the 2008 orderbook consisting of 36 units, compared to a total of only 38 newbuilds delivered since 1993.

However, the jack-up sector over the first quarter of the year experienced a slackening of demand and a 10% drop in day rates.

‘While the outlook over the next two years is good, jack-up rigs coming off hire will be hard pressed to achieve previously obtained day rates,’ says DVB.

What will define the long-term development of the jack-up rigs and the wider drill market are the vagaries of global political developments, energy price fluctuations and whether exploration and production activity can develop with the breakneck speed needed to match world demand.

DVB suggests that it is the state-owned companies that are driving the market for now, with Pemex, Petrobras, ONGC, Saudi Aramco and Adma chartering 136 rigs, compared to 99 on hire to the top five majors, Shell, Chevron, Total, BP and ExxonMobil. Also, Opec intends to spend $130bn by 2010 on increasing production.

‘All this is leading to an increased demand for rigs, with higher specification rigs being able to command a premium,’ the report and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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