No newbuild cycle? No problem...

Once again, demand indicators for the offshore rig market are overheated and flashing wildly, just crying out for someone to slam down on the proverbial red button and execute the newbuild sequence. It was certainly what happened in the mid-2000s and early 2010s, when day rates peaked and supply was tight. But we know now how that turned out: The speculation and subsequent supply glut blew up the market for the last decade.

So not this time. This time, the supply side forces are still holding the line. Though marketed utilization for jackups and drillships have stabilized clear above 90% since early 2023, and day rates have more than doubled to $150,000 and $500,000 respectively for the two rig types, it has yet to trigger a construction-led supply response.

Unsurprisingly, money is a big reason why all remains quiet on the ordering front. For starters, there is less access to capital as survivors of this millennia's offshore downturns - from lenders to shipyards and rig owners - still suffer from PTSD, no thanks to the supply excess that kept the market underwater for years.

Prices have also gone up since the last two newbuilding rounds. Industry players suggest it would now cost between $250-300 million to order a jackup and upwards of $850 million for a drillship. At such prices, financial analysts estimate it would take a jackup contract of at least seven years with a day rate well over $200,000 or a drillship contract of 10 years or more with minimum day rates of $650,000 to underwrite any order.

Three to five years from order to delivery

Then, there are the operational hurdles. On the yard front, gone are some of the familiar names (bye-bye KFELS, DSME and CPLEC, to name a few defunct acronyms) plus the appetite, not to mention capability, for rig building. Mergers, right-sizing and diversification over the last decade have resulted in fewer yards that, though busy again today, now focus mainly on building ships and rig facilities have been repurposed.

Lead times from order to delivery for any unit is now three years to five years, down from as fast as 18 months at the peak of the previous cycles. Even if one can find an amenable yard with available slots, downpayments are back to over 70% to build in Singapore or at least 30% at Chinese yards, with milestone payments to boot.

The enduring uncertainty of the offshore market also helps keep players circumspect about building again. Aramco's recent cutback on its offshore expansion plans and the potential premature release of jackups over the next two years is a cautionary example of how suddenly things can turn on a dime. Indian state operator ONGC, for one, was making plans to renew its aging fleet but has now put that on hold while it awaits to see if the supply bottleneck will ease.

With new orders a no-go, stranded newbuilds and cold-stacked units have found new life in the last two years as demand surged as these are cheaper and faster to get to market than ordering from scratch. Orphaned jackups have been sold for between $80-120 million; while the price tag for abandoned drillships at South Korean yards has been $200-300 million apiece. However, such bargains have since become scarce as all the easy targets - rigs with the best specifications and stacked for the shortest length of time - have been snapped up.

Alternatively, a cold-stacked floater would cost between $70-125 million and, if a yard slot can be found, up to 18 months to reactivate. As for jackups, a standard reactivation for a stacked unit can cost between $10-15 million. The bill goes up the longer a unit has been out of action. On paper, there are 10 drillships, 17 semis and 59 jackups cold-stacked in the market. But it is buyers beware, for over two thirds of these rigs were built in the last century and many are in various states of severe disrepair.

In any case, a supply crunch will not result in a doomsday scenario for the rig market. It is primarily a challenge for the operators. After years of scraping by, rig contractors are now in a position to sit back and enjoy the higher day rates a tight market engenders, even return some dividends to the stakeholders who have stood by them in lean times. But no need to bring out the tissues for the oil companies just yet. With the robust oil price in the last two years, many are sitting pretty on much cash.

Coping with existing supply

If the existing rig fleet is likely to form the basis of supply for the foreseeable future, operators will do well to plan their projects well ahead. It is best to go to market as early as possible, not just because few rigs are immediately available, but to try and lock in prices before the peak is reached. Another way to mitigate day rate progression is to work with other aspects of total contract value, such as using escalation mechanisms under terms and conditions, to keep headline day rates down. Longer charters will also allow oil companies to trade term for lower rates, so it makes sense to line up campaigns whether across countries and continents, if jurisdictional regulations permit, or among operators to rig share.

All this is already happening. Increasingly, consultations between operator and rig provider are conducted through direct negotiations to circumvent the competition. This is especially so for oil majors with the clout, deep pockets and work scope to underwrite long-term, multi-rig charters. Shell, for one, has invited a small group of contractors to discuss its requirement for up to five rigs covering terms of between three and five years each for work in the US Gulf as well as the Atlantic margin, spanning potential locations from Brazil to Namibia and Egypt.

Yet others are thinking outside the box. Just this month, TotalEnergies and Vantage Drilling set up a joint venture to acquire drillship Tungsten Explorer from the latter. The operator agreed to pay $199 million for a 75% stake in the rig, which Vantage will operate for 10 years. This innovative arrangement precipitated following TotalEnergies' tender in 2023 to secure two ultra-deepwater floaters for multi-country campaigns with a West African focus for minimum 10 and five-year terms each.

Upgrade rigs instead to improve efficiency

Finally, perhaps what the market should expect going forward is not a newbuild cycle, but an upgrade cycle. It is a lateral solution to the supply conundrum. How to cover increased demand with no change to rig numbers? By drilling more efficiently using new or better equipment. It is a potential win-win all around - so long as contractors are subsidized for the upgrades, such as via a bump in rate for any bespoke installation or when such equipment is used, and operators can claw back the initial investment with shorter campaigns that reduce overall project cost. All parties can even claim to contribute to a reduction in emission footprint due to increased efficiency.

For jackups, one fashionable upgrade is offline capability. For floaters, popular upgrades include adding a second BOP or a Managed Pressure Drilling (MPD) system. But the latest frontier in drilling technology would be the 20K Blowout Preventer (BOP) stack. Currently, only two sets have been built and they are fitted on Transocean drillships Deepwater Titan and Deepwater Atlas.

As manufacturer NOV touts on its website, the equipment is designed to optimize uptime and reduce unplanned stack pulls. More importantly, the capability opens up drilling opportunities in new locations previously inaccessible due to high-pressure, high-temperature limitations. Market sources indicate it currently costs about $100 million to order a new 20K BOP set, with a three-year lead time. For sure, that is almost as long a wait as ordering a newbuild, but it is without doubt much cheaper!

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.