Offshore drillers see tightening rig market, increasing day rates

Signs of an improving global offshore drilling market appear to be flourishing, with longer contract durations not seen in years, rising day rates and upstream customers asking to secure rigs years in advance of projected work starts, the top executives of two large marine drillers said in respective third-quarter earnings calls Nov. 7.

Moreover, lead times between contract signing and start dates are increasing, while contract time frames are widening, Bernie Wolford, CEO of deepwater driller Diamond Offshore said.

“Our average contract durations of 360 days are at their highest point in five years,” Wolford said. “Industry remains in a period of demand expansion.”

And offshore driller Valaris, which has both deepwater and shallow-water rigs in its fleet, sees an outlook of increasing demand and “constrained” supply tightening the market, company President and CEO Anton Dibowitz said.

“Commodity prices remain supportive, with spot Brent crude above $85/b buoyed by tight supply and the recent escalation in geopolitical risk,” Dibowitz said. “More importantly, five-year forward prices are now around $70/b — a level at which more than 85% of undeveloped offshore reserves are estimated to be profitable.”

“Supportive commodity prices and attractive breakevens for most offshore projects provide customers with the confidence to invest in long-cycle offshore projects,” he said.

S&P Global Commodity Insights expects an 11% increase in exploration and production spending for 2023, with offshore activity projected to rise by 20%, S&P Global said in a recent Global Spending Report Nov. 2.

Offshore capex to recover ‘strongly’ in 2024
Offshore capital expenditures are expected to recover “strongly” by 2024, when it will bounce back from 2018–20 lows and reach previous historical highs posted during the mid-2010s, according to the report. Offshore spending growth is mostly expected to come from Africa and Asia-Pacific.

“This growth is projected to continue, with total upstream offshore capex estimated to reach approximately $233 billion by the end of 2027 — a 10% upward revision from our previous report,” S&P Global said. “Over the forecast period ending in 2027, we predict that Asia-Pacific and Latin America will drive half of E&P spending offshore.”

Matt Lyne, Valaris’ senior vice president and chief commercial officer, said his company currently sees 25-30 near-term contract opportunities for all deepwater floaters with expected duration of greater than one year, and which should begin over the next few years.

“We estimate that approximately half of these opportunities will need to be met by either incremental reactivations of stacked and stranded new build rigs, or active rigs moving regions, which … we don’t expect to see a lot of, given many currently contracted rigs will likely be retained by their existing customers,” Lyne said.

Valaris has been awarded new contracts and contract extensions since the start of Q3 with associated contract backlog of about $800 million, increasing its total backlog to roughly $3.2 billion, a 40% increase over the past 12 months.

In specific markets, Valaris sees continued deepwater opportunities in Brazil in 2024 and 2025 with three ongoing tenders across multiple operators, and some of these should result in contracts by year-end 2023, Lyne said.

‘Strong pipeline’ of potential work in Med, W. Africa
A “strong pipeline” of opportunities for floating rigs in the Mediterranean and West Africa exists for work starting in late 2024-2025 and 2026, with about 17 requirements, more than half of which should require incremental rigs, some including multiyear opportunities.

And while visible demand Gulf of Mexico is lower than in other areas of the so-called “Golden Triangle” that includes Brazil and West Africa, “we continue to see a constructive supply/demand picture in the region and expect future demand to keep the majority of rigs occupied,” Lyne said.

In shallower waters, jackup rig demand continues to “steadily increase,” and the contracted jackup count now at its highest level since mid-2015, he said. As a result, active jackup utilization is above 90% with both average and leading day rates continuing to trend upwards.
Since early 2022 demand growth for benign-environment jackups has primarily been driven by the Middle East with Saudi Arabia, Qatar and the United Arab Emirates all increasing their rig counts, said Lyne. “More recently, we have also seen a return of longer duration opportunities in Southeast Asia including Malaysia, Thailand and Vietnam,” he said.

“We anticipate rigs from outside the region will be needed to satisfy some of this demand which should enable day rates to increase as contractors moving rigs in from other regions seek to recover mobilization costs through upfront payments for the day rate,” he said, adding Trinidad is also a region of “strong” demand for high-specification jackups.

Concerning the UK North Sea, while some drillers have seen it as a sluggish market for 2024 work, Diamond’s Wolford has seen some promising developments.

Surge in P&A tenders
The UK government recently awarded 27 new licenses in a bidding round for areas that can be quickly brought into production, he said, adding: “Also, we have seen a surge in [plugging and abandonment] tenders over the past several months.”

“Today we have visibility of some 4,000 days of uncontracted P&A demand scheduled to commence before the end of 2025,” he added. “More recently, a number of drilling and P&A opportunities have emerged with 2024 start dates, in part due to the scarcity of available supply anticipated for 2025.”

Valaris’ average daily rig revenues have inched up to $279,000 for floating deepwater rigs in Q3 2023 from $252,000 in Q2 and $239,000 in Q3 2022. Likewise, its average daily revenues for shallow-water jackup rigs have risen to $108,000 in Q3 2023, up from $99,000 in Q2 and about flat with Q3 2022.

Valaris’ active rig fleet for the last year has consisted of about 33 total rigs, including initially 11 and currently 13 deepwater floating rigs and currently 20 jackups.

The company has “stacked” or idled three floaters – down from five a year ago – and seven jackups.

Diamond Offshore’s average day rate for its fleet of floating rigs was $307,000 in Q3 2023, up from $299,000 in Q2 and $235,000 in Q3 2022.
Source: https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/110723-offshore-drillers-see-tightening-rig-market-increasing-day-rates