Market recovery sparks lower rig attrition, higher rig reactivation

Utilisation and day rates are on the rise. The offshore rig market is in a long-overdue upswing previously interrupted by the COVID-19 pandemic. Two other indicators that point to a rig market in rebound are lower attrition rates and higher rig reactivation numbers.

The global active rig count today stands at 532 units, so out of a total supply of 684 units, 77.8% are contracted. Marketed utilisation registers at a higher rate of 88.8% for the 599 marketed units. As such, fewer rigs are expected to be retired while more stranded newbuilds and cold-stacked units are anticipated to be brought back into the active fleet.

Attrition lowest in eight years

Attrition rates have fallen drastically in the last 12 months and one might also argue that there are few units truly left to retire. Over the last eight years, a total of 164 jackups, 140 semis and 43 drillships have been retired from the global fleet. In the chart below, we can see that attrition rates for all three categories have decreased significantly. Compared to 35 jackups, 13 semis and 6 drillships which departed the global drilling fleet last year, only 4 jackups and 5 semis were cut in 2022.

Jackups Mercury Focus, Sonora, Valaris 67 and WFD Rig 300 were units capable of working in water depths of 76-110 m (250-360 ft), and were aged between 43 and 53 years old. Two of the younger floater units, Sevan Brasil (10 years old) and Sevan Driller (13 years old), were sold for conversion to Fast LNG units. The youngest floater recently sold for scrap was semi Ocean Valor, which was 13 years old at the time. So, has the attrition cycle reached a peak after the mass reduction in global supply over the last few years? Demand has picked up over the same period with contracted utilisation inching closer to proportions seen before the oil price crash in 2014. At present, with the reduced number of marketed rigs and demand increasing, supply is tight in most regions, especially so for jackups and drillships, meaning attrition is likely to stay low.

Rig reactivation on the rise

There are currently 25 cold-stacked floaters worldwide: 15 drillships and 10 semis. A total of 11 units belong to Transocean; however, in its recent quarterly call, the contractor is confident reactivations in its fleet will occur in the near future as higher deepwater rates continue to strengthen its balance sheet. According to Transocean, with a greater number of active tenders and high day rates, it sees a path to possibly reactivate two rigs, but it will not reactivate on speculation, only when a contract is awarded.

Rig reactivations have definitely ramped up in the last 12 months. Going back to late last year, several cold-stacked floaters have been reactivated and put to work. Drillships Valaris DS-4, Valaris DS-11 and Valaris DS-16 were a few of the earliest units to be readied for work. Valaris DS-4, which had been preservation stacked in the UK having last worked in 2019 offshore Nigeria, was reactivated for its 548-day charter with Petrobras. Valaris DS-11 was also revived for a long-term deal with Petrobras offshore Brazil, while Valaris DS-16 is drilling away on a two-year charter with Occidental in the US Gulf of Mexico. Drillship Valaris DS-9 was also reactivated before its two-year (plus options) charter with ExxonMobil in Angola. It was in preservation stack mode since July 2020.

Seadrill drillship West Carina was reactivated in January and is now on a three-year scope with Petrobras offshore Brazil. The unit last worked for PTTEP offshore Malaysia in 2020 before being stacked in Sri Lanka. Seadrill drillship West Jupiter is also readying for its deployment with Petrobras in Brazil, which will start in December. The unit was idle from November 2019 to March 2022. Vantage Drill-managed drillship Polaris has also departed Malaysia after undergoing reactivation, contract preparation and upgrades to start its nine-month campaign with ONGC offshore India. It last drilled for Reliance in January 2021 before it was stacked in Sri Lanka.

For jackups, today's marketed availability is also tightening up and the number of available rigs is decreasing quickly. With marketed utilisation at almost 92%, this means that only a maximum of 8% of the marketed jackup fleet is even potentially available for hire. With so many units being reactivated for work in the Middle East market, supply is tight. Out of the 32 units reactivated in the last 12 months, 22 jackups are bound for the Middle East. Some are newbuilds that have been sitting around in shipyards, while others are jackups that have been stacked due to lack of work since the last downturn.

To date, net stacking activity for cold-stacked floaters and jackups is on a steady decline in the Asia Pacific region. A steady stream of retirements and non-drilling conversions have brought the number of idle units down in the recent years, but the total number of reactivations this year has surpassed that of the last nine years combined. Stranded newbuild jackups and cold-stacked units are mostly being reactivated for charters in the Middle East. The total number of jackups (hot and idle) moving out of the Asia Pacific region to the Middle East in 2022 and 2023 account for 28 units. Asia Pacific's marketed utilisation has hit close to 94% for jackups, but floaters trail at a lower rate of 68%.

Reactivated with or without work lined up

In July, Equinor awarded a 540-day contract to drillship Valaris DS-17 (Reliance) to start in mid-2023, and the 3,658 m/12,000 ft-rated unit will be reactivated for this charter. It was cold stacked in the Canary Islands since 2020 and last worked in the US Gulf of Mexico for Cobalt International in mid-2017. The total contract value of the new job with Equinor is approximately USD 327 million, including an upfront payment totalling about USD 86 million for mobilisation costs, a contribution towards reactivation costs, and capital upgrades. This demonstrates another strategy for operators to facilitate bringing back cold-stacked units into the active drilling fleet. Commercial drivers for contractors to reactivate units idle for years could come in the form of upfront cash and more competitive day rates. In the long run, this could play out as a win-win for both parties. Climbing day rates in today's market and longer-duration campaigns of at least 500 to 600 days are also encouraging factors for rig owners to seriously consider reactivating their idle rigs.

Jackups reactivations in Southeast Asia are estimated to cost between USD 20 million and USD 30 million. A moored floater or a DP unit with one BOP will likely cost just under USD 100 million to reactivate, while dual-BOP, DP units with managed pressure drilling (MPD) equipment may cost as much as USD 150 million to reactivate. With rising costs, this may be expected to possibly increase even further, going into the future.

Since demand is on the rise, some rig owners and contractors may choose to ready their units for potential charters before work is secured. Aquadrill semi Aquarius, now managed by Vantage Drilling, is understood to have been reactivated without any follow-on work for now. The sixth generation ultra-deepwater semi, built in 2009, last worked for ExxonMobil offshore Canada. Reactivation on speculation, while risky and expensive, is a more time-sensitive option that could give contractors an edge in tenders or direct-negotiation charters when operators cannot afford the wait.

Yvonne Seow, Senior Analyst, Offshore Rigs, S&P Global Commodity Insights

Posted on 16 December 2022

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.