Operators feeling the heat in tight jackup market

<span/><span/>It was not too long ago when available jackups were plentiful worldwide. However, as Middle East demand surged over the last two yards, the situation has turned on its head. Since 2022, 53 jackups have been gradually making their way to work in the Arabian Gulf. To undertake work for national oil companies in Saudi Arabia, UAE and Qatar. As a result, operators that need to drill any time soon are finding that there is limited availability left in the market.

Even in the Middle East, smaller outfits are struggling to secure jackups to meet their requirements. Abu Dhabi-based El Bunduq Company, for one, commenced its jackup search for its 2023 campaign in the first half of 2022. It conducted three pre-qualifications (PQ) last year and pushed back the commencement window to early 2024 before finally issuing a limited tender in January this year. Despite two extensions of bid deadline, the exercise still failed. So El Bunduq went back to the drawing board, issued a new pre-qualification in April followed by an Invitation to Bid in May for a revised work scope of 270 days plus a 60-day option, now starting by mid-2024. Submission has been extended once since then, and the exercise remains ongoing.

Jackup demand has grown steadily in the last two years, with the number of contracted jackups increasing from 294 units in January 2019 to about 354 units in May 2023. Correspondingly, the number of stacked units has declined, falling from around 111 units worldwide in January 2019 to the current 86 or so units. Warm-stacked units are the best benchmark for an improving market, and these have been fallen from 73 units in December 2020 to 23 currently.

Long and winding tender process…

As a result of the smaller pool of available units, it is slim pickings for operators still in the hunt for a jackup. What the limited market has translated into for them is a more tedious procurement process: pre-qualifications and surveys are often repeated as little or no availability is revealed, while tenders that are issued either fail, are cancelled or have to go through multiple iterations. It can be a lot of wasted time and effort. And if the outcome turns out to be successful, operators will have to brace for higher day rates because, on top of the pricing premium due to the tight supply, operators may well have to foot a hefty mobilisation bill if the selected unit is not located nearby.

For Asia-Pacific in particular, the situation has become dire. Australia is one area that has lost a few rigs to other regions recently. Despite outstanding jackup demand in the country, Noble Tom Prosser relocated to Malaysia for new charters, leaving Australia/New Zealand with just Valaris 107. Meanwhile, Inpex Australia has been struggling since late 2021 to find a big jackup to drill one well over about 100 days between October 2023 and July 2024. In the most recent survey issued by the operator this February, it received two offers for units located in Europe and one has since secured a charter and is no longer available.

Asia-Pacific is the main provider of the jackups to the Middle. Of the 53 units heading there since 2022, 21 are from Southeast Asia, 11 from the Far East and two from India. As a result, the working fleet in Southeast Asia is almost all booked out for 2023, with just four units of the 33 delivered jackups there - Murmanskaya, Velesto Naga 2, Idun and Mist - showing any availability for the remainder of the year.

In Indonesia, Pertamina Hulu Energi Offshore Northwest Java's (PHE ONWJ) latest joint jackup tender with PHE Offshore Southeast Sumatra (PHE OSES) has failed again as there were no bidders - despite having eight pre-qualified contractors offering more than 10 rigs in the initial process. This was at least the fourth re-tender by the operators since the initial PQ in July 2022. The charter is expected to cover two years plus a one-year option, with targeted commencement now pushed back, optimistically, to third quarter 2023.

Indonesia is a notoriously tough place to work for rig contractors due to the red tape, long procurement process and often modest engineering estimates. In these times of fast-increasing rates, by the time commercial documents are opened, the market will have moved well beyond the budgeted price, hence scuppering tenders. Another Indonesian operator mired in multiple PQs is PC Ketapang II, which also lost COSLPower to the Middle East earlier this year. The rig is one of seven jackups COSL secured long-term charters for with Saudi Aramco, in this case for almost double the rate it had been making in Indonesia.

Vietnam is also facing a jackup crunch. Already, three of national rig contractor PV Drilling's fleet of five are drilling outside the country, while the remaining two units - PV Drilling I and PV Drilling VI - will be going to work for Petronas Carigali in Malaysia later this year. Vietsovpetro (VSP), for one, is currently seeking up to three jackups under two separate tenders. However, things do not seem to be going to plan for VSP as contractors have been told it plans to issue yet another new jackup tender by end-June that looks set to supercede the earlier exercises.

Limited availability boosts jackup day rates

Over in India, ONGC has also been hard pressed to maintain its fleet strength. In a usually crowded market, it faced a two-rig shortfall in its last 12-jackup tender against the renewal of incumbent units. The limited availability helped push day rates up from USD 20,000s into USD 80,000s for the recent fixtures, a level not seen there since 2015.

All this is unexpected for Asia-Pacific, a region once home to a surfeit of jackups both new and stacked. From over 100 available newbuilds just two years back, there are now just 18 units still unspoken for at Singapore and Chinese yards. Even China is feeling the impact of the loss of rigs to the Middle East. On top of the jackup awards it secured in Saudi Arabia, COSL is losing four bareboat units on its fleet to owner China Merchant Industry Holdings (CMIH) after the yard sold them to UAE's ADNOC Drilling.

Given these developments, rig contractors are expecting the jackup market to improve further. Borr Drilling has said it expects rates to reach over USD 175,000 by the latter half of 2023. By all accounts, the market has yet to reach the end of the diaspora of jackups to the Middle East. So operators should brace themselves, for in this roller coast ride that is the offshore market cycle, it looks like we have yet to reach the crest.

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.