Charting demand

35 offshore projects and 100 rig years have slipped after the oil price collapse. Oddmund Føre, Analyst, Rystad Energy, explains.

The market for oilfield services is hurting and offshore drilling is no exception. The global market for mobile offshore drilling units (MODUs) faced a decline of 12% last year. This was twice the decline we saw in 2009 in the same industry, leaving 2015 behind as the most challenging year in the recent past. After booming years in the rig market, we have seen volumes of new rig capacity entering the market. In addition, the oil price has put further pressure on the tight cash flow situation for E&P companies, which has resulted in reduced demand for exploration and development drilling. These drivers combined have led to low utilization and reduced rig rates, and in turn an increased focus on retirements as a consequence.

In the world of exploration and production, a change in development schedules is not a rare reality considering factors such as project complexity, infrastructure challenges and governmental regulation. As reduced revenue due to a diminishing oil price has played an important role, budgets have been subject to increased scrutiny upon sanctioning of new development projects. Rystad Energy has taken a closer look at new offshore development projects that have been delayed or cancelled after the oil price plunge of 2014. A project is considered delayed if the original expected sanctioning date falls within two years of the time when news flow indicates a later approval date. The conclusion is that 35 offshore projects have been delayed or canceled as of January 2016.

The 35 projects we have identified translate into a demand for floaters and jackups in excess of 100 rig years that consequently have slipped. The left chart shows this rig demand split by region based on the underlying projects. West Africa, Southeast Asia and Western Europe are the three regions affected the most, with the majority of the rig demand subject to rescheduling. The Kasawari project operated by Petronas in Malaysia is just one example of rig demand that was delayed in this period. The Gendalo-Gehem project by Chevron in Indonesia is another. In Western Europe, Statoil has not been able to approve the Johan Castberg field in Norway, leading to further delays of this field as well.

Source: Rystad Energy RigCube

The chart (above) shows that more than half of the rig demand in question comes from deepwater fields largely made up of elephants such as Bonga Southwest-Aparo in Nigeria and Mad Dog 2 in the Gulf of Mexico. The remainder is split equally between shallow water and midwater.

There is no doubt that 2016 will be a challenging year for the MODU market. Nevertheless, Rystad Energy expects the current year to be the turning point followed by a market recovery in 2017 with a growth rate around 10%. There is a number of projects in the pipeline that will be sanctioned in the upcoming years, which can contribute to a healthier rig market. Gas projects like Zohr in Egypt, Leviathan in Israel and LNG projects in Mozambique are projects that we have to watch out for in the near future.