Drilling advances
Though mostly lost among the incessant unconventional chatter, deepwater has managed to ballast the playing field. So says one super-major, which also dabbles in shale, but contends that the global deepwater segment, for now, has positioned itself on a firmer economic footing.
“Deepwater can compete, if not demonstrate higher returns, because of fundamental cost reduction. Break-even prices in deepwater—we are now talking $30/bbl,” Shell Global Upstream Director Andy Brown told the Financial Times on Aug. 12.
Indeed, bolstered by improving prices, the renewed gravitation toward deepwater prospects follows years of belt-tightening and project streamlining. If nothing else, operators hope to end 2018 better than 2017, when, as Bloomberg reported, the industry closed the year with a record low in offshore and conventional discoveries, yielding a pitiful 11% reserve replacement ratio.
“With this supply backdrop, combined with current offshore break-even economics for most projects at levels ranging from the $40s to as low as the low $20s/bbl, it’s not surprising to see increasing optimism from our customers regarding offshore developments,” says Jeremy Thigpen, president and CEO of Transocean Ltd, which operates a 46-rig fleet and, as of July 31, was working through a $1.1-billion backlog amassed over a roughly nine-month period.
“In short, in an environment in which our customers are experiencing relatively high and stable oil prices; relatively low and declining project costs; and some very real reserve replacement challenges; one can reasonably expect to see additional investments in the offshore market.”
Takeaways from the recently passed earning season have demand starting to grow in the Gulf of Mexico, Brazil, parts of West Africa and other traditional deepwater and ultra-deepwater theaters, as well as in emerging theaters like Guyana. That said, Transocean and fellow offshore drillers Diamond Offshore, Noble Corp. and Rowan Companies acknowledge that the dynamically positioned (DP) sixth-generation floater fleet remains woefully oversaturated, preventing any meaningful day-rate increases, at least in the near-term. At the same time, the available supply of moored rigs has tightened.
“Customers are looking to lock in capacity for 2020 and beyond, as they see the coming recovery of the moored asset class. Although demand for sixth-generation dynamically positioned assets is clearly picking up, this particular segment remains well oversupplied, and we have yet to see an inflection in market day rates,” says Diamond Offshore President and CEO Marc Edwards, adding “when you’re talking about the DP assets, the rate recovery is not going to happen before 2020 or 2021.”
Thigpen said interest also is building in underexplored ultra-deepwater areas, with bottomhole pressures in the 20,000-psi range. “Beyond the more traditional ultra-deepwater fields, we continue to see multiple customers looking at projects in frontier areas with water depths beyond 12,000 ft and in higher-pressure fields requiring 20K-compliant equipment.”
Premium jackups are hot. Second-quarter earnings calls also show heightened demand for top-drawer jackups, especially in the North Sea and Middle East. Noble, which describes the jackup market as “in transition to full-scale recovery mode,” says all 10 of its premium jackups are committed to contracts. “Utilization figures for premium jackups have steadily advanced to a level that supports rate improvement,” says V.P. and General Manager of Marketing and Contracts Robert Eifler.
Rowan, likewise, said all but one of its 23 jackups were contracted or committed as of Aug. 1, with five of its seven ultra-harsh environment units stationed in the North Sea, which it describes as ground zero in the jackup market rebound.
“We had stated on several occasions in 2017 that customer discussions and tendering activity were on the rise, especially in the jackup market,” Noble President and CEO Julie Robertson told analysts on Aug. 3. “We expressed confidence that some of these discussions and tenders would conclude with contract awards. Over the ensuing seven months, our modest expectations have been exceeded.”
Offshore contractors’ revived confidence also is reflected in tender replies for work starting in 2020 and 2021, with quotes “sometimes double and triple” today’s fixed day rates, says Transocean’s V.P. of Marketing and Contracts Roddie Mackenzie. “I think there is a general sense among the contractors that the days of cash break-even need to end, and they need to get back to making some solid terms, when we get to later in 2019 and 2020.”
Mainstays mending. From all indications, the Western Hemisphere’s ultra-deepwater strongholds of Brazil and the Gulf of Mexico are in the beginnings of a recovery. “Over the next couple of years, we continue to believe that deepwater rig activity in Brazil could again exceed 40 floaters,” says Thigpen.
Similarly, as of Aug. 1, the Bureau of Safety and Environmental Enforcement (BSEE) had approved 42 new well permits this year in waters deeper than 500 ft, compared to 29 for the like 2017 period.
Across the aquatic border, Transocean, for one, believes Mexico will continue to welcome international operators to its deepwater arena, despite President-elect Andres Manuel López Obrador’s nationalistic banter during the campaign. “In Mexico, we expect to have two ultra-deepwater rigs working by early next year with additional opportunities continuing to emerge,” Mackenzie said. “Among the operators, they’re quite optimistic that things will not deteriorate, and we take our lead from them. So, we remain quite bullish on Mexico for that.” 
