Global offshore market is on the upswing

For offshore drillers, we have experienced what I call “Eight Years of Winter.” Now, however, I’m pleased to say that in the offshore drilling industry, we are definitely well into springtime, and speeding toward what, by all accounts, appears to be a warm and sustained summer. For the past eight years, every player in our industry has had to do everything possible to adapt and survive. Now, FINALLY, we are experiencing improving utilization and strengthening dayrates, due to the tightening supply of the most coveted high-specification assets in key markets. 

Drillships experienced a steep rise in utilization over the course of 2021 (Fig. 1), moving quickly from 74% to 93%, with forecasted utilization to be around 98% for the next two years. Semisubmersibles experienced an even more impressive rise in utilization, from 63.4% in January to 82.4% in mid-December. And, forecasts have the utilization rising to 94% by 2024. 

Fig. 1. Drillships and semisubmersibles have been experiencing a steady increase in utilization that should last well into 2024. Charts: Transocean.

So, what changed? A lot. And, I’ll try to provide a bit of context as to why we expect this to be a sustained market improvement for the drilling industry.  

WHERE WE HAVE BEEN 

For offshore drillers, the downturn started in late 2014, when oil prices plummeted, and shareholders, after suffering some catastrophic losses, really started to look more closely at their portfolios and returns. What they realized, was that despite exceptionally high oil prices, and tremendous growth opportunities, their investment returns never quite materialized as expected. As a result, they applied tremendous pressure to the E&P companies to curtail their investments in their core business, and demanded that more capital instead be returned to them. Obviously, this meant less available capital for service providers, including offshore drillers.  

While this in itself was painful for companies like Transocean, over the next few years, a growing pressure from activists, politicians, investors and financial institutions, and some communities at large, emerged advocating for an energy transition away from hydrocarbons. Through this process, somehow, oil and gas became vilified. So, investors re-directed their communications to E&P companies and instructed them to direct their capital toward renewable, lower-carbon energy sources, which, of course, translated into an even more diminished investment in hydrocarbons. 

Interestingly, through all these years of underinvestment, demand for hydrocarbons (Fig. 2)remained relatively robust. As such, over the years, we have witnessed a material reduction in hydrocarbon inventories, which has naturally facilitated concerns over energy security. Additionally, oil prices have been extremely constructive for the past several years, due to sustainable cost reductions realized over the past several years. Project economics (especially offshore) have become extremely attractive and we have meaningfully compressed project timelines, expediting cash-on-cash returns, and our customers need to replace reserves.

Fig. 2. Demand for hydrocarbons has remained relatively robust and is poised for further growth. Chart: Raymond James.

And, I apologize to all of my land colleagues for saying this, but the best place to do that is offshore. Some of the largest reserves of hydrocarbons are found offshore in deepwater (Fig. 3)and harsh environments, necessitating specialized equipment, technology and expertise. The production economics of these reserves are highly competitive—and in many cases superior—to those found onshore. Additionally, the carbon intensity of offshore hydrocarbons is also frequently lower than those found onshore. 

Fig. 3. Some of the world’s largest hydrocarbon reserves are offshore, in deepwater and harsh environments. Deepwater production is highly concentrated among a select group of operators. Chart: Wood Mackenzie.

Because of the aforementioned reasons, deepwater production is forecasted to increase over 60% between 2022 and 2030. Deepwater is expected to grow from 6% of upstream production in 2022 to more than 8% by 2030. Brazil, Guyana, and Mozambique are the main growth regions this decade. Without new discoveries, output in the U.S. GOM, Angola, Egypt and Norway will decrease. 

Deepwater production is highly concentrated—65% of current output is from Petrobras and the seven majors. This has increased with recent strategic transactions, such as Chevron acquiring Noble, Woodside and BHP’s upstream merger and Talos buying EnVen in the U.S. GOM. 

Fleet reconfiguration. These are some of the reasons we began streamlining and reconfiguring our fleet during the downturn to ultimately own and operate the highest-specification harsh environment rigs and ultra-deepwater drillships, Fig. 4. We sold our jackup fleet to Borr Drilling back in 2017 and shifted our full focus to harsh environment and deepwater drilling, making a series of strategic additions to our fleet through the acquisition of Songa Offshore, Ocean Rig, Transocean Norge, Deepwater Aquila, and our latest newbuild additions: Deepwater Atlas and Deepwater Titan. The Atlas and the Titan are the world’s only 20,000-psi-capable rigs. Reservoirs requiring 20,000-psi technology were discovered long ago, but the technology didn’t exist to actually access them. Now, it does; and, we are excited about the future prospects for these two assets. 

Fig. 4. Asset quality matters. This graphic shows our fleet transformation since 2014. Chart: Transocean.

During the downturn, Transocean and other offshore drilling companies, also worked diligently and creatively to reduce project costs for delivering wells. And, I’m happy to say that we were successful, contributing to a reduction in the cost-per-barrel break-even from circa $75/bbl to well below $45/bbl, depending on the geographic market.   

And, as we progressed through 2019, with oil prices remaining relatively steady in the $60-to-$65/bbl range, our customers started to gain an increasing confidence to once again invest in offshore projects. From a pure business fundamental standpoint, it was starting to look good. And, as we predicted in late 2019, in January 2020, Transocean announced five new ultra-deepwater contracts – all of which were at market-leading rates, in fact, significantly above the latest leading-edge dayrates.  

The pandemic and Ukraine situation impact activity. As we entered 2020, we quite understandably thought the recovery was really starting to take shape. Unfortunately, the pandemic hit, putting all pending projects, as well as our lives, on hold. Luckily, those projects were never cancelled…just temporarily shelved, as everyone tried to process how the pandemic was going to impact our lives and our businesses. Needless to say, it was a rough year-and-a-half from 2020 through 2021. Then, as the world started to rebound, and as demand for energy, specifically oil and gas, returned to pre-pandemic levels, the draws on inventories were suddenly realized, and cause for legitimate concern.  

While unbelievably tragic, the ultimate tipping point, was Russia’s invasion of the Ukraine. Then, suddenly, all of the public pressure around energy transition, turned to a heightened focus around energy security, and people started to recognize the reality that the most affordable, most efficient, most transportable form of energy in the world is, in fact, hydrocarbons. While we all recognize the urgency, and the need, to reduce our carbon footprint and do what is best for the environment, we should also acknowledge the unbelievable importance that hydrocarbons represent to national security and to the well-being of people around the world…and will continue to provide for the foreseeable future. 

WHERE WE ARE NOW 

Oil prices are very “constructive,” which is to say that all members of the value chain can once again generate acceptable returns on their respective investments. Operating cash flows from E&P companies are near, at, or even exceeding record levels. Project costs remain low, in the $40-to-$45/bbl range in most offshore basins. After eight years of relative underinvestment, there is an obvious need to replace reserves. And, the once emotional, and, in my opinion, misguided, focus on energy transition, has given way to a far more practical focus on energy security and energy expansion. As such, I think that we are well poised for what could be a multi-year recovery. 

My takeaway is this: As painful as this downturn has been, it has actually been extremely healthy for our industry. It has forced us to consolidate, Fig. 5. It has forced us to scrap old rigs that weren’t as efficient. It has forced us to look for every opportunity to eliminate waste in the system and the cost to deliver wells more efficiently. 

Fig. 5. The latest downturn, while painful, did force the industry to consolidate its floating rigs, which has been a healthy development. Chart: IHS Petrodata/S&P Global.

Historically, as an industry, amid recovery, we have been prone to overbuild and add too much supply, too quickly. I think this time is different. We have several built-in governors, which will prevent us from increasing capacity. I think we could be in a very healthy place for the industry, as opposed to these huge peaks and huge valleys that we have seen over the past couple of decades. We could see more moderate growth. Capital discipline is at the forefront of everyone’s minds, and I think this will result in a multi-year recovery for the simple fact that we can’t overbuild as an industry. 

Factors against overbuilding. Why can’t the offshore drilling industry commit the sins of the past, and overbuild yet again? There are multiple reasons. Assuming that one could find a shipyard willing to do it—which is decidedly unlikely in my view, given otherwise robust order books and drillers walking away in the last downcycle—I do not foresee a circumstance in the near future where anyone would order new drillships. This is important and such an order is highly unlikely because if a competitor wanted to build a 20,000-psi rig from scratch today, it would probably take them up to five years and cost over $1 billion. 

There are also a number of high-quality cold-stacked assets that need to be reactivated before one would consider building a new rig. At Transocean, for instance, we still have several high-specification, cold-stacked rigs that are still very young, that we need to put to work first. We would focus on reactivating those assets and getting 100% utilization before we would even consider a newbuild. And we wouldn’t construct a newbuild on speculation. A customer would have to come to us with a very attractive contract, dayrate and term, that would support the construction of a new rig. And, again, let me stress, that a new rig, if ordered today, would take at least five years to enter the market. 

The second reason we are unlikely to overbuild is a lack of capital. I am proud to say that Transocean is the only publicly-traded offshore driller that preserved the equity of our shareholders. The rest of our competitors restructured. Sure, they emerged from bankruptcy with clean balance sheets; however, they do not carry an abundance of cash. And, it will take cash to reactivate assets. Customers will need to pay for it, and our competitors certainly don’t have the capital to invest in a newbuild or a speculative reactivation.   

The final constraint is the supply chain. Supply chains, while beginning to improve after eight challenging years, including a two-year pandemic, are likely to remain stretched for a number of years. While every asset and reactivation is unique, we estimate that the reactivation of a cold-stacked ultra-deepwater drillship could require 12 months. 

As a result, I do think that we will see dayrates on the active fleet, whether they are our rigs or our competitors’ rigs, continue to move upwards until such a time as the customer is willing to pay for the reactivation of cold-stacked assets. They will take time to get back working properly and on contract. Assets like the rigs our industry stacked during the downturn have never been reactivated. These rigs have been sitting in salt water and humidity. In some cases, for multiple years. So, while we have planned for what we think is every contingency, we are going to be surprised as an industry. And that is not just Transocean. I think this applies to everyone.  

Offshore rig supply and demand. From a total supply standpoint, the overall number of rigs that we have today can ultimately support the demand offshore (Fig. 6)in the near-to-mid-term; but, as mentioned, it is going to require considerable capital and time to reactivate assets that have been stacked for four or five years.   

Fig. 6. The overall number of rigs can support the demand offshore, represented by global floater opportunities. Map: IHS Markit/S&P Global.

As we enter 2023, the demand for our assets and services remains strong. Accordingly, the outlook for our high-specification floating fleet is the most optimistic it has been in recent years. We believe we have entered a multi-year upcycle. Increased cash flows from higher dayrate contracts will enable us to continue to address our balance sheet, as we transition our focus from extending our liquidity runway to actually deleveraging and positioning the company for the future.  

As the active supply of high-specification floaters remains extremely limited, we anticipate there will be more opportunities to begin reactivating our cold-stacked fleet. As always, we will continue to prudently examine all opportunities to place our cold-stacked rigs back into the market, and thoroughly assess each potential reactivation on a case-by-case basis, to ensure that each creates value for the company and our shareholders.  

As of late last year, 82% of the high-specification harsh environment global fleet was contracted, and 86% of Transocean’s high-specification harsh environment fleet was under contract. Meanwhile, Transocean has nine drillships with 1700 ST hoist or 1400 ST hoist, and all nine are contracted. Transocean owns the only two drillships with 1700 ST hoist—Deepwater Atlas and Deepwater Titan. Of the 12 units in the global fleet with 1400 ST hoist, of which Transocean operates seven, the global contracted rate is 75%, including our seven that are 100% contracted. 

The market for harsh environment and ultra-deepwater rigs is tight across the globe and getting tighter. Direct negotiations continue to dominate, as a result of market tightness, and we are seeing improved contractual terms, higher dayrates, and longer durations. The offshore CAPEX budgets (Fig. 7)of the majors have increased for the second consecutive year, and we see this reflected in tender and contracting activity. Importantly, these budgets are increasingly directed to offshore deepwater. By the third quarter of last year, the majors had contracted nearly 31 rig years on deepwater drillships, when compared to 20.5 rig years for jackups, which operate in shallow water. 

Fig. 7. Within total global upstream spending, offshore CAPEX budgets have increased for the second consecutive year. Chart: Rystad Energy.

Drillship dayrates (Fig. 8)have continued their upward trajectory and moved comfortably above the $400,000/day mark. As an example, in just ten months, the Deepwater Conqueror saw an increase of $105,000/day, excluding integrated services like MPD. Compare that to the third quarter of 2020, when the average drillship fixture was $184,000/day. In the second quarter of last year, the average was $393,000/day, an increase of 113%. 

Fig. 8. Within the overall increase in offshore dayrates, drillship dayrates have continued their upward trajectory and gone above the $400,000/day mark. Chart: Transocean.

Big picture outlook. Indeed, the outlook for our industry-leading assets and services is the most promising it has been in many, many years. There is finally recognition that we have underinvested in this space for nearly eight years now, and we need to get back to our core business and generate more production to replace inventories that have been drawn off for the past two-and-a-half years. 

While hydrocarbons will undoubtedly continue to lose market share over time to renewables in the overall energy mix, most believe that volumetric demand for oil and gas will continue to increase. Rystad Energy recently estimated that 63 MMbpd of new supply are needed to avoid a shortfall in 2030, Fig. 9. This cannot be accomplished without significant investment in additional exploration and development, including in the offshore basins requiring our assets and expertise. Accordingly, we, as the market leader in offshore drilling, have a necessary and important role to play in the ongoing energy expansion for the foreseeable future. 

Fig. 9. Since the Covid pandemic in 2020, U.S. and world oil inventories have reduced continuously, with Rystad Energy estimating that 63 MMbpd of new oil supplies are needed by 2030. Chart: Raymond James.

TECHNOLOGY FACTORS 

Whether onshore or offshore, we recognize technology is going to play a critical role in the future of the drilling industry. Even with the challenges we have faced in the downturn, we have continued to invest in the technology that helps us to become more reliable and more efficient, Fig. 10.  

Fig. 10. Transocean has continued to invest in technologies that improve reliability and efficiency of operations. Images: Transocean.

There are many examples of technologies we have introduced, including those that engineer safety into our operations, such as our robotic riser bolting tools, or our patented HaloGuardSM system, Fig. 11. The latter sounds a series of alarms when members of our crew are in close proximity to a moving piece of equipment on the drill floor. If required, the system will halt equipment to prevent injury to personnel, who move too close. The robotic riser system automates all activities around the rotary table during riser operations, improving personnel safety by eliminating the need for work in restricted-access areas while simultaneously improving consistency and increasing efficiency of operations. 

Fig. 11. Transocean’s HaloGuardSM system has been deployed to five rigs. Images: Transocean.

To achieve our Scope 1 and Scope 2 GHG reduction target of 40% by 2030, we will continue to invest in the development and implementation of new technologies and other initiatives (Fig. 12) to reduce fuel consumption and optimize our power management capabilities. We are reducing the total amount of power that our rigs need to generate by optimizing the energy efficiency of our equipment, reducing unnecessary power draw from inactive equipment, and developing enhanced operational guidelines that reduce power demand while maintaining safe operations. Additionally, we have recently introduced fuel additives to a few of our assets, which further reduce our fuel consumption. There is no doubt, technology will drive safety, reliability and efficiency for our industry, onshore and off.  

Fig. 12. Like much of the industry, Transocean is investing in development and implementation of new technologies and initiatives to reduce fuel consumption and emissions while optimizing power management capabilities. Image: Transocean.

Final thoughts. We are an unbelievably resilient and innovative industry, which has endured significant and frequent cycles. One thing is for sure, we are an industry that always finds a way; an industry that is, and will remain, essential to ensuring access to affordable, reliable energy sources that support shared prosperity, growth and innovation globally. It is undeniable that the drilling business is changing in exciting ways. I’m excited for what’s ahead for our industry. We are just scratching the surface of what’s possible, as we continuously advance as technical leaders, and work offshore toward producing more energy with lower emissions. 

About the Authors

Jeremy D. Thigpen

Transocean Ltd.

Jeremy D. Thigpen is Chief Executive Officer of Transocean Ltd. He joined the company as CEO in April 2015, and served as President until February 2022. He previously served as Senior Vice President and Chief Financial Officer at National Oilwell Varco, where he spent 18 years. During his tenure at NOV, Mr. Thigpen spent five years as that company's President of the Downhole and Pumping Solutions business and four years as President of its Downhole Tools group. He also served in various management and business development capacities, including Director of Business Development and Special Assistant to the Chairman. Mr. Thigpen serves as a member of the Board of Trustees at Rice University (since 2022), and he served as the International Association of Drilling Contractors’ Chair in 2022. He earned his Bachelor of Arts degree in Economics and Managerial Studies from Rice University in 1997 and completed the Program for Management Development at Harvard Business School in 2001.