This week, offshore rig utilization inched up slightly to 83.6%, continuing its upward trend. And also continuing the recent trend, the big news in the rig market again focuses on announcements that several more offshore rigs are going to be built in the next few years.
With a total of 88 MODUs currently under construction or on order, the offshore rig fleet is poised to experience its largest growth spurt in over 20 years.
The Last Big Boom
In total, about $12 billion was spent on new offshore rigs during the first 4 years of the 1980s. That at a time when the price of oil averaged a little over $30 per barrel.
Today's Rig Boom
The table below illustrates the growth of the rig fleet over the next four years and when the new rigs are scheduled to become available.
Then vs. Now
Overall, the industry is investing less in inflation-adjusted terms, than it did during the boom of the early '80s. This makes sense, given that today's oil prices in the $60 - $70 range still remain below the $80 - $100 inflation-adjusted price range that dominated from 1979 to 1982.
However, on a per rig basis, a great deal more is being spent now than 25 years ago.
For instance. the cost for a new jackup rig has nearly quadrupled from $35 million to $135 million. When adjusted for inflation, the cost of a jackup built in 1980 would cost about $90 million today. The additional $45 million (50% increase) per rig can primarily be accounted for by the fact that today's jackups are capable of drilling in water depths more than 100 feet deeper (on average) than jackups built in the early '80s. And today's jackups can drill to depths over 30,000 feet, whereas rigs built in the early '80s reached only about 22,000 feet (on average).
Similarly, among floaters, the cost for a new rig today has increased more than 400% in real dollars, rising from a cost of about $83 million per floating rig to nearly $440 million per rig today. Again adjusting for inflation, the cost of 1980 floater would be about $210 million today. That leaves an additional $230 million per rig that must be accounted for in terms of increased capabilities and other factors. As with the jackups under construction, floaters capabilites have also increased greatly, with average water depths having increased four-fold from about 2,250 feet to over 9,000 feet, and drilling depths having also increased about 40%.
In terms of real dollars, a barrel of oil has basically doubled in value from it's early 1980s price. But the average cost to build a new MODU has more than quadrupled. Or looking at it another way (to remove the dollars and inflation), it cost about 1 million barrels of oil to build a jackup in the early 1980s whereas it costs about 2 million barrels of oil today. Thus, the value of the commodity that rigs are used to obtain is not keeping pace with cost of building new rigs to get at that commodity, even while the market is booming.
Unless oil prices push higher, it will become increasingly difficult to justify the addition of new more expensive rigs to fleet on par with the level of investment during the early '80s. And with the painful downturn that marked the mid-80s thru 2000, companies should rightfully be cautious about continuing to invest more dollars into the burgeoning rig fleet.
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