Weekly Offshore Rig Review: Going, going, gone from the GOM

Worldwide offshore rig utilization has held basically constant between 82% and 83% for most of the last month. However, for the first time in several weeks, utilization has ticked up slightly as two GOM jackups went on contract and one Venezuelan drill barge came off contract, for a net increase of one rig under contract.

Gulf of Mexico Utilization
To start 2006, we'll take a look at the world's largest offshore rig market, the U.S. Gulf of Mexico. At this time, there are 157 MODUs in the GOM, which includes jackups, semisubs, drillships and submersibles. That is more than twice as many rigs as the next largest regional fleet, the 75 rigs in the North Sea. And it is more than the North Sea and Persian Gulf combined. Of those 157 rigs, 114 are currently under contract for a utilization rate of 73%.

Looking at the jackup market in particular, which makes up the largest subsection of the GOM fleet, there are currently 112 jackups in the GOM. Compared to other regions, the GOM has nearly twice as many jackups as the Persian Gulf, with 66 jackups. Of those 112 jackups, only 78 are currently under contract, which translates to a 70% utilization rate.

Going, going, gone
The interesting thing about the Gulf of Mexico rig fleet is not its current size, but the fact that it is about to decline significantly. In the coming week, 3 Rowan 350' ILC jackups will be leaving the GOM to head to the Persian Gulf where long-term contracts with Saudi Aramco await them. Shortly thereafter, a fourth Rowan 300' ILC will be leaving the GOM to also go to work for Suadi Aramco in the Persian Gulf. Beyond that, a Noble 250' ILC and Diamond 300' ILC will be leaving the Gulf of Mexico for other areas of the world. So, within the next 5 to 6 weeks, the GOM jackups fleet will experience a drawdown of at least 6 rigs leaving for other areas.

In addition to rigs leaving, it is likely that at least two more jackup rigs will be officially retired in the wake of Hurricanes Katrina and Rita: the GSF High Island III (250' ILC) and the GSF Adriatic VII (328' ILC) are both now listed by the US Coast Guard as underwater obstructions. That's in addition to 5 jackups already retired because of the storms.

Effect on the Rig Fleet
In total, at least 8 jackups in the GOM are no longer going to be a part of the fleet, which amounts to a 7% decrease in the fleet size from its current level. The more noticeable change is within the high-end segment of the jackup market, namely 300'+ ILCs, of which there are currently 34 in the Gulf of Mexico. By the end of February, that number will have declined nearly 20% to 28 rigs, as at least 5 300'+ ILC will be leaving the region and one will likely be retired. At which point, the GOM will then be tied with Persian Gulf for the number of 300'+ ILCs.

When taken as a whole, the GOM jackup fleet will not be greatly affected by the lose of these rigs. Of all the world regions with at least 10 jackups, the US Gulf of Mexico has the lowest utilization rate of 70%, whereas the other 8 regions with 10+ jackups are averaging well over 90% utilization. Counterintuitively, though, the average day rate for GOM jackups is the second highest among these 9 regions, trailing only the North Sea with its more stringent standards.

But when looking specifically at the 300' ILCs, this subsegment is currently experiencing more than 90% utilization and one of the highest average day rates for any region, less than 1% below the average for similar jackups in the North Sea. So, to see 15% of the fleet leaving the region is rather shocking. This decrease in fleet size is likely to drive costs for high-end jackups in the GOM significantly higher, and we would not be surprised to see the average day rates for Gulf of Mexico 300'+ ILCs increase 30% to 50% this year to the mid-100s.

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