Weekly Offshore Rig Review: Day Rate Decline?

Worldwide offshore rig utilization continued to move up for the third straight week, with a net total of 2 idle rigs landing new contracts and pushing utilization up to 83.7%.

A Different View of Day Rates
Over the course of the last 3 years, oil prices have climbed steadily higher from an average of price of about $23/barrel in 2002 to close to $70/barrel for most of this year so far. These high oil prices have helped to drive rig demand both on and offshore, creating one of the tightest offshore rig markets in history.

In trying to get a better handle on oil prices and day rates, we decided to perform some calculations to determine the average day rates for rigs over the last 10 years in terms of barrels of oil. So, instead of looking at a day rate as a dollar amount, we will be looking at how many barrels of oil the rig earned. In order to do so, we simply divide the average day rate by the average price of a barrel of oil thus removing the dollars from the equation. This provides an inflation-adjusted comparison of how much offshore rigs have been earning in light of the commodity that they are used to procure.

Day Rates on the Decline?
When you begin to look at how much offshore rigs have been earning in terms of barrels of oil, it quickly becomes apparent that on that basis, rigs are earning much less today than at any point in the last 10 years. The table below provides the average day rate on a year-by-year basis for the three primary offshore rig types (jackups, semis, and drillships) alongside the average price of a barrel of oil in that year and how the day rate works out in terms of barrels of oil.

Year Avg Day Rate Avg Oil Price Day Rate in Bbls
1996 $68,768 $20.46 3,361
1997 $99,663 $18.64 5,347
1998 $83,841 $11.91 7,040
1999 $45,732 $16.56 2,762
2000 $47,014 $27.39 1,716
2001 $67,045 $23.00 2,915
2002 $71,882 $22.81 3,151
2003 $69,221 $27.69 2,500
2004 $67,282 $37.66 1,787
2005 $75,073 $50.04 1,500
2006 $95,633 $67.00 1,427
Average $71,923 $29.38 3,046

The data above highlights the fact that 1998 was by far the best year for day rates in terms of barrels of oil. At that time, day rates were still holding on to higher levels attained due to higher oil prices in 1996-97, while at the same time the price of oil dropped to its lowest yearly average price since 1974. This divergence left rigs earning significantly more for a much less valuable resource than at any other time during the last 10 years.

Things turned around quickly in 1999 and 2000 with day rates dropping nearly in half from their 1998 levels, while at the same time the price of oil recovered significantly. This brought the average day rates in terms of barrels of oil back below the 10-year average.

Since that time, actual day rates have generally continued to rise, but they have not kept pace with the rapid increases in the price of oil. As such, even though average day rates (in dollars) are at their highest levels since 1997, rigs are earning less today (in terms of barrels of oil) than at any point in the last 10 years.

What's In Store?
Looking forward to 2007, it looks as if day rates will begin to catch up with the price of oil. At this point, 417 of 687 jackup, drillship, and semisub rigs, which is 61% of those rigs, have contracts for some portion of 2007, and the overall average day rate for those contracts is about $172,000. That average is nearly twice the average day rates earned so far in 2006. Since the Energy Information Administration has predicted oil prices to remain near $68 per barrel for the rest of 2006 and 2007, the average day rate in terms of barrels of oil should rise to about 2,539 barrels. That is nearly 80% higher than the current day rate in barrels, but still nearly 17% below the 10-year average.

For more information about the future of rig utilization and day rates, contact us about our new suite of RigOutlook reports. Just call +1-281-345-4040 ext. 11 or email dkent@rigzone.com.