Weekly Offshore Rig Review: Riding the Cycle
Over the last two weeks, we have examined the expected utilization levels for jackups and floating rigs over the next four months. This week, we'll take a broader look at the long term future of the worldwide offshore and land rig fleets.
In order to provide rig utilization forecasts, our modeling team has created the RigOutlook projection model. The model's purpose is to determine the point in time at which the market will see peak demands for the particular rig types being studied and determine the length of each demand cycle.
These utilization cycles are key to the RigOutlook model, as the system utilizes historical information on rig utilization, fleet size, day rates and other factors to uncover and model the industry dynamics. These cycles of rig demand and the factors that affect that demand over time can be projected into the future to predict likely rig demand for the next ten years.
Rig Utilization Cycles
Each rig utilization cycle is defined as the period of time from a nadir, or low point, in utilization through a peak in utilization and back down to another low point. Thus, each cycle contains a period of expansion, which is the first portion of the cycle from the low point to the peak in utilization, and a period of contraction, which begins with the peak in utilization and ends at the next low point in utilization. The expansion period is generally the longer portion of the cycle, accounting for about 55% of the length of the cycle over the past 16 years.
The nature of the oil and gas industry, with its tendency towards boom and bust cycles, tends to enforce this pattern. As commodity prices rise, so does rig utilization. Increased rig utilization means more discoveries and increased production. Increased production increases supplies, which in turn leads to lower prices. When prices fall, rig utilization begins to fall as well. The cycles within each rig type vary somewhat in their relationship to the overall market and specific commodities, but in general, rig utilization follows the cycles in oil and natural gas prices with a six to twelve month lag time.
The Current Utilization Cycle
Currently, the worldwide rig market (including jackups, semisubs, drillships, and land rigs) is in the midst of one of its longest cycles ever seen, and certainly the longest cycle in the last twenty years. The current utilization cycle began in mid-2002, when utilization began rising from a low point of less than 2,000 contracted rigs. As such, it has been ongoing for more than 50 months, and it has yet to reach its peak. The current cycle is forecast to last for more than 30 more months before reaching a new low point in utilization.
For the period from 1990 to 2006, which included three complete rig utilization cycles, the average cycle length was 40 months. That is more than a year shorter than the ongoing expansion phase of the current cycle, and less than half the overall predicted length of the current cycle. The extended length of the current cycle is attributable to a variety of factors including strong growth in oil demand from India and China, continued political uncertainty in the Middle East and Africa, and the growing involvement of large investors in the commodities markets, among other factors. All of these factors have contributed to historically high oil prices which have driven demand for both offshore and land rigs.
Future Rig Utilization Cycles
In the coming years, rig utilization cycles are expected to return to the shorter cycles seen before this current period. Expansion periods will be significantly shorter, lasting about two years, as opposed to the current 5 year expansion. However, utilization will likely be starting from a much higher point than it did during this current cycle. As mentioned earlier, the current utilization expansion started at a time when about 2,000 rigs were contracted. In the next ten years, utilization is not predicted to fall below 2,500 rigs at the lowest points in the utilization cycles. Thus, there will not be as much room for growth in future cycles because the available pool of non-contracted rigs will be much smaller than it was in 2002 when the current cycle began.
Get the Details
For more information and detailed long-term predictions of utilization over the next 10 years for each type of rig, contact us today about the RigOutlook Worldwide Long Term Rig Demand report. This 35 page report provides an overview of expected rig utilization for jackups, semisubmersibles, drillships, and land rigs that details the future utilization cycles for each type of rig through 2016. This predictive model has proven to be highly accurate over the last six months, with its predictions falling within less than 0.5% margin of error for predictions created in March for the rest of this year. So, if you want to know when rig utilization will peak and fall, you can trust RigOutlook for an accurate prediction. Contact Tony Beebe via email at firstname.lastname@example.org or call our offices at +1-281-345-4040 for details on the RigOutlook reports and how you can subscribe.