Weekly Offshore Rig Review: Semisub Demand Drivers

This week, worldwide offshore rig utilization moved up again and now stands at 83.7%. The total number of rigs not contracted did not change, as new rigs entered the fleet and immediately started contracts, thus driving up the number of contracted rigs and the overall fleet size.

In the last issue of the Weekly Offshore Rig Review, we looked at semisubmersible day rates. This week we will look at demand for semisubmersibles. Demand for semisubmersibles and drillships is volatile in this cyclical industry with demand rising an average of 30% from the low and falling 21% from the peak in each cycle of rig activity since 1990.

Semisub Demand Cycles
Rig demand, for all types of drilling rigs, tends to run in cycles that include a build-up of demand and increasing utilization, a peak in demand, and a period of contraction in demand. Each of these cycles begins when utilization reaches a low point and begins to increase again, and each cycle ends with a new low point. At the center of each cycle is the peak in rig demand.

Over the last 15 years, at the bottom of each semisubmersible demand cycle, the market has exhibited an interesting trend towards increased utilization. In August 1992 only 108 rigs were contracted. By the next low demand point in February 1994 110 rigs were drilling. In February 2000 the rig count only dropped to 112. Each time the lowest number of rigs contracted increased by two. However, the current cycle started from a low of 105 rigs contracted in January 2003 breaking the pattern.

High demand does not have any obvious pattern. 135 semis were contracted in 1990. The next peak was in October 1993 when 124 rigs were drilling. In November 1997 demand rose to 145 rigs under contract. 142 semis were contracted in October 2001. Last December 2005 there were 152 semisubmersibles contracted.

Key Demand Drivers
As with any complex market, there are a great many factors that drive demand for semisubmersible rigs. These can include uncontrollable acts of nature, specific actions taken by governments and individuals, ongoing development efforts, and a host of other actions. Some of the most important of these factors are outlined below.

Crude oil price's impact on semisubmersibles
Probably the single most important component in determining rig demand, particularly for deepwater rigs, is the price of oil. Oil prices have a large impact on semisubmersible demand and increases or decreases in the price of oil can signal changes in demand for semisubmersibles. Usually the effects of oil price changes are felt 8 to 9 months later. With the recent declines in oil prices over the last two months, it is possible that semisubmersible demand could be affected as soon as the second quarter of 2007.

Consumer’s impact on semisubmersibles
Consumers are an important driver of oil prices, and their demand for gasoline, heating oil, natural gas, and other petroleum products does much to drive world oil markets and rig markets, in turn. Consumer demand for gasoline has waned recently with gasoline prices over $3/gallon in the United States causing many consumers to find ways to minimize driving and reduce their gasoline consumption. Extreme temperatures also raise demand for hydrocarbons to be used in heating and cooling houses. Thus, the news that El Niño is back and bringing a warmer winter to North America and lower heating requirements is likely to have a downward impact on demand for semisubmersibles in the near term.

Large discoveries' impact on semisubmersibles
Major discoveries, such as the Jack well in the ultra-deep Gulf of Mexico, cause demand for semisubmersibles to increase. Development of the 3-15 billion barrels of oil reserves encountered by the Jack well is likely to require several semisubmersibles and/or drillships to spend many years at work in the region. Similarly, the joint Husky and CNOOC discovery of 5 TCF of natural gas south of Hong Kong will likely drive significant semisubmersible demand in the coming years. While these discoveries will affect the long term demand, the immediate impact is likely to be minimal.

Governments' impact on semisubmersibles
Governments can most markedly affect demand for semisubmersibles in two ways. The first is through their land management practices. By leasing more deepwater areas and making more room for exploration, governments can drive more demand for semisubs. A current example of this is the group of 50 blocks Nigeria is putting up for lease next month. Converesely, the lack of leases and closing of high potential areas, such as the North Slope, effectively reduces demand.

The second method that governments can employ to affect rig demand is taxation. Raising taxes, as the UK government did in the North Sea, obviously makes an area less attractive for drilling. Alternatively, the lack of or lowering of taxes can help to increase exploration, as evidenced by the US government's failure to implement a stronger tax regime on GOM deepwater leases.

Determining Demand
Putting all these parameters together to determine how many rigs will be drilling in the future requires searching through a lot of data. The RigOutlook model uses historical information on utilization, rig counts, and other factors to provide a systemic model that forecasts demand.

In March the RigOutlook model predicted there would be 19 semisubmersibles contracted in the Gulf of Mexico and 52 semisubmersibles contracted worldwide in September 2006. The June forecast was the same with 19 and 52 semisubmersibles predicted to be on contract in September 2006.

In actuality, for the month of September there were 19 deepwater semisubmersibles drilling in the GOM and 50 worldwide. Thus, both the three month and six month forecasts were within 4% of the actual number of rigs contracted.

Looking forward to 2007, the RigOutlook model is predicting that deepwater rig demand will remain strong throughout the year. At the same time, shallower water semisubs are likely to begin experiencing decreased demand beginning late this year or early 2007.

For More Information
For detailed predictions of future deepwater rig utilization, the new RigOutlook for Deepwater Demand provides in-depth analysis and mid-term forecasts for the drillship and semisubmersible fleet around the world, with specific focus on the Gulf of Mexico, North Sea, Brazil, West Africa, Southeast Asia, deepwater demand and other key segments. Based on a newly developed and very accurate analytical model, the market-by-market and worldwide rig utilization forecasts in this 48-page report present a heretofore unavailable look at future offshore rig activity. For more information about this report and other rig demand forecasts, please call +1-281-345-4040 or email tbeebe@rigzone.com.