Weekly Offshore Rig Review: Jackup Change Up

Over the course of the next several years, the offshore jackup fleet will be changing significantly as 63 new jackups join the fleet by the end of 2009. That represents a 16% increase in the overall jackup fleet size. Of those 63 new jackups, only one rig is rated for less than 300' water depths (It is rated for 295' feet). As such, the higher specification, deeper water jackup fleet will be the main area of the fleet experiencing growth. It will be growing from its current size of 199 rigs to 261 rigs, which is a 31% increase in size over three years.

Even in the short term, the jackup fleet will be passing an important milestone. During the first quarter of 2007, the number of jackups rated for 300' or greater will exceed the number of jackups rated for less than 300' water depths. The number of jackups rated for 300' or greater has been growing steadily since the 1990s whereas the number of shallower water jackups has basically stagnated. Over the course of the last decade, ten times as many 300'+ WD jackups (30 rigs) have been delivered as shallower jackups (3 rigs). This trend has been accelerating over the last several years and will continue even more strongly through 2007 and 2008 when 49 300'+ jackups will be delivered compared to just one less-than-300ft jackup.

With so many new deeper water jackups joining the fleet in the coming years, the dynamics of the market are shifting, which will have long-term impacts on the marketability of the older, shallower jackups. Historically, 300'+ jackups have earned higher day rates and experienced higher utilization rates than shallower jackups. The deeper jackups have also experienced less variability in utilization during downturns.

Over the course of the last six years, jackups rated for less than 300' have made significant gains in both day rates and utilization levels when compared to the 300'+ jackups. The reasons for this change will be discussed below.

The table below outlines the utilization rates and average day rates for both the shallower (< 300' WD) and deeper (300'+) subsegments within the jackup fleet over the last six years. The utilization and day rates for each of these subsegments is compared in the corresponding ratio column. In the case of utilization, this is simply the shallow jackup utilization rate divided by the deeper jackup utilization rate. With day rates, the ratio represents the shallow jackup average day rate divided by the deeper jackup average date rate.

In both cases, the ratio is expected to be less than one because the shallower jackups experience lower levels of utilization and day rates than do the deeper jackups. If shallow and deeper jackups experienced the same utilization level or earned the same day rates, the ratio would be equal to one. So, the closer the ratio is to 1, the closer the utilization and day rates of the two groups of jackups.

Comparison of Jackup Water Depth Segments
2000 to 2006

Less Than 300' WD Jackups 300' + WD Jackups Ratios
Month Utilization Avg. Day Rate Utilization Avg. Day Rate Util. Ratio Day Rate Ratio
Oct. 2000 81% $31,775 93% $45,976 0.87 0.69
Oct. 2001 67% $43,111 87% $56,184 0.77 0.77
Oct. 2002 73% $37,572 92% $52,526 0.79 0.72
Oct. 2003 78% $36,014 92% $53,690 0.85 0.67
Oct. 2004 80% $40,222 91% $56,475 0.88 0.71
Oct. 2005 80% $53,581 94% $72,007 0.85 0.75
Oct. 2006 83% $91,812 92% $105,305 0.90 0.87
6-Yr Avg. 77% $45,865 92% $60,970 0.83 0.74

The day rate ratio has been appreciating since 2003, rising well above the six-year average and standing at 0.87 at this time. The average dayrate for less-than-300 ft in October 2006 is $91,812 and for greater-than-300 ft is $105,305. Although the day rate ratio is not expected to exceed 1, the fact that average dayrates are so close for both groups of rigs is a major change from historical trends and as such is very remarkable.

The main reason for this deviation from past behavior and the tightening of the day rate gap is the high level of demand for the deeper water jackups. The demand for jackups picked up in 2004 following the recession of 2001-03 but the supply of greater-than-300 ft jackups could not increase fast enough to meet that growing demand. As such, operators were forced to use shallower rigs when deeper jackups were not available, thus driving up demand, tightening the market and pushing day rates to historically high levels.

Looking forward, with the flood of new deeper water jackups entering the market, a few possibilities loom large. Most notably, we expect utilization rates for shallower water jackups to begin to drop off back to their 2002 levels near 70% as newbuilds begin to take work away from these older rigs. At the same time, overall jackup demand has been slowing over the last several months and is expected to decline during 2007, as per our forecasts. This confluence of increased jackup supply and declining jackup demand will almost certainly begin to push day rates lower by the end of 2007 or early 2008.

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 tbeebe@rigzone.com or call our offices at +1-281-345-4040 for details on the RigOutlook reports and how you can subscribe.