Weekly Offshore Rig Review: Jackup Turning Point

In the previous edition of the Weekly Offshore Rig Review, we examined the future demand for deepwater semisubmersibles and how fleet growth is affecting demand. This week, we continue to provide predictive data and analysis from our RigOutlook reports, this time focusing on the jackup market.

Factors Reshaping Jackup Demand
Over the course of the last few years, several new factors have been introduced into the overall jackup demand equation. These factors have been affecting demand moderately over the last two years or so, but they have the potential to significantly increase the demand outlook for the worldwide jackup fleet. These factors are:

  1. Deep Wells - Deep wells (those below 15,000 ft) and deep water jackup wells (those beyond 350 ft) are finally seeing a significant portion of the fleet equipped to efficiently drill in these areas.
  2. Natural Gas / LNG - Globally there is a push to switch to natural gas, and as demand for natural gas rises a higher percentage of wells will be for natural gas. Tied to this is the heightened awareness over environmental concerns that has led to recent calls for the reduction of emissions.
  3. New Project Economics - High oil prices have made many projects economical that once were shelved due to low prices. Some of these projects are smaller fields or are marginal in terms of daily output. This has resulted in an increase in oil wells being drilled which means increased jackup demand without a corresponding increase in consumers' short-term demand for oil.
  4. Regional Fleet Increases - Different regions of the world have been steadily increasing the fleet of jackups as part of a larger drive to increase production capacity. Of particular note are the Persian Gulf and Southeast Asia.
  5. An Aging Rig Fleet - Attrition in the fleet has averaged 3.9 jackups per year since 2000. Since more than half of the jackup fleet is older than 25 years, the original design life, it is not unreasonable to assume attrition will remain at 3.9 jackups per year. So, the 60 plus new jackups coming out of the shipyards in the next 3 years could be largely offset by attrition during the next 10 years.
Thanks to these five factors, there has been a steady increase in demand for jackups, with a significant push in late 2006 and early 2007. Assuming these factors continue to hold sway, the recent acceleration in jackup hiring is an early signal of a new operating environment where jackup demand will reach higher levels than ever before.

In this new environment, demand is expected to stabilize at 340-350 rigs contracted in 2007 and then pick up rapidly to hit a peak of around 390 rigs contracted in 2010 before dropping off steeply to a low of 340 rigs or lower. This is especially remarkable given that peak worldwide jackup demand has never exceeded 360 jackups in the past 20 years.

But Will They Stick?
While the factors that are driving jackup demand in a new direction have been in the works for years, they have yet to firmly take hold of the marketplace. There is still a significant possibility that these factors may not become realized.

One key area of concern is whether the investments now being made in deep wells will actually result in major new finds and production increases. These projects carry a high risk for oil companies as it is not known if large amounts of oil or gas can really be found in these areas. If a significant majority of them do not materialize as expected, many of the newer, high spec jackups will end up working on shallow wells that could be drilled by lower spec rigs, resulting in intense competition and cannibalization.

Another inhibiting factor is the huge level of investment needed worldwide in terms of liquefaction and re-gasification plants, transport equipment such as LNG tankers, pipelines and power plants or residential uses for gas. Given this financial commitment expected of many countries (most of which are in the developing world), it will be challenging to drive these LNG projects forward. Besides these financial hurdles, these major projects also face governmental and regulatory barriers that are harrying many potential projects. Bringing all of the pieces together is a like a very complex puzzle of capacity, timing and commitment. If one part of the supply chain is delayed there is much at risk.

And, as always, the potential for declining oil prices casts a shadow over any predictions. While oil prices are not likely to decline significantly in the coming years, if they do move markedly downward, some development projects will most likely be shelved and regional demand may also suffer.

If things do not play out well, and the jackup market reverts back to its earlier patterns, the demand for jackups is expected to decline through 2007 and 2008. Jackup demand is then expected to pick up again in 2009 (as was predicted in our earlier RigOutlook reports).

Critical Time
The next two years or so will be very critical in terms of determining the future direction of the jackup market. If deep discoveries become economical, LNG trends continue unabated, and oil prices remain high, the future of the jackup market will be brighter than ever. However, if these trends do not work out, the jackup market will return to its earlier patterns of demand. Only time will tell which direction the market is headed.

Want More Details? More Rig Types? More Forecasts?
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 2017. This predictive model has proven to be highly accurate over the last twelve 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. You can learn more at the RigLogix web site. Or 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.