Weekly Offshore Rig Review: North Sea Scrutiny

Over the last two weeks, a spate of small safety incidents has turned some of the industry's attention to the North Sea. First, on Sunday, November 25th, a fire on the Thistle Alpha platform caused the evacuation of 116 crew members, all of whom returned safely by Monday. Then, on Tuesday, November 27th, a small fire broke out, this time on Shell's North Cormorant platform. The incident was quickly contained and no evacuation was necessary. Most recently, on Tuesday, December 4th, a fire occurred on the Songa Dee semisubmersible drilling rig at StatoilHydro's Troll field. While these incidents are unrelated, their timing has drawn attention to the region.

In this week's offshore rig review, we too will turn our attention to the North Sea to examine recent offshore rig utilization and contract trends. Starting with the Songa Dee, which experienced the fire earlier this week, we'll look at utilization and day rates for key rig types in the region.

The Songa Dee started working for Norsk Hydro in December 2005 at a day rate of $155,000, and the rig has been drilling around the Troll field for the last two years. When the contract began, its $155,000 day rate was 16% above the average day rate at the time for semisubs working in the North Sea. Over the course of the last two years, average semisub day rates in the North Sea have more than doubled from $133,446 in December 2005 to $292,309 right now. As such, the Songa Dee has moved from earning an above-average day rate to a below-average one.

Looking at North Sea semisubs more broadly, this group of rigs accounts for the largest segment of the North Sea mobile offshore rig fleet (including jackups, semis, and drillships) with its 39 rigs amounting to 51% of the 76 rigs in the region as of December 6th. Of these 39 semis, 37 are currently contracted for a 95% utilization rate. That utilization level is at the very peak of semisub utilization rates for the North Sea, which have increased steadily over the last four years from less than 60% in late 2003.

While utilization rates have risen, day rates have not been left behind. During the four year period that saw utilization rates climb so much, day rates have also soared. From an average of about $90,000 in December 2003, North Sea semisub day rates have more than tripled to $292,309 for December 2007. As recently as April 2006, semisubs in the North Sea were earning as little as $50,000 day rates, but in January 2008, the lowest day rate set to be paid is $155,000.

Looking forward to 2008, day rates for North Sea semisubs are set to continue their strong upward trend. Currently, 80% of the semis in the North Sea are contracted for work in December 2008, and the average day rates for those contracts in $357,521, more than 20% higher than current rates. With such a tight market and only a handful of rigs available for new contracts in 2008, rates for new contracts are likely to stay high and push that average up as the year moves forward.

In the North Sea, jackup rigs account for 47% of the mobile offshore rig fleet and represent a very important segment of the market that is only slightly smaller than the semisub fleet. Of the 36 jackups that are currently in the North Sea, 34 are under contract for an overall utilization rate of 94%, on par with the semisub fleet utilization rate. Unlike the semisub fleet, which has seen utilization rates climbing steadily over the last 4 years, the North Sea jackup fleet has maintained consistently high utilization levels going back more than 15 years. Since 1994, when the North Sea jackup fleet size stabilized between 35 and 40 rigs, utilization has only dropped below 80% for two periods of time: from February 1999 to May 2000 and again from March to June 2004.

While North Sea jackup utilization rates have been quite steady, day rates have been very much on the rise over the last three years. After rising steadily over the course of 2001 and 2002 and then dipping back down in 2003, rates held fairly steady in the $60,000 to $70,000 range from mid 2003 to early 2005. The second quarter of 2005 marked a turning point when North Sea jackup day rates began climbing from an average of about $70,000. Within a year, by March 2006, rates had risen just over 60%. After two years, by March 2007, day rates had more than doubled from their April 2005 level, averaging $170,912 in April 2007.

While day rates continued to climb through the rest of 2007, things seem to be cooling off at this point. The December 2007 average day rate is off almost 3% from November, which is the first month-to-month decrease since a 0.9% dip in April 2006 which was followed by steady increases. Looking forward to next year, jackup day rates in December 2008 look to be nearly 20% lower than current rates. With 58% of jackups already contracted for that time period, there is not a lot of free capacity to influence that average. At the same time there are enough free rigs to avoid creating a very tight market that would push day rates up. Plus, with the glut of newbuild jackups that will be available next year, there will potentially be several new rigs entering the North Sea and little pressure for rigs to leave for other regions. All of these factors look to combine to create a probable weakening in North Sea jackup day rates in the coming year.

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