Analysis: Do Oil Prices Affect Floating Rig Contracts?

The price of oil is starting to slowly recover from its recent downhill slide. Many analysts believe that the bottom of the valley has been reached, and that the industry will recover to a more appropriate price per barrel over 2009 and onward. Nonetheless, the petroleum market has been historically cyclical, with multiple peaks and valleys along the way.

Comparing the price of NYMEX crude to dayrates, contract lengths and number of contracts awarded to floating rigs worldwide, a clear relationship is observed through these highs and lows.

Drillship and Semisub Dayrates

The graph below compares the price of NYMEX crude to dayrates for all floating rigs worldwide from January 2004 through March 2009. The dayrates included in this analysis are an average of dayrates for new contracts signed each month.

Starting at just under $37 a barrel in 2004, the price of crude rose steadily through mid-2006. The first big peak observed in crude prices occurs in the summer of 2006, resulting from the Israel-Hezbollah war in Southern Lebanon and the coinciding Iranian tensions. This rally is mirrored in floating rig dayrates, where average dayrates for semisubs and drillships start at just over $100,000 at the start of 2004, rallying through to an average high of nearly $408,000/day in February of 2007. The peak in dayrates here were experienced about six months after the peak in crude prices.

After a slight dip, oil prices start to rise again and spike to a new high in the summer of 2008 to more than $133 a barrel, then prices dwindled rapidly over the next several months. Again, the average dayrates for floaters mirror the price of crude, peaking at $470,000 in November 2008, just four months after the peak in oil prices.

This slight lag in response to the price of crude is caused by the longer length of contracts signed for this category of rigs, the amount of time in advance floating rigs are contracted, and an increasing demand for drilling rigs with deepwater capabilitites.

Contract Lengths for Floating Rigs

The graph below tracks the average length in days for new floater contracts signed in each month on a worldwide-basis, starting in January 2004 through March 2009.


Average Number of Semis and Drillships Contracted


As depicted in the above graph, there are two obvious peaks in the amount of time contracted once in mid-2005 and again in early 2008, parallelling increasing crude prices at the time. Moreover, there was a marked increase observed on contract lengths for floaters starting in early 2005 through late 2008. This trend in contracted time coincides with a overall rally in oil prices during the same time period.

The increase in oil prices throughout this span of time helped to open up new areas of exploration and development, making previously under-explored deepwater regions economically feasible. This increased demand for the limited number of floating rigs worldwide and drove operators to sign longer contracts to ensure that operators had available rig time when they were ready to begin deepwater projects.

Further solidifying the relationship between the price of crude and contract lengths for semisubs and drillships, the noticeable drop in contract length in 2009 replicates the plunge in oil prices experienced over the same time period.

Contracts Awarded to Floating Rigs

The graph below depicts the number of contracts awarded on a worldwide basis to floating rigs from the start of 2004 through March 2009.


Number of Floating Rigs Contracted


Although the graph above does not depict a similar rise as oil prices over the time period, it does portray that crude prices greatly affected the number of floating rigs contracted. While the average price per barrel of crude was $31 in 2003, that number rose considerably through 2004 and 2005. In turn, the number of floating rigs contracted spiked during this time period.

However, the number of floating rigs contracted did not continue to grow due to rig availability, as mentioned in the previous section. On the other hand, this greatly influenced the latest rig building boom that begain in 2005.

Future of Floating Rigs

The price of oil has clearly affected the worldwide floating rig market, including this segment's dayrates, contract lengths and number of contracts awarded. Additionally, the number of floating rigs in the market has seen an obvious increase from 146 in 2004 to 193 in 2008. Furthermore, there are currently 88 newbuild floating rigs expected to be delivered after January 2009, with the majority of these rigs already holding contracts. However, the combination of today's lower price of oil and a larger fleet of floating rigs is expected to contribute to a leveling off of dayrates, or possibly a decline.


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