Analysis: How Crude Prices Relate to Jackups
While the price of oil adjusts from the industry's biggest rally, and subsequent fall, myriad aspects of the petroleum sector amend as well. Concentrating on NYMEX crude prices from the start of 2004 through March 2009, this analysis focuses on how the average dayrate, contract length and number of contracts awarded the worldwide jackup fleet are related to the price of oil.
The chart below eximines the monthly average price of NYMEX light sweet crude alongside the average dayrates for all jackup contracts awarded during each month. The dayrates included are only for newly contracted rigs, and do not include dayrates on existing contracts.
The summer of 2006 saw a crest in oil prices due to the Israel-Hezbollah war in Southern Lebanon and the resulting Iranian tensions. As depicted in the above graph, the major peak in jackup dayrates occurred in mid-2006, alongside the 2006 spike in oil prices.
In addition, the international jackup fleet began to grow in 2006 as newly built rigs were coming out of the shipyards and into the market. In fact, from December 2005 to December 2006 alone, the number of jackups working increased by seven, from 391 to 398 jackups. As the jackup fleet has continued to grow, the increased supply of jackups has stymied average jackup dayrates, despite the crude price rally through the summer of 2008.
Contracts Awarded on Jackups
The graph below tracks the number of contracts awarded to the worldwide jackup fleet from January 2004 through March 2009.
As portrayed in the graph above, the number of contracts awarded steadily increased from 2004 to 2005. As the price of oil rose from $31 a barrel in 2003 to more than $59 by the close of 2005, there was a corresponding increase in the number of jackup contracts awarded during that time period. Multiple times during late 2004 through 2005, as many as 80 or nearly 100 contracts were awarded in a month.
Moving forward, several strong hurricane seasons in the Gulf of Mexico have had an affect on the jackup supply. Several jackups were destroyed and had to be declared as a total loss. Traditionally, the Gulf of Mexico has been a market leader in the number of jackups working in its waters. These events, along with decreases in contract duration, have led drilling contractors to move their rigs to other regions. While the Gulf of Mexico remains an important region for jackups, demand is on the decline.
Despite this decline in demand for the Gulf of Mexico, and thus the number of contracts being awarded to jackups worldwide, the jackup market still saw a marked increase in the number of contracts being awarded in mid-2008, mirroring the last major rally in oil prices.
Contract Length for Jackups
The graph below depicts the average length in days for new jackup contracts signed each month on a worldwide basis, starting from January 2004 through March 2009.
As seen in the graph above, the average number of days contracted has remained relatively steady for jackups over the five-year time frame. The average length of jackup contracts increased over 2004 and 2005, coinciding with increasing oil prices. In 2006 through 2007, the average number of days contracted remained steady with a higher number of contracts being awarded than in the two previous years. Nearing the end of 2007 and through 2008, contract lengths shortened, contradicting the price of crude at the time.
The Future of the Jackup Market
While there are obvious connections between the price of crude and the worldwide jackup market, the relationship is not always clear. A primary reason for the weakening of the relationship between jackup dayrates and oil prices is the growth in the size of the jackup fleet combined with a slightly stagnant level of demand. While floating rigs, particularly those capable of drilling in ultra-deepwater, have seen steadily growing demand, the jackup market has been relatively subdued as demand for shallower water rigs has not kept pace with deepwater drilling demand.
Nonetheless, jackups are an integral part of the offshore rig fleet, and they will continue to hold a strong segment of the market. Many of these rigs have been specially equipped to work in harsh conditions, such as the North Sea. Additionally, if new waters are opened up along US shorelines, as drilling in the arctic becomes more of a reality, and while development grows in historically less-active areas, such as Asia Pacific, the demand for jackups will continue to increase.
From the start of 2004 through the close of March 2009, the number of jackups worldwide increased from 387 to 441 rigs. In fact, the current fleet of jackups is expected to grow even more, with 63 jackups scheduled to be delivered after the start of 2009. Even so, this combination of a larger jackup fleet with the current lower prices of crude points to a leveling off of dayrates, or even more declines.
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