The global deepwater rig market, which has drawn the attention of Wall Street because of recent sharp declines in bids and dayrates, could see higher demand and rates by 2016 and 2017, analysts said.
New construction in the past few years has led a number of semisubmersibles and drillships starting to debut in the market at the same time that demand has weakened, largely because of the rising costs of oil services. That was the message delivered earlier this month at IHS CERAWeek in Houston, when Chevron CEO John Watson cited a fivefold increase in offshore rig costs in the last decade.
These factors have led to a notable slide in current dayrate bids to $400,000 or below for highly capable floating semisubmersibles that can work in water depths of 10,000-12,000 feet. That class of rigs was getting close to $500,000/day or above last year, International Strategy & Investment Group analyst Jud Bailey said in a recent report.
"In the offshore market, even the most bearish investors are surprised at the magnitude and pace of the dayrate declines in the deepwater and ultra-deepwater segments," Bailey said.
In his weekly video to investors on Friday, Bailey said deepwater costs "are too high. ... You're seeing a huge transition" to development activity, where oil companies, particularly majors, are focusing less on exploration than gearing up to produce existing discoveries.
In recent years, the global deepwater rig market has gone from about 70% of the fleet doing exploration to about 40%, he said.
Bailey, who for the last few weeks has hammered hard on the theme of a more severe slump in the deepwater rig sector than many had predicted, now said ISI has "dialed back" expectations for floating rig demand growth for 2014. This year, ISI expects demand to number only seven incremental rigs, instead of the nearly 25 rigs predicted earlier and for 2015 it expects demand growth of 13 incremental rigs.
By comparison, floating rig demand grew by about 10 rigs in 2013, the analyst said.
"We're anticipating a little bit of a pickup in 2015, but to be honest, I'm not even sure we'll see that [amount]," said Bailey.
While ISI's projected decreases appear steep, many other forecasters are talking about how soft the market is if not actually putting raw numbers behind it.
In his own weekly look at the oil services sector, Credit Suisse analyst Jim Wicklund late last week said deepwater rigs have "come under increased pressure" driven by a "perfect storm" of cheap capital and shipyards "hungry for work" that have spurred more newbuilds. But he also noted that supply is not the only issue -- demand also has slowed.
"Years of incredibly cheap and attractive financing and new shipyards have resulted in a lot more rigs on the water and under construction, just as the majors' capex growth has slowed" due to deferral of projects, Wicklund said. "Today it is hitting the deepwater market and in a year or so, we expect it to hit the [shallow-water] jackup market."
He said there is a "shift away" from deepwater to onshore unconventional plays which offer shorter turnaround times and less exploration risk.
Moreover, "according to the rig companies, bid requests are down as is requested duration" of potential contracts, Wicklund said, adding that "the deepwater has gotten so expensive, it is now the second-highest marginal cost oil behind oil sands." It "is not a good place to be when onshore is getting cheaper."
UK energy research and consultants Douglas-Westwood is forecasting a deepwater spending surge starting in 2016 .
Douglas-Westwood said in a summary of a new report released Thursday that it has identified a "temporary trough" in global expenditure in 2015 "primarily driven by delays to delivery of floating, production and storage units in Latin America," and added that African projects "have also experienced delays, resulting in a surge in capex from 2016 onwards."
"Deepwater expenditure is expected to increase by 130%, compared to the preceding five-year period, totaling $260 billion from 2014 to 2018," Douglas-Westwood said. "As production from mature basins onshore and in shallow water declines, development of deepwater reserves has become increasingly vital. Robust oil prices support investment in deepwater developments -- the sustained high oil prices over the past few years have increased confidence in the sector."
Two things to look for in seeking signs of a recovery are evidence that dayrates are stabilizing and majors are "starting to "green-light [new] projects again," said Bailey.
"If you think of these things in multi-year cycles ... by 2016-2017 you'll probably see a bit of recovery in the exploration side of the business, combined with lower service costs and perhaps higher commodity prices," he said.
