As the upstream investment has collapsed, the offshore rig market has been affected greatly, something that led to rationalisation and consolidation. Namely, the number of rigs operating under contract is under 200, which is down by one-third from the peak, Simon Flowers, Chairman and Chief Analyst, WoodMackenzie, informs.
For this reason, Mr. Flowers wonders if it is time to invest in this sector. Namely, he presents three reasons to invest in it, in order to help anyone interested.
1. Offshore projects investment outlook is looking better
The upstream industry has reduced costs, meaning that more new projects will come forward for FID. In fact, development drilling accounts for the majority off offshore wells and some other projects, can be half of the total capital expenditure.
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The other third of offshore wells drilled are exploration, with WoodMackenzie assuming stable spend at 2019 levels. However, it added that this might be conservative due to the sector’s return to profitability in the last couple of years.
Specifically momentum is gathering, as big projects are underway or close to FID in Guyana, Brazil, Angola, Norway, Australia, Senegal, Mozambique, India, China and the Black Sea.
2. Tight rig market
New rigs are coming onto the market, replacing retirals or leading lower spec rigs into cold stack. Utilisation rates for these rigs could increase from 70% that it is today to more than 90% in a course of four years.
3. The return of pricing power
Rates for new contracts are reducing, reaching the low levels of 2017. Increasing utilisation promises to grow rig rates.
Specifically, rates for the ‘Top 40’ rigs could double from US$200k/day to more than US$400k/day by 2022. Rates at these levels would drive profitability for rig owners.
There are risks to the outlook
Despite the positives, these do not come without risks. Namely, oil and gas companies are cautious to invest, as tight capital discipline has imposed difficult hurdle rates on new projects.
In addition, the increase in FIDs is in no small measure because of lower costs, including drilling costs.
Rig operators are desperate to get back to making money, but higher rig rates will in turn erode new project economics. The fear is that a sharp jump in rig rates might nip an investment recovery in the bud
Simon Flowers concludes.
