Offshore focus: rig demand

As in other parts of the world, last year the offshore drilling rig market in the Middle East witnessed a dramatic decline in rig utilisation and hire day rates as a result of the global financial crisis.

Working utilisation (based on total regional supply) in the Middle East region, which is predominantly a jack-up market, fell from around 84 per cent in January 2009 to approximately 67 per cent at time of publication. This change is significant given that utilisation in the region has not dropped below 80 per cent since around mid-2001. At present, more than 30 of the 120 jack-up rigs located in the Middle East are idle without any future contracts.

Due to a large amount of availability and thus fierce competition for drilling contracts, daily rig hire rates have also softened considerably. For example, in the Persian Gulf, day rates for independent-leg, cantilever-type jack-up rigs rated for water depths of up to 91 msw (300 fsw) were around US$130,000 in the earlier part of 2009, but the year concluded with a contract at a rate of just $54,000 per day. Again, this drop signals a significant downturn in the market.

The past year has been a challenging one for most rig owners, and ODS-Petrodata’s forecasts for 2010 suggest that global jack-up rig supplies will continue to outstrip demand – which means continued strong competition for work and low day rates in most places. Some drilling contractors are cold-stacking units to help tighten up the active fleet, but more rigs will need to be mothballed to offset the large numbers of newbuilds to be delivered by shipyards in the coming years.

This year (and perhaps for some time yet) the Middle East is expected to maintain its position as the world’s largest market for jack-up rigs, having more than twice as many marketed units as its nearest competitor, the US Gulf of Mexico. And unlike areas such as Northwest Europe, Latin America and the Indian Ocean where jack-up rig demand is forecast to shrink in 2010 from 2009, the Middle East is predicted to see demand growth this year thanks to the South Pars and other Iranian projects, coupled with anticipated modest increases in the UAE, Oman and Bahrain.

However, the region’s top two jack-up rig users – Saudi Arabia and Qatar – could disappoint this year. After scaling back drilling programmes and releasing a substantial number of rigs in 2009, it remains to be seen if/when Saudi Aramco, the region’s largest jack-up rig operator, might restore its offshore fleet to previous levels. (The operator recently tendered for the provision of several jack-up rigs – an encouraging sign for drilling contractors.) Meanwhile, rig activity offshore Qatar, after a decade of growth, has begun to taper off as various projects reach completion; the country has put a freeze on further development of the enormous North Field and the moratorium is not likely to be lifted before 2014. These two countries have the capacity to greatly influence the market.

Drilling budgets will to some extent depend on commodity prices. Fewer offshore E&P projects are likely to be sanctioned with oil prices below $50/barrel. Some of the region’s influential figures have indicated that a price range of $70-80/barrel would be sufficient to sustain E&P activity. Rig utilisation data seems to support this; in the Middle East, jack-up utilisation started to drop in late 2008 when oil prices fell below $70/barrel but stabilised again during the second half of 2009 when prices rose above $70/barrel.

ODS-Petrodata Ltd is a world leader in providing offshore market news, data and research to the oil and gas industry. It is an international company with offices in Aberdeen, Houston, Oslo, Dubai and Singapore.