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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Oil Price Rally Revives Offshore Oil Sector

The offshore drilling segment of the energy industry was among the hardest hit by the 2014 downturn. Many went under, and those that did survive were on their last legs when prices began to climb back up. Now, things are looking up and the sector could see a full recovery by 2020.

Reuters recalls in a recent story how offshore drilling rigs fetched around US$180,000 per day during the worst of the downturn, from as much as half a million dollars before. Now, according to offshore drilling giant Transocean, it is raking in US$300,000 per day for its specialized vessels deployed in the North Sea.

That should come as no surprise: just like oilfield service providers, offshore drillers first suffered more than producers and are now reaping the benefits of a recovering industry. But the future of offshore drillers was always less certain than that of the oilfield service sector as a whole. The reason: offshore drilling is as a rule costlier than onshore exploration and production, especially in deep waters. In a lower-for-longer environment, E&Ps are naturally opting for cheaper resources. Yet this is by no means the whole picture.

There’s still a future for offshore oil, and it’s not too bleak; in fact, in parts of the world, it’s rather bright, with these parts including Brazil, parts of South America, and, perhaps somewhat surprisingly given its legacy status, the North Sea. Supermajors are in a rush to expand their footprint in these hot spots and they will need rigs to explore them and pump the crude and gas. The drilling sector is gearing up for higher demand.

In the second quarter of last year, offshore drillers retired the most rigs over a three-month period, Bloomberg reported at the time, citing an energy advisory firm. Now, IHS Markit has forecast that in 2020, global drilling rig demand will hit 521 on average, versus its estimate for this year, which is for 453 rigs. Related: China’s CNPC Boosts Global Oil, Gas Ties

Yet, the industry has changed, and these changes will have a lasting effect. Back in 2013, crude was riding the demand growth wave, trading at over $100 a barrel, and everyone was in a rush to drill—anywhere. The new generation of offshore rigs were designed for depths of as much as 10,000 feet, but they weren’t designed for long-term idling. Now many of these rigs have been idled for two or more years and besides, demand is shifting to smaller, more flexible and, ultimately, cheaper vessels, as producers seek to extend the life of already producing fields and lower the costs of new production.

No wonder then that offshore drillers are consolidating. The biggest deal so far has been Transocean’s acquisition of Ocean Rig for US$2.7 billion in cash and stock. This was the second substantial deal for Transocean since the start of the year. Earlier, it bought Norwegian Songa Offshore for US$1.1 billion.

But Transocean is not the only buyer. UK-based Ensco also made a couple of large deals: in 2017, it took over Atwood Oceanics for US$1.76 billion and earlier this month it inked a deal with smaller sector player Rowan Cos worth US$2.38 billion. The deal includes Rowan’s interest in a joint venture with Saudi Aramco.

Demand for drilling rigs is unquestionably set for a rise. Big Oil is actively working on its reserves replacement, and energy independents are eager for a piece of the offshore pie while it lasts. The recent consolidation could continue, allowing the survivors to better position themselves for this rising demand. It would also help them to take better advantage of the automation trends in the industry: the robots are coming to offshore rigs.

By Irina Slav for Oilprice.com

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