The oversupply of jackup rigs is being exacerbated by the large amount of rigs under construction, but once these rigs are delivered, rig supply may normalize.
By David Carter Shinn (email@example.com); Dec. 14th, 2016
As a jackup rig owner, the prospect of another 106 newbuild units coming into a market with record oversupply and little chance of a material demand increase in the short to medium term could be seen as discouraging. In such an environment, it's not surprising to hear hopeful predictions like: “but a lot of those newbuilds will never be delivered”. While a (small) few of these rigs may not reach delivery, over 90% probably will – and that won’t necessarily be a bad thing for the jackup market.
Commercial issues will affect deliveries more than technical issues
Two factors will affect jackup deliveries: technical and commercial. Yard competence and poor owner project management will, in some cases, lead to technical failures. Will these failures be so catastrophic that they will permanently keep rigs from being delivered? Our view is that they won't. Over 95% of the jackups under construction are being built to recognized class rules under class supervision. While there are (and will continue to be) technical issues with some rigs, the majority will be resolved.
As an example, take the Ocean Warwick (delivered in 1971). The rig suffered critical structural and systems damage during Hurricane Katrina in 2005, but was reactivated (now Nabors 660) and was until recently working for Saudi Aramco. If technical challenges like these can be overcome, then so can those which certain shipyards and owners may be dealing with now. The main risk of newbuild non-deliveries for technical reasons lies with yards who have never built jackups before, but these yards account for less than 10% of the rigs under construction.
Most technical issues can be fixed
At the same time, approximately 50 of the jackups under construction are ready for delivery. Technical risk for these rigs, therefore, is virtually nonexistent. Rigs which have had (or will have) deliveries deferred for a year or more may encounter problems from poor preservation, but these issues are unlikely to stop deliveries from ever happening.
What is (and will continue to be) keeping the majority of jackups from being delivered is a situation which is driven solely by commercial issues. The market is now left with 106 jackups, the majority without contracts, which owners do not want – or are unable – to take delivery of until the market improves. Yards are willing to fund (or share) delivery deferral and stacking costs because they don’t want to have to sell the rigs at loss. Too much capital has already been invested to scrap these projects, and they aren’t going to disappear; they will simply be delayed.
Deliveries may be what’s needed to balance the jackup market
We have made statements on non-deliveries before. Following our report, From delivery to stacking, we noted that of the current 106 jackup rigs under construction or on order, about 10 of these might never be delivered. This may be less extreme than other views, but we base our outlook on the belief that the vast majority of construction projects will be delivered and that commercial issues are the key contributor to delivery delays.
In our report, we also noted that there is an oversupply of 221 jackups. Although rigs under construction account for nearly 50% of the oversupply, their delivery may be what the market needs to initiate the en masse scrapping required to lead to a supply balance. While yards and owners maintain a holding pattern on their newbuild projects, owners of older rigs have less motivation to scrap. When the jackup market begins to show signs of recovery, however, newbuild deliveries will start. As newer, higher quality assets will be better positioned for demand, the new supply in the market could finally prompt older rigs to be taken out of the market.