Last week, COSCO Shipyard announced that it “sees no notable upturn in the global market any time soon” and will close three of its five offshore yards by 2020 to cut overcapacity. While prospects for building new jackups rigs over the medium term are virtually nonexistent, a more pressing problem for the Chinese yards is delivering the 65 jackups they already have.
But the problem isn’t just in China. Keppel FELS and PPL in Singapore are stuck with another 29 rigs which should (and, for the most part, could) have been delivered by now. Globally, there’s a total of 107 newbuild jackups waiting to enter a market which is already oversupplied by over 80 comparable rigs built post-2000 and by nearly 230 in the segment overall.
False hope for newbuild deliveries?
In most cases, owners are sitting with outstanding balances which are higher than the values of their rigs. Whether owners have funding to take delivery or not, they are deferring delivery as long as they can in an effort to wait for a market upturn. Yards and owners are caught in a closed loop: defer; wait; repeat.
Will it ever end? Not for the next two years at least. There’s a long list of reasons why, but here are a few of them:
- Jackup demand doesn’t appear to be picking up significantly. Existing contracts aren’t being replaced by new ones and limited tenders are being targeted by a high volume of competitors.
- “Hot”, delivered rigs will find work first as they are favored by oil companies due to their ability to start operations relatively quickly and are likely “proven” rigs.
- Many short term contracts are being offered which don’t support financing for owners to be able to take delivery of newbuild rigs.
- Oil companies are touting major efficiency improvements which will allow them to drill faster and cheaper. While the push for efficiency is good for owners of higher spec (i.e., more efficient) rigs, some of this efficiency will have an offsetting effect on rig demand.
- Old rigs aren’t leaving the market fast enough. Regions like India and some parts of the Middle East prefer older, and less expensive, jackups. But even if all 144 rigs built before 2000 suddenly disappeared, there would still be 196 new rigs to take their place – that leaves an oversupply of 52 rigs. And looking at the free dates for older rigs, less than 100 of these rigs will come off contract over the next two years.
Shipyards aren’t acting commercially
With the jackup market in its current state, it’s hard to understand the complacency of the yards. While yards have been very accommodative on agreeing to delivery deferrals, these efforts amount to sticking one’s head in the sand. Simply waiting for the market to undergo a material transformation not only in contracting activity, but in fleet supply (i.e., removal of old rigs) will only continue the long, self-destructive process that is already underway.
As such, one would think that yards would become more creative in finding solutions for their rigs. But we have yet to see any indications of proactive, commercially-focused solutions from yards (or owners) which could alleviate the situation and help apply some force to the gridlock.
What could these solutions be? Look for more on that in our next article.
Graph data: Bassoe Offshore, shipyards, and IHS; Image attribution: Main image is author's own.