Out of the 105 jackup rigs under construction worldwide, 64 are at Chinese shipyards. In a market which is oversupplied by over 300 rigs, most of these newbuild projects have essentially been halted as owners and yards have agreed on delivery deferrals to buy time until market recovery. While shipyards wait anxiously for delivery payments by owners, they build up costs on assets that continue to stay at values less than original newbuild cost. These rigs are also being stacked with minimal maintenance which leads to deterioration of their condition over time and puts further pressure on their value.
Eventually, these jackups will be delivered. Established, solvent drilling contractors should be able to finance and take delivery of these rigs over time, but the problem for Chinese yards is that 42 of the 64 rigs under construction are owned by pure play, “asset-only” new entrants who speculated on jackup rigs during the newbuild boom. Now, yards and owners are in standstill while the Chinese government continues to provide subsidies and push for new inter-yard alliances and specialized projects to prevent further devastation to their shipbuilding industry.
How did this happen?
During the newbuild boom starting in 2011, Chinese yards were all too eager to offer owners with limited funding terms which required as little as a 10% (in some cases down to 1%) down payment to enter into a construction contract for a newbuild drilling rig, with the outstanding balance to be paid upon delivery. The subsequent order activity created a buildup of infrastructure and competence in the country which looked to overtake offshore shipbuilding rivals Singapore and Korea.
Fast forward to now: rig orders have dried up while jackup rig oversupply and lack of drilling contracts makes it undesirable (and virtually impossible) for speculative owners to get funding to take delivery of their rigs which have become negative equity investments with little prospect of recovering value in the near term. China is left with a large network of yards which need to find ways to survive.
What’s going to happen?
Chinese yards have so far been accommodative toward owners by allowing delivery extensions at little to no cost. The question is: how long they will continue to do this? Yards are reluctant to sell off newbuild rigs at distressed prices and book large losses, and new investors are not yet willing to take over rigs without significant discounts. Over time, however, we see the market reaching clearing levels at prices below, but toward the upper end of newbuild prices with new buyers acquiring rigs from original “new entrant” owners.
Will there be a shipyard crisis in China?
In short, there already is one, but it’s more discreet than Korea’s, for example. The major government-owned yards are on life support by subsidies and are taking cost cutting measures to ensure survival. While many private yards will suffer the same fate as their now-bankrupt peers, the majority of offshore rigs are being built at state-owned yards such as COSCO, China Merchants HI, DSIC, SWS, and ZPME, and we see these yards, backed by subsidies, holding out long enough to avoid a complete meltdown.
Data source: Graph data from IHS; Bassoe Offshore. Image attribution: Main image is author's own.