Ultra-deepwater not really taking the plunge

Ultra-deepwater not really taking the plunge
The ultra-deepwater segment experienced a dramatic emergence into the offshore drilling market. Now, it's oversupplied with rigs that don't even operate near their designed water depths. Their future looks challenging.

Up until the year 2000, only 18 ultra-deepwater floaters existed.  After that, fleet expansion took off as a result of high expectations for a surge in demand for drilling at ultra-deep water depths (i.e., greater than 7,500ft).  Out of the fleet of 192 UDW rigs, 116 (or 60%) were built after 2011. 

 

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But demand for floaters never picked up enough to match supply.  Before many of the newbuild UDW rigs were delivered, rig utilization plummeted from its peak.  Current total floater utilization (drillships and semisubmersibles) is at an historic low of around 40% (ex. rigs under construction) while there are a massive amount of newbuild UDW rigs nearly complete at shipyards in Korea or preservation stacked by their owners. 

 

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Out of the 63 stacked drillships, 53 are UDW units, and 19 more are under construction. 

 

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Demand for floaters will return

Yes, drilling demand will pick up again when operators increase capital expenditures.  At the same time, there are around 30 floaters which are older than 25 years of age.  Over 70 floaters have been scrapped already, and more will come.  This will have a double effect on utilization, and owners of newer, efficient assets will be well placed for the recovery. 

 

But there’s still a problem for the UDW drillship segment

What’s interesting is that the UDW rigs that are working aren’t even working at water depths near their capabilities.   Although drilling demand is low, and deepwater projects have been put on hold, prospects for UDW drilling have never really materialized.  Currently, 68% of all floaters are working at water depths of 5,000ft of water depth or less. 

 

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Looking at only UDW rigs, nearly 50% of all drilling is at water depths of 5,000ft or less of water, well below the 10–12,000ft capability of the UDW fleet. 

 

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Why are UDW rigs drilling in shallower waters?

Oil companies have focused on shallower fields due to cost cutting, but even at peak rig demand levels, very few wells have been drilled at 7,500ft and deeper water depths.  UDW drilling once was expensive, with dayrates up to around USD 600k/day, but what’s really held up UDW expansion is the field development costs (subsea systems and platforms, for example) compared to fields in shallower waters.  As UDW drilling dayrates have fallen under USD 200k/day, however, along with the fact that the midwater fleet is aged and not competitive enough anymore on dayrates, higher spec UDW rigs have been contracted for programs for which they aren’t really necessary. 

 

The future of UDW

The UDW fleet will be challenged in the future while the midwater segment retains focus and drilling demand increases in the new lower cost environment.  The extent of this depends on a few factors.  Harsh environment semis should see stronger demand than non-harsh UDW drillships (which make up the majority of the UDW fleet).  For drillship owners – until the midwater fleet is renewed – there will be a growing, albeit limited, number of opportunities at midwater depths (and fewer in deepwater and very few at UDW depths).  But the vast supply of newbuild UDW drillships will likely continue to experience a difficult, low dayrate, and underutilized market for the near to medium term. 

 

Image attribution: Main image by Adventures of KM&G-Morris under the Creative Commons 2.0 License. Graph data sources: IHS; Bassoe Offshore 

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