Rystad Energy analysts forecast a historical high of floater retirements

Rystad Energy’s latest research indicates that 88 units within the floater market will have to be taken out between 2015 and 2017, making it the largest ever retirement cycle in the history of offshore drilling.

Forecasts for lower drilling activity

Despite an oil price stabilisation around US$65/bbl over the past quarter, E&P companies are still cautious to commit to new drilling activities and capital expenditure offshore. As a consequence of lower activity from E&P companies, Rystad Energy analysts expect floater drilling demand to fall from 2014 levels of 262 units to 220 units in 2016. The expected demand reduction has contributed to increased oversupply in the floater market and we have already seen increased attrition activity from rig owners in response to this development. Analysts do see the need for further attrition to close the gap between supply and expected floater demand. Hence, the key question is; how much retirement activity is necessary over the next years to balance the floater market?

Floater market

Over the period of 2015-2017, the floater market awaits an influx of 64 new units of which 24 units are scheduled for delivery in 2015, 22 in 2016 and 18 in 2017. Out of the 24 floaters with expected delivery in 2015, 10 units have already been delivered from the yards. As a first response to the declining demand outlook, it is clear rig owners are delaying delivery dates for their newbuilds. Further delivery delays are likely and it is likely that units scheduled for delivery in 2015 and 2016 being pushed 6 - 12 months or further out in time depending on contractual terms between rig owners and yards.

Fleet growth in the floater market in 2016 and 2017

However, assuming no further delivery delays, the scheduled delivery plan will result in a fleet growth in the floater market of 5% in 2016 and 7% in 2017. While the floater supply is bound for an increase, the demand is set to decrease over the next years by -10% in 2015 and another -7% in 2016. The floater demand is expected to reach a floor in 2016 and increase again by 8% from 2016-2017. With demand and supply pointing in different directions the result will be an oversupply of between 80 and 120 units each year over the period.

Given the supply growth and demand decline, how many rigs need to be retired over the next years to reach equilibrium? Looking back on historical gross utilisation numbers, there is an average level of 83% over the last 10 years. Applying this historical utilisation rate to expected demand numbers in 2015 - 2017, there will be a need to retire around 88 units in total over the next three years to balance demand and supply. Over the last six months Rystad Energy has seen rig owners responding to the poor market outlook by retiring 37* units, with 18 of the 37 units retired in 2015. There is, however, a need to see another 31 rigs retired in 2015 to balance the market at an 83% gross utilisation level, which will lead to record high levels with 49 units retired in one year. In 2016, rig owners have to retire an additional 36 units to balance at 83% gross utilisation in the bottom year for floater demand. With demand expected to increase again in 2017 only a few additional units need to be retired to balance the market.

Adjusting the market imbalance

With increased retirements, rig owners will be able to adjust the market imbalance over the next three years. However, for this adjustment to happen the floater market will have to go through the largest retirement cycle in the history of offshore drilling with 88 units taken out from 2015 - 2017. Last time the industry saw such a large retirement cycle was after the oil crisis in 1985.

Adapted from press release by Cecilia Rehn

Published on 16/06/2015

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