It is so depressing for drillers to be marketing and contracting drilling rigs during a downturn.
All you can do is run through your operational costs a hundred times to see how low you can bid. Back in year 2000 rates for jackups in South East Asia were around $22,000 a day and you agonized over whether you could raise your rate to $22,150 for your next offer but worried that this could mean losing the job even if you were the incumbent.
Ah, but the opposite is great fun, marketing in a rising market just after a downturn.
Between year 2000 and 2005 rates for jackups in South East Asia moved from that lowly $22,000 to $265,000 a day. How bold should I be? What can I get away with? It does of course require an insightful understanding of the market and an awareness of the intentions of your competition. It is also time for skulduggery and misinformation tinged by the shame and humiliation from your peers of leaving money under the table.
Although the South East Asia jackup market has this last year been a bit sluggish in recovering from the downturn compared with other regions, it has suddenly become a rising market. We are in a similar position today to that of 18-years ago except that there is the threat of the numerous new build jackups pending delivery hanging over our heads and the fact that the scrapping of venerable and pensionable jackups has not been as vigorous as it perhaps should have been. This will hold rates back from going ballistic as they did early this century.
But the situation is being helped unwittingly by the operators themselves.
Many operators in this region have traditionally struggled to understand a rising market – or maybe it is just that they refuse to accept it. It was always quite shocking to see how far out of touch they could be, secure in their little bubble and loving every minute of the downturn. This head-in-the-sand attitude leads to stringent requirements set out in their tenders such as refusal to accept new builds or rigs stacked for more than six months, not to mention extremely onerous contract terms.
What they fail to understand is that they are actually helping to tighten the market by setting such stringent requirements. At time of writing there are eleven idle un-contracted jackups in the region but not one qualifies if you will not accept new builds and stacked units. This has led to a “fake” shortage and difficulties in securing a rig not to mention shock at seeing rates suddenly climb to over $80,000 a day from $50,000 only a month or two ago. Contractors are all too well aware of the situation and bid accordingly. The big boys have been saving their powder for this very moment.
Of course, it is never so bad as it is in Indonesia. Hampered by its tenuous, bureaucratic and restrictive tendering process, Indonesian operators cannot react to market changes quickly even if they wanted to. The process just does not allow it. Once operators have budget approved from SKKMigas (the Owners Estimate or Engineering Estimate) you then must advertise your drilling program in the national press seeking registration. Next you send out a market survey to those who have registered followed by a laborious pre-qualification exercise. This rarely gets to a formal tender as you are obligated to only qualify Indonesian flagged rigs of which there are none – well maybe a couple. So, the whole process, apart from getting approval for the OE, repeats itself. The re-tender also runs the risk of failure if you get less than three qualified bidders which is more frequent in a rising market where contractors chase easier charters in neighbouring countries. This is also impacted by the local content requirement. If higher than the legislated 35%, few international or regional contractors are interested – and we have seen up to 50% required, enough to discourage all but Indonesian bidders. This process therefore takes an inordinate amount of time and wasted paper, sometimes up to a year. But eventually a winner (or more correctly the lowest bidder) emerges which is when the operator opens the commercials and finds that the rate – and remember we are in a rising market – offered is far higher than the approved OE. Contractors worth their salt, and kudos to Indonesian contractor Apexindo here, refuse to bow to pressure and reduce their rate to match the OE which results in another failed tender and a trip back to SKKMIGAS to try to get the OE raised to match the market – which of course likely won’t match the market as it has risen further in the meantime. Then the process starts all over again.
It is even worse if you are an Indonesian operator looking for a mid-water floater. Mid-water floaters are an endangered species and virtually extinct. Several operators in Indonesia, including Pertamina Hulu Energi North Sumatra Offshore and Premier Oil have found this out to their cost. Budgeting is generally based on market rates at the time of seeking OE approval, but this is difficult to do if there are no market rates available. After your fruitless search for an Indonesian flagged mid-water floater, none of which exist, you allow in foreign flagged mid-water units, but these are extremely scarce and fully contracted, so you end up getting offers for deepwater or ultra-deepwater units instead. These are not scarce. And, surprise, they are priced for deepwater work not mid-water rates, likely double your OE. Back to the drawing board and SKKMigas and another delay to starting your project. Meanwhile rates are still rising.
For drilling contractor marketing teams, it is a good time to be working. No longer do you have to bid on every single opportunity, even when you know it is pointless, just to show management that you are trying everything possible. Now you can target opportunities you think you can win – and win with a half decent rate. The boot is about to be on the other foot. But is won’t last long, and it won’t be like 2003-2005 due to the abandoned new builds in China that are starting to fly off the shelves now the Chinese have got around to discounting their prices. Make the most of it while it lasts……..