Although we are only five months into the new year, a picture is already emerging of what we can expect of the jackup market this year when you compare statistics for 2017 and those to date for 2018.
Year 2017 began with a fleet strength of fifty-one (51) jackups plying their trade in the region. Of these only twenty (20) were working which gave us a utilization rate of just 39%. During the year we had forty-six (46) contract awards, mostly short term. By year end the fleet had diminished to forty-nine (49) units but we now had thirty (30) working with a utilization rate up to 61%. Definitely an improvement from the dark days of 2016 but 61% is hardly a utilization rate to get really excited about when you still had nineteen (19) jackups still idle. Contractors reported that they were busy fielding enquiries but not very busy finalizing contracts.
Now to this year. To date in 2018, that is to end May, there have been thirteen (13) new fixtures and we currently still have a fleet strength of forty-nine (49) of which twenty-two (22) are idle, a 55% utilization rate. Eleven (11) new tenders have been issued, roughly comparable with the same period last year.
So, on the face of it, and considering what is in prospect for the rest of this year, we are basically looking at more of the same rather than any major improvement in the market.
But that is not the full picture. What has happened this year is desperation measures. Most awards have tended to go to rigs that have come off or are coming off contract, that is “hot rigs”, which does not help those stacked since 2015 and 2016, and rates have slumped from around $50-60,000 for foreign owned units last year to the latest fixture this year, $43,50, as some contractors try to win at any cost. Such rates are surely below operating costs. “Keep the rigs working whatever the cost” now seems to be the mantra.
Of course, there are other factors peculiar and specific to this region, the main one being indigenization. The main jackup markets in the region are Malaysia, Indonesia and Vietnam all of whom have domestic drilling companies. Thailand, Myanmar and Australia are more fringe players. The jackup contractors in the region can be divided into domestic drillers (UMW, Perisai, Apexindo, KS Drilling and PV Drilling), regional drillers (COSL, Japan Drilling and Aban) and the foreigners (Ensco, Noble, Borr, Maersk, Vantage, Shelf and Seadrill). Over 50% of contract awards made in 2017 went to domestic drillers. Petronas in Malaysia carried out a policy of Malaysian first, Indonesia introduced its Indonesian flag requirement, and in Vietnam PetroVietnam only approved contract awards to PV Drilling. While the rest were bleeding the domestic drillers kept working and in the case of Malaysia, at preferential rates.
Another interesting pattern emerged from the 2017 fixtures. If an award did not go to a domestic driller it frequently went to a regional one. COSL and Aban were the main beneficiaries, with COSL virtually guaranteed to win in Indonesia where several operators have Chinese partners and Aban by simply bidding far below the current market rate. Out of twenty-two (22) awards to non-domestic drillers, half went to regional drillers, indicating a preference for fellow Asians who are considered easier to deal with and generally more accommodating.
To judge by the flow of jackups departing the region this year for greener pastures, the foreign drillers may have finally accepted that their prospects in this region have been minimized by indigenization and by a preference for regional contractors. The only markets in the region where these factors do not apply are Thailand and Australia, neither of which are major jackup plays. Just three (3) rigs left the region in 2017 but in the first five months of this year eight (8) premium units have already departed and another is lined up to depart in Q3. Ensco, Seadrill, Vantage, Japan Drilling and even COSL and Aban have mobilized units out this year although the latter two have not exactly helped by promptly replacing them with rigs incoming from other regions.
Unfortunately, the mass departures have had no effect on the demand supply equation. This is down to Borr Drilling. The Norwegian driller has taken delivery of five new build jackups from PPL and KeppelFELS shipyards in Singapore with another five (5) to be delivered during the year. They are all stacked in Singapore and technically form part of the region’s supply, playing havoc with the utilization rate and in the process balancing out the departures.
In summary it is difficult to convince yourself that this year is going to be any better than 2017. Only nine (9) of the contract awards made in 2017 and 2018 to date have been for programs lasting one year of more. 84% of the awards have been short term, the clear majority being of less than six months duration. Thus, most contracted rigs come back on the market all too frequently lessening the chances of any long time idle units picking up new charters. No wonder they are moving them out.
And this market is not going to benefit from any mass scrapping of so called “legacy” units. There are only four (4) old jackups left, the rest of the fleet are all premium units built between 2007 and 2018.
The region therefore needs to lessen the supply side while waiting for the demand side to increase. This is highly unlikely to happen this year which translates into a No, the region’s jackup market this year is not going to be any better than 2017.
Roll on 2019.