BRIGHT FUTURE OR A FALSE DAWN? THE ASIA PACIFIC FLOATER MARKET

It has been a long time since there was anything worth writing about the floater market in the Asia Pacific, but the second half of 2018 has seen a positive tsunami of activity in the sector. A slew of contracts have been awarded, rigs have been scrapped, rigs departed or soon to depart, rigs arriving from other regions, and, horror of horrors, even one instance of a contractor actually turning down a contract.

Since July we have seen new contract awards to regionally based floaters Ensco 8504, Maersk Deliverer, Dhirubhai Deepwater KG2, Ocean Monarch, Noble Clyde Boudreaux, Hakuryu 5, Scarabeo 7, Ocean Apex, West Capella and Stena Clyde who actually refused the charter. However, six of these awards do not start until 2019 which is the reason why there are still ten out of seventeen regionally based floater still sitting idle. Throw into the mix a highly pivotal double contract award for Seadrill for two UDW drillships, West Capella and West Carina, the latter currently on its way into the region from Brazil. The rate for the latter is reported as around $200,000, a significant statement in a market where rates for UDW rigs have languished for several years between $100,000 to $135,000.

Apart from the West Carina another UDW floater is on its way over here. COSL have been contracted to manage and operate the UDW floater SS Amazonia, a Friede and Goldman Ex-D design semi rated for 7,875 ft which had been re-possessed by China’s ICBC Leasing after former owner Schahin went into bankruptcy. Initially the rig, already en-route, will go to China but COSL have stated its intention to market the rig into the Asia Pacific region, specifically mentioning Myanmar. Once these two arrive the count of UDW units in the region will be thirteen, vastly outnumbering the deepwater and mid water units which account for only five. By the second quarter of 2019 COSL will have added another floater to the region’s fleet with the arrival of deepwater semi Hai Yang Shi You 982 into New Zealand.

Meanwhile four floaters have departed the region for pastures new. Ocean GreatWhite has gone to the North Sea as befits a harsh environment rig, Ensco DS-9 high-tailed it to South America, Nanhai IX  gone home to China and Deepsea Metro I is joining its sister rig Deepsea Metro II, now called the Fatih, in Turkey after its sale to Turkish Petroleum (TPAO).

Add to the those departures three other units dispatched to the scrapyards. Only one of these, Stena Clyde, was considered competitive, the others, Belford Dolphin and Noble Dave Beard, were cold stacked. The region still has seven floaters cold stacked and it is surely reaching crunch time on whether these units, all but two stacked since 2016, are going to continue the long wait for reactivation or head off to an India scrapyard. The longer they sit idle the more it costs to reactivate them and there are no contracts in view that would justify the reactivation costs. These include SC Lancer, Ocean America, Ocean Onyx, Deepwater Luanda, Ocean Rover, Sevan Driller and West Orion.

Does all this activity herald a bright new day for the sector? Well there are sixteen tenders that have yet to be awarded which might suggest so, but close examination of them reveals that all but one are short term, one, two or three wells or workovers and plug and abandonment projects. The exception is the three plus two-year charter for Inpex in Australia but that does not commence until end of 2019. What is also noticeable is that all but three are for mid-water units, i.e. in water depths below 5,000ft.  

In addition to the tenders that are currently in play there have been seventeen market surveys / Expressions of Interest issued since 2017 which have yet to manifest themselves into tenders. This time though eight are for deepwater or ultra-deepwater units although some of these were supposed to have started by now and may have just been price checks. Mostly though these are again for short term work with the two relatively long-term projects, one for five months and the other for six wells, only starting in late 2019 and early 2021 respectively.  

So, as we can see, much of the forthcoming work is for water depths below 5,000ft suitable for a standard mid-water floater something the region has very few of after the downturn forced a mass recycling of these elderly units. If an operator with a mid- water requirement fails to latch onto the much in demand Hakuryu 5 or fails to prise the Scarabeo 7 away from Eni then he is looking at contracting one of just three deepwater units or one of thirteen UDW rigs of which six are moored or moored/DP. These though will come with an UDW price tag and not at mid-water rates and we have seen from the most recent fixture here that these are heading north of $200,000. Will someone bring in a mid-water floater from outside? More to the point are there any left? Could be some good sense behind China’s CMHI shipyard’s decision to build a new mid-water semi.

So, the market is somewhat scrambled, with more work around than before but mostly short term. The rigs remaining in the region will start winning charters but will also face idle time in between. The prognosis for 2019 is that the utilization rate will yo-yo as rigs begin and end short term charters but one thing for certain is that rates are inevitably going to start moving upwards.

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CARIGALI WHAT WERE YOU THINKING OF?

Prior to the downturn, Petronas Carigali had begun to show a preference for using regional drillers as against international contractors. They privately admitted they were easier to deal with and did not take impertinent exceptions to the contract such as responsibility for any oil spills caused by a blow-out. This resulted in first contracts in Malaysia for Apexindo and COSL (although I don’t know for sure what position they did take on oil spills.) Things changed during the downturn when Petronas decreed that domestic drillers Velesto (former UMW) and Perisai be give contracts before an none Malaysian rigs, a restrictive practice likely in contravention of the principles and rules set out by UNCTAD. The upturn in the market, albeit slow in this region, has now seen Malaysia run out of Malaysian owned rigs and Carigali issue tenders for several jackups which are not this time restricted to just Malaysian owned units but open to “warga asing”.

The first recipient of Carigali’s largess has been another regional drilling contractor, China Petroleum Offshore Engineering (CPOE) for their jackup CPOE-17, a Friede and Goldman JU 2000E design unit built at Dalian Shipyard (DSIC) in China and delivered in 2016. CPOE have not worked in Malaysia before nor indeed have they worked in this region before. Their only international experience, outside of working for parent company CNPC, has been in Iran where they have two rigs currently contracted and two that did work in Iran but are currently cold stacked in the UAE.

This a left field award by Carigali, doubtless prepared to ignore CPOE’s lack of any real international experience and seduced instead by a dayrate said to be around $45,000/day accompanied by a minimal mobilization fee. They are currently paying Malaysian contractors around $65-70,000/day for a similar premium jackup. The bid, submitted by CPOE’s Malaysian agent, also reputedly took no exceptions to the contract nor to any of Carigali’s terms and conditions. As any contractor familiar with Carigali’s contract form will tell you this is a highly risky and dangerous strategy. Mind you when push comes to shove even Carigali would have some difficulties taking on CPOE’s owners, the giant state owned China National Petroleum Company if it ever came down to enforcing the contract. 

Word out of China is that CPOE have belatedly decided to look at the contract form and decided they cannot live with its terms as well as realizing that operating in Malaysia is not like operating in China nor Iran cost wise. It is highly likely that we will hear in the next few days that they have rejected Carigali’s LOI which ought to embarrass Carigali for their lack of due diligence when evaluating the bid.

In the more “decent” days gone by, I have seen a major oil company then in the region call up a regional drilling contractor who had submitted a bid with not one exception. The contractor was asked to please read the contract form and then confirm they still wished their bid to be considered as well as maintain the unusually low rates proposed. The operator quite rightly identified the safety and performance risks to their own operation that could arise when the driller fell foul of the very onerous contract terms and tried to penny pinch on operational costs. The contractor withdrew his bid.

Unfortunately submitting unconditional bids has become more frequent in the region especially from certain regional contractors, probably driven by desperation but perhaps not realising that they are putting the future of the entire company at risk if for example they had a major blow-out and oil spill which had not been carved out of the contract.  Maybe it is also a bit of the Asian notion that a signed contract is merely the basis on which further negotiations can take place. Of course, major oil companies will not see it this way and I know from personal experience that Carigali certainly do not and they will enforce the contract as it is written and signed.

However, Carigali should know better that to accept without question such a bid from a relatively unknown and internationally inexperienced contractor apparently content to adhere to all terms and conditions in the contract and at an obvious unsustainable dayrate. It can only lead to trouble for both parties and CPOE will do well to turn this opportunity down.

 

WHY BOTHER WITH AN INDONESIAN FLAG -ITS NO GUARANTEE OF WORK.

Back in 2008 the Indonesian government passed the Cabotage law which stipulated that domestic carriage services in Indonesian waters could only be performed by Indonesian shipping companies with Indonesian flagged vessels and crew members. Drilling rigs were included in this but were initially granted a three (3) year exemption period. Come 2011 however, the exemption period ended, and Indonesia’s Ministry of Transportation issued a decree that foreign flagged drilling rigs could henceforth only work in Indonesia in the absence or unavailability of an Indonesian flagged rig. The Cabotage law was now in effect for drilling rigs.

Predictably this has caused chaos for operator’s seeking to charter rigs for their drilling projects. Indonesian flagged drilling rigs are few and far between. Although the downturn did mute the impact of this new law somewhat as drilling programs virtually ceased, the recent slow improvement in drilling activity has now highlighted the problems that the Cabotage law has created for the drilling sector.

SKKMigas requires operator’s to pre-qualify bidders in advance of a full blown tender and at this point to exclude foreign flag units. This leads to bids submitted only by the contractors with an Indonesian flagged rig, initially these were just Apexindo and Harmoni Drilling, the latter a “newbie” without the requisite years drilling experience and who never got past “go”. The result is a failed tender as it does not meet the required quorum of three bidders. The follow up pre-qualification allows in foreign flagged units but then at the re-tender stage they are disqualified for not meeting the Cabotage requirement leading to another failed tender. This then leads to a “direct appointment” with the remaining bidders who either have an Indonesian flagged rig, commit to re-flagging before commencement of the drilling program or have rigs acquired by or about to be acquired by an Indonesian entity.

You would expect this to work to Apexindo’s advantage; they are after all a genuine Indonesian drilling contractor and this law is after all meant to help them. Well its Indonesia so it is not that simple. There is another process quirk, the OE or Operator’s Estimate (or sometimes called Engineering Estimate.) Prior to tendering the operator is compelled to issue a Market Survey or Request for Information (RFI) seeking availability and rates of suitable drilling units. They then use the rates quoted in these submissions as the basis for the overall cost of their drilling project, effectively their budget, and this is duly approved by SKKMigas becoming the OE. Unfortunately some drilling contractors, mistakenly believing they are currying favour with the operator, deliberately quote  low rates leading to an OE that bears no relation to current market rates and causes a failed tender when bids received are higher than the OE.

Some recent examples of how this pans out. Firstly PT Saka had three qualified bidders for one of their drilling programs, two were Indonesian offering Indonesian flagged units, the other from a regional drilling contractor with a foreign flagged rig. One of the Indonesian drillers was declared the winner but his dayrate, though matching rates elsewhere in the region, was much higher that OE and he refused to lower his rate to match the OE. Saka were then forced to re-tender with the foreign flagged rig seizing its opportunity by now coming in at a much lower rate than they bid first time around and even lower than the OE (which worked out around $46,000 a day.)  The Indonesian rigs maintained their rates which were in line with the market, so the foreign flag unit was awarded the contract. It had then to be mobilized into the country while the Indonesian rig remained stacked in Indonesia.

This same scenario is about to be repeated by Pertamina Hulu Mahakam with a bid from a contractor with an Indonesian flagged-rig being rejected for being above the OE. The contract is now being offered to a regional contractor with a foreign flagged unit who was suddenly prepared to drop his pants and his rates and seemingly prepared to work his rig at a loss. To most international operators this would not be acceptable as it would be regarded as a potential safety risk and impact the efficiency of their operations given the propensity, if not necessity, for the contractor to then try to save money and reduce his losses by cutting his operational costs.

The moral of this story is that going to all the trouble to meet the Cabotage requirements does not guarantee work despite the law being designed to encourage and provide work to domestic contractors. Its all about the money! Contrast with Malaysia were Malaysian owned rigs get contracts at preferential rates and are surviving the downturn.

Meanwhile US Driller Ensco found a neat way to offset Cabotage and pick up a contract in Indonesia but encountered difficulties of a different sort. They sold a 1976 built jackup to an Indonesian entity who then re-flagged the rig. The book value of such a “legacy” rig would presumably be low enough that investment by the Indonesian company could be minimized. The rig duly won a one plus one year contract with a Pertamina unit. Early this year it was to be farmed out to a sister Pertamina unit for the remainder of its contract. Simple enough given that it is an Indonesian flagged rig. Ah! but there is another complication. The rig has been caught out by the recent government switch from the Petroleum Service Contracts system (PSC) to the Gross Split system. The Pertamina unit wanting to take over the rig is on the new system. Rules require the rig to be exported out the country from the PSC Pertamina and then re-imported into Indonesia to the Gross Split Pertamina before a switch can be approved. Re-importation incurs a 10% VAT surcharge applied to the declared import value. There is also the mobilization costs and loss of dayrate to consider. So much for any advantage garnered by having an Indonesian flag.

Up to now the Cabotage law has not really affected floaters as there has been very little floater activity in Indonesia in recent years. COSL did sneak in a Chinese rig last year but it is working for an operator with significant Chinese investment and few questions are asked. This year though, three new mid water floater requirements have emerged, from Eni, Medco and Pertamina Hulu NSO. Eni expected few issues in contracting the rig of their choice, after all it had drilled for them in Indonesia previously and was parked nearby in Balikpapan and still on contract to Eni International. Of course, they still had to go through the tender process and did so only to be then told by SKKMigas to cancel the tender and re-tender for an Indonesian flagged semi-sub. Likewise both Medco and PHE NSO were instructed to seek an Indonesian flagged rig. No mid water floaters have been built since the 1980’s and their ranks decimated during the downturn by the scrapping of nearly the entire fleet, after all most were well over thirty-five (35) years old. Only three remain in the entire region, including the Eni contracted unit, and none of these have an Indonesian flag. And so the merry-go-around will continue, pre-qual to tender to failed tender to pre-qual to failed tender and so on. No wonder the tendering process in the country averages around a year from start to finish.

So it does seem that having an Indonesian flag, especially for a jackup, is not actually an advantage. The law that was supposed to help them is counteracted by other laws. But if you did want to re-flag a rig what is required? It must be owned at least 51% by an Indonesian “domestic” company. The number of Indonesian “domestic” companies interested in investing into drilling rigs has been noticeable only by their absence, not that you can blame them when base investment for 51% of a premium jackup would be in the order of US$70-100m. Such investment through bank loans would be possible if contracts were long term and rates at reasonable market levels but firm drilling contracts in Indonesia are restricted by regulation to just two years, (with rare exceptions,) and dayrates are  held back by having to match the OE which is always lower than market. Such dayrates make it impossible for the contractor to make repayments on his loan. The Cabotage law intended to encourage domestic participation is nullified by the procurement process. 

It would be remiss not to mention the thorny issue of local content, or TKDN. . The rules themselves are clear enough; the first bid should require 35% local content, a re-bid 30% and 10% for the third tender irrespective of rig type. The problem is the calculation which has become an art form due to inexact and vague language but over the years jackup contractors have managed to live with the 35%. However 35% or even 10% is very difficult to achieve for someone owning an ultra-deepwater drillship or semi-sub. But in reality the rules go by the wayside as you end up with an assortment of TKDN requirements with absolutely no consistency and in contravention of the laid down percentages. Take the three current floater tenders,  PHE NSO, who have been tendering for this requirement for years now, have specified 30%, Medco are at 25% and Eni is at 15%. None of these are close to what is specified. To add to the obfuscation there are the jackup tenders that require 50% local content. It appears that rules are to be broken when it is convenient.

But its all smoke and mirror after all, and again… in the end, it’s all about the money.

THE MORE THE MERRIER?

Opportunities for the Asia Pacific region’s fifty (50) strong jackup fleet are not exactly extensive. This is especially true in Malaysia, Vietnam and Indonesia who practice forms of cabotage that mean Velesto (UMW) and PV Drilling’s fleets are rarely out of work. It is not quite so true in Indonesia where Apexindo should have a major advantage but get tied up in bureaucratic knots by the Indonesian tendering system. Unfortunately, other countries in the region do not have such prolific jackup work.

So, you might ask, how come a region with nineteen (19) idle jackups can allow three (3) more to enter the region after having won contracts against regionally based competition, and notwithstanding mobilization costs? Aban, COSL and now CPOE have recently been awarded charters in Malaysia and Indonesia for rigs that are based in the Middle East and China.

So, how did Aban manage this? Aban has worked in Malaysia before with Deep Driller 3 in 2010 so are not an unknown quantity. Their charter with Petrofac, with the Aban VIII, is believed to be at a decent rate, reportedly $60,000 a day which probably includes mobilization costs from the UAE, so it is unlikely they won by bidding lower than anyone else as they have done recently in Vietnam and in Abu Dhabi were rates have been below $40,000. With Velesto’s fleet fully committed the only explanation must be that the four (4) months’ work this year and then having a commitment to return to Petrofac after a six-month idle break for two more wells in 2019 is not attractive enough to the competition to justify reactivation costs and more especially a commitment in 2019 at a 2018 rate.  As we head out of the downturn most driller’s will be optimistic that rates for 2019 will rise significantly and want availability to take advantage of this.

The COSL award, to China based jackup COSL 943, is easier to explain. The rig is currently working for Husky Oil in China. In Indonesia it will work for the Husky-CNOOC joint venture. COSL have an unrivalled record of winning contracts in Indonesia with operators that have Chinese partners even when it takes a lot of finagling by the operator to circumnavigate the Indonesian tendering system and Indonesian flag requirement. Best not to delve into this too closely.

And who are CPOE you may ask. China Petroleum Offshore Engineering (CPOE) are the in-house drilling company of giant state owned integrated oil and gas corporation, China National Petroleum Corp (CNPC). Sort of like COSL was for CNOOC.

CPOE was only established in 2004 so a relative newcomer with just ten years of operating expeerience. It has a fleet of seven jackups and an inland barge. The first six of their jackups, designed for shallow water below 150ft, were designed by China’s Offshore Engineering Equipment Institute and built at Quindao Wuchan shipyard and delivered in 2007 and 2008. They then branched into the 300ft category by ordering two F&G L780 Mod II units, a venerable design that dates back to 1980, which were delivered in 2008 and 2009. An updated L780 design, the Super M2, followed in 2015 built at CIMC before they moved into the premium rig league with two F&G JU2000E units delivered from SWS and DSIC respectively in 2014 and 2016. The CPOE 17, beneficiary of the Carigali award in Malaysia, is one of the latter units. It worked a three (3) month maiden charter for CNOOC in 2016 but has been idle since.

As you would expect, most of CPOE’s fairly limited drilling experience has been in Chinese waters for parent CNPC. The sum total of CPOE’s international experience is having had four jackups on charters in Iran, two of which are still ongoing. So how could they have beaten out competition from the likes of JDC, Maersk, Seadrill and Apexindo, all with idle units seeking new work, not to mention Velesto, Malaysia’s primary jackup supplier. Velesto though are currently 100% utilized and have no availability which meant that Petronas Carigali would have to consider a non-Malaysian unit.

Carigali have for some time shown a preference for a regional contractor if their own have no availability. Just before the downturn both Apexindo and COSL were awarded charters by PCSB, that for COSL being a first for a Chinese driller and likewise a first for an Indonesian driller. Apparently, they are “easier” to handle by which we assume they do not take many, if any, exceptions to the Carigali contract and always do as they are told. This theory is possibly born out by the news that CPOE were currently studying the contract details before accepting the Carigali charter, in other words they appear to have bid on the basis of accepting the contract and other terms in the tender document in full, taking no exceptions and only now, after receiving an LOI, are looking at the terms and conditions in the contract.

As a veteran of negotiating contracts with Carigali for over 30 years I can tell you that their contract form is not friendly to the drilling contractor and I am sure it has not got any more friendly during the downturn when most operators have taken advantage of the times by adding in even more onerous T&C’s. Is Carigali taking a risk by handing a contract to a relatively inexperienced contractor? I imagine they are well covered in the contract and the rate quoted them, whatever it is, was very much to their liking. Hard to see first tier drillers like of Ensco, Transocean, Seadrill etc. submitting a bid that did not protect them from company breaker clauses, but then it has always been different in this region. The old adage is “a signed and binding contract is just the basis for further negotiation.” It used to annoy me no end!

Mind you its not just the jackup contractors that have been caught out by an “incoming”. To an extent the same has been true in the floater sector. Nanhai IX, Deepsea Metro I, West Capella, Maersk Deliverer, GSF Development Driller I, Deepwater Nautilus and Dhirubhai Deepwater KG II have all slipped into the region in recent times beating out competition from a flotilla of idle units mostly stacked in Labuan and taken up work in the region.

In summary it is no surprise that the region’s utilization rates lack behind those of other regions, just 63% for jackups and 45% for floaters. Maybe those with idle units are playing the long game?

IS THE 2018 JACKUP MARKET IN ASIA ANY BETTER THAN LAST YEAR?

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.

ASIA PACIFIC QUARTERLY REVIEW OF OFFSHORE ACTIVITY FOR Q1 2018.

NEW AWARDS AND TENDERS

A drop in jackup utilization rates from 63% at the end of December last year to just 48% at the end of this quarter is mirrored by the Floater sector which also dropped from 28% to 22%. This would suggest the market is worsening but in fact there are promising green shoots of recovery.  But don’t hold your breath, a full recovery is not exactly imminent.

New fixtures during the quarter were same old same old, numbering the same as in Q4 last year; twelve (12) in total, with five (5) for jackups and seven (7) for floaters. Four (4) of these new charters were long term, firm periods of 18-24 months which is promising. Of the floater charters three (3) were ultra-deepwater, three (3) for tender rigs/swamp barges and one (1) for a mid-water floater. Indonesia was the busiest with four (4) new contracts awarded and two (2) for Australia.

Fresh market surveys during the quarter amounted to sixteen (16), a little better than last quarter. Several of these were converted to tenders within the three-month period. Nine (9) surveys were for jackups and five (5) for mid water floaters, a regional market sector having a serious shortage of supply to this will be an interesting sector to watch.

The good news however is that there was a significant leap in the number of new tenders issued, sixteen (16) in all. Seven (7) of these were for work in Indonesia although two (2) of these were re-tenders. Nine (9) were for jackups, four (4) for mid water floaters, an UDW requirement and two (2) for TAD’s/swamp barges.

So, at the end of the quarter there are fifteen (15) jackup tenders currently awaiting award and thirteen (13) for floaters still under evaluation.

ARRIVALS AND DEPARTURES

A busy quarter for departures. Six (6) jackups and one (1) UDW floater mobilized out of the region for pastures new. We have seen the back of West Telesto, Topaz Driller, COSLSeeker, Deep Driller 8, Hakuryu 10, Jindal Explorer and UDW floater Dhirubhai Deepwater KG2. The high number of jackups leaving is reflective of the poor prospects for international jackup contractors in what is a grossly over supplied region likely to worsen with progressive deliveries of new build units into the sector throughout the year.

There have been two new arrivals, Transocean’s GSF Development Driller 1 into Australia from cold stack in the Canary Islands and COSL’s Nanhai IX from China to take up a charter in Indonesia.

RIG CONSTRUCTION

Following a full year with nary a new build rig delivered to its owner, all of whom shied away from committing to accept a new asset when the final payments would have been due, the turn of the year has seen five (5) new jackups delivered already, three (3) for Borr Drilling, one (1) for Japan Drilling, all of which are stacked in Singapore and one for Northern Offshore which has remained in China.

Meanwhile five contracts for UDW drillships have been cancelled. One for an Ocean Rig drillship, the Amorgas and four that were ordered by Seadrill, West Aquila, Libra, Dorado and Draco. This means that Samsung and Daewoo are each now the “proud” owners of three (3) UDW drillships for which they must seek new buyers. There are still eighteen (18) drillships in various stages of completion yet to be delivered.

More positively the quarter did see an order for a new build floater. AWILCO placing an order with KeppelFELS for a harsh environment semi with options for three more. This is the first order for a new build of any kind since August 2015.

Both Singapore yards, Keppel and Jurong. did have a little to cheer about when Sete Brasil finally settled with Petrobras and decided to continue with the construction of just four new UDW units and terminate the contracts for the other twenty-four originally contracted. The four (4) were two (2) each for the Singapore yards both of whom had originally received orders for six units.

One stranded harsh environment semi, Stena MidMax, cancelled by Stena last year, has been sold by Samsung shipyard to AkerBP. The market expects more acquisitions of stranded UDW units and harsh environment semis over the coming months.

IDLE RIGS & NEW STARTS

Warm stacked jackups in the region currently outnumber those working, twenty-five (25) to twenty-four (24). There are also another eight (8) cold stacked. The situation with the region’s floater fleet is even more dire with only five (5) units currently working out of a fleet of twenty-two (22). And there is a further twelve (12) that are cold stacked.

This is reflective of the fact that there were just nine (9) contract start-ups during the quarter whereas seventeen (17) rigs completed their contracts in the same period and either became idle or started new charters. However, five (5) jackups and five (5) floaters of the region’s idle fleet do have charters to start over the coming months.

COLD STACKING AND SCRAPPING

Four venerable floaters left the region to head to a scrapyard, Songa Venus, Songa Mercur, Doo Sung and Ensco 5005. One UDW floater, Discoverer Luanda, was cold stacked as soon as its charter expired in in January. One of the three remaining mid water floaters in the region, and easily the oldest of them all, Stena Clyde, has been reactivated for a short contract in Australia.

Talking of reactivations, the recently reactivation of Transocean’s GSF Development Driller 1, which has just arrived in the region, has triggered talk of planning for further reactivations from Diamond and Ocean Rig, noticeably for moored units. There is a dearth of moored mid water units world-wide.

OTHER REGIONAL NEWS

The long running dispute between East Timor and Australia over their maritime boundary in the Timor Sea has finally been settled with the boundary re-drawn. As a consequence, the Greater Sunrise Gas project, which has ended up in Timorese waters, is now back on and operator Woodside is now progressing this long-delayed project.

Meanwhile the Philippines has indicated it will allow exploration in its Reed Bank acreage in the disputed waters of the South China Sea and is forming a joint venture with CNOOC of China to undertake this, tantamount to asking the devil into your front parlour. Reed Bank is well within the Philippines Exclusive Economic Zone.

And another negative instance of China’s pervasive influence in the disputed South China Sea has been felt by several contractors and sub-contractors as well as Spanish operator Repsol when China leant heavily on Vietnam to shut down the planned $2bn development of the Ca Rong Do oil and gas field which is also well within Vietnam’s Exclusive Economic Zone. Repsol has been forced to claim force majeure on many contracts it had already committed too, with the main losers being Ensco, Yinson/PTSC, Heerema, Keppel FloaTec and Drill-Quip.

A major change in New Zealand has seen Shell complete its threatened withdrawal from the country after being around for close to 100 years. Austrian outfit OMV, already with a strong presence in New Zealand, have acquired all of Shell’s upstream assets in the country. The deal has also seen Malaysian Sapura Energy farm into five (5) permits in the Taranaki Basin that OMV acquired from Shell.

Woodside has considerably strengthened their Australian portfolio by acquiring ExxonMobil’s stake in the giant Scarborough gas field off Western Australia. They have assumed operatorship and have offered partner BHP Billiton a greater share in the venture.

Malaysia has a new national operator aside from Petronas. The state of Sarawak has announced the formation of its own state petroleum company Petros. In future it will handle all new exploration and developments within the state although Petronas will retain control of all existing production and developments.

MERGERS AND ACQUISITION

Borr Drilling have been at it again. After creating some excitement in January when it was revealed they were in discussion with KeppelFELS to buy some of their stranded jackups, they then announced they are to purchase Paragon Offshore, the Noble offshoot, who have a large fleet of “legacy” jackups, mostly cold or warm stacked which they have been busy scrapping as part of the reorganization following their entry into Chapter 11. Borr have already announced they are likely to scrap most of these jackups, retaining the two former Prospector premium jackups. The main thrust of the acquisition would appear to be to acquiring the experience of an established drilling contractor, its operational track record and safety systems.

Meanwhile Transocean completed its purchase of Songa Offshore and already indicated it will likely scrap Songa’s three (3) “legacy” semis that are currently cold stacked in Norway.

THE REGIONS OFFSHORE RIG FLEET

At the end of the quarter the Asia Pacific’s marketed and active offshore fleet consisted of eighty-eight (88) rigs, forty-nine jackups, four (4) mid water floaters four (4) deepwater floaters, fourteen (14) ultra-deepwater floaters and seventeen (17) tender assist units.

 

THE NORWEGIANS ARE AT IT AGAIN !

The Norwegians have always seemed to have had an innate instinct as to when the green shoots of a recovery from a downturn point their little heads through the darkness. It would appear that history is repeating itself with the recent news reports concerning Norwegian contractors Awilco Drilling and Borr Drilling.

Awilco have taken the drilling industry and indeed the shipyards by surprise and given rise to a wave of optimism by placing an order for the construction of a new harsh environment mid water semi-submersible, the first order for a new offshore rig since August 2015. The lucky recipient of this $435m contract is Singapore’s KeppelFELS, still reeling from the downturn and their involvement in the Brazilian “carwash” scandal. The Awilco order, for a Moss Maritime CS-60 ECO design unit comes in the same week as Sete Brazil and Petrobras finally settled their disputes leading to the likely continuation of the construction of two (2) UDW semi-subs for Keppel and two (2) drillships for Jurong shipyard. Some compensation at least for Keppel although another four (4) semis they had under construction for Sete have now been cancelled.

Awilco have noted the increased activity levels in the North Sea harsh environment sector and noted the rise in rates and have been quick to order a new modern rig to take advantage of this upswing as well as to replace their aging existing rigs. Semis WilPhoenix and WilHunter were both built in the early 1980’s and will find it increasingly hard to compete against the modern and highly efficient harsh environment rigs that have been built over the last few years. There are three (3) brand new HE rigs sitting in China awaiting acceptance at present. In addition, Awilco have options to build three (3) more Moss Maritime rigs to be exercised 12 months, 24 months and 36 months from March 2018. Note too that Transocean have recently said they are on the lookout to acquire one or more harsh environment assets

Meanwhile the rise of fellow Norwegian contractor Borr Drilling continues its upward surge. The new start-up company, with origins in Seadrill, began by acquiring Transocean’s jackup fleet, a total of fifteen (15) units, five (5) of which were still under construction. They followed this up by acquiring nine (9) more stranded jackups from PPL Shipyard in Singapore and then in January were reported to be in discussions with KeppelFELS to acquire around six (6) of their stranded assets. The latter deal has not yet moved forward, at least publicly, and is likely still in the negotiation phase. Not content with this, Borr have now made an offer to acquire Paragon Offshore, the somewhat ill-fated offshoot of Noble Drilling. The latter had carved out all its aging assets into the new company which was destined to have little chance of surviving a downturn. Indeed, Paragon duly went into Chapter 11 Bankruptcy, emerging in 2017, and has since then been divesting itself of many of its idle and aged units, either sold for scrap or sold for conversions to MOPU’s.  At time of writing they have managed to rid themselves of thirty (30) of their “legacy” units (nice term for very old) all built between in the late 1970’s or early 1980’s.

What have Borr acquired for their $232.5m? Asset wise Paragon has a current fleet of twenty-two jackups and one floater. Of these eight jackups are cold stacked and veritable candidates for scrapping as they have all been idle for quite a while and were all delivered between 1972 and 1984. Paragon currently also have another eight jackups currently warm stacked with another three due to join them at completion of their current contracts during 2018. All but one were built between 1979 and 1984 and really should also be candidates for the scrap yard. The solitary exception is the 2014 built Prospector 5, a F&G JU2000E premium unit acquired from Hercules together with a sister rig, the 2012 built Prospector 1, back in November 2014.

Seven units are currently contracted including the lone floater and the North Sea spec Prospector 1 and another jackup will start a new charter in the coming months. However, three (3) of these will be off charter before the end of this year. Paragon have a current backlog of $204m which is unlikely to be the most attractive and significant aspect of an acquisition by Borr. What Borr is after, similar to their antecedent Seadrill, is a stable and experienced management structure and organisation, a solid management system and at least two quality assets. This is the same model as followed by Seadrill when they first started and acquired an organisation and experience by buying Smedvig. Another advantage for Borr is that they also acquire Paragon’s experience and track record which will assist them to qualify for tenders where often operators’ are unwilling to give new start-up company a chance, preferring a company with experience and a track record. Paragon currently have operations in the North Sea, Middle East and South Asia and have previously worked in Mexico, the Gulf of Mexico, South East Asia and West Africa.

Another potential advantage for Borr is that they might be able to substitute some of their idle new builds for a contracted Paragon unit though this will be limited by the paucity of Paragon’s contract portfolio. Vantage used this trick last year in acquiring a Hercules jackup while the latter were in Chapter 11 and substituting their modern jackup Sapphire Driller mid-way into a 5 year charter. Borr have twelve (12) idle uncontracted units at present and another nine (9)to be delivered this year and in 2019. They are in sore need on contracts.

Meanwhile Borr have issued a rallying cry to its competitors and are taking up the high ground in the fight to reduce the jackup rig fleet where almost 50% of the world’s assets are over 30 years old. They have been encouraging “responsible owners” to rationalize their fleet and consolidate the fragmented market. The company’s strategy is to focus on operating modern high spec assets and they will only consider putting Paragon’s aging fleet back to work if there is no high reactivation costs involved and  they are also cognizant of complying with modern safety standards and drilling efficiency. If they are to practice what they preach and Walk the Talk then we can expect the entire Paragon fleet except for the two JU 2000’s to be scrapped or sold for other non-drilling. Borr is currently doing this for four (4) not so old F&G L780 Mod V jackups acquired from Transocean which Borr have labeled as non-core.