By Gerard Kreeft
The June announcement that Noble Drilling had acquired Diamond Offshore is the latest sign that offshore drillers are finally achieving their long-anticipated goal of having a firm grip on the direction and strategy of the deepwater rig market. And perhaps for the first time also determining the pace and direction of the deepwater marketplace that originally was determined only by the oil majors.
The Present Situation—the case of the drillers
The current floater supply has declined by 41% to 166 units from a peak of 281 in 2014. Only 16% of current supply is older than 20 years.
The Jackup supply has declined by 8% to 497 units from a peak of 542 in early 2015. 32% of current supply is 30 years old.
Seven drilling contractors–Transocean (37), Valaris (53), Noble (32), Seadrill (36), Shelf (36), Borr (24) and Diamond (12) manage or own 230 high quality assets—virtually creating a monopoly position on the deepwater market. The company that emerges from the merger of Noble and Diamond will now own or manage 44 high quality offshore drilling assets and become an industry leader. No doubt other possible mergers will follow.
Total utilization of 6th & 7th generation drillships is now 90%, an industry record: 84 units under contract, and 8 units ‘available’ and 9 ‘cold stacked’.
Deepwater rig demand has never been higher with 6th and 7th generation drillships pulling in day rates of $500,000 or more.
Before a clamor of a new cycle of rig-building ever starts, certainly those units listed as ‘available’ and ‘cold stacked’ will be brought back into the marketplace. A new building cycle is unlikely because of high costs and a lack of shipyard capacity.
The present situation—the case of the deepwater majors
Oil consumption will be 100Million barrels per day (100MMBOPD) in 2024, according to Rystad Energy.
Much of the deepwater exploration will take place within the Golden Triangle: Latin America (Brazil, Guyana and Suriname), North America (US Gulf of Mexico, and Mexico) and Africa (Atlantic Margin and South East Africa. These three regions plus the eastern Mediterranean area account for 75 percent of the global deepwater rig demand.
A key concern for the operators is the potentially reduced number of global offshore areas available for drilling and the scarcity of offshore rigs.
It is estimated that $228Billion will be spent on deepwater exploration in 2026. 75 projects will be sanctioned in 2026 compared to 27 in 2020.
Andrew Latham, Vice President Energy Research, and Dmitrii Rudchenko, Upstream Data Analyst, both of Wood Mackenzie, in a timely July 2021 study entitled ‘Deepwater’s Growing EUR Advantage’, explain how deepwater upstream growth is expected to rise from 10Million Barrels oil Equivalent per day (MMBOEPD) in 2021(6% global supply) to over 17 MMBOEPD by 2030(10%).
Latham states that almost half of oil and gas reserves being sanctioned for development over the next 5 years will come from the deepwater. Why? According to Woodmac the out performance is based on reservoir fundamentals. Deepwater reservoirs will produce substantially more oil and gas than shallow or onshore reservoirs.
Estimated Ultimate Recovery in deepwater averages 12MMBOE for oil wells and 43MMBOE for gas wells. Future deepwater oil fields will enjoy twice the average EUR of fields already onstream.
Oil Wells
Brazil with 36Billion barrels of oil reserves has an average EUR of 14 MMBOE per well. Brazil’s early deepwater developments took place in the post-salt plays of Campos Basin where heavier crudes and drilling technologies of the 1980s limited average EUR to 8MMBOE per well. Recent investments in pre-salt in the Santos Basin is 27MMBOE per well.
Angola has 11Billion barrels of oil reserves, 1,000 wells and an average of 10MMBOE.
Nigeria has 37Billion barrels of oil reserves and an average EUR of 16MMBOE.
Guyana has 6Billion barrels of reserves and an average EUR of 24MMBOE.
Gas Wells
Gas basins are approximately half the size of oil basins. Woodmac anticipates development of approximately 1000 deepwater gas wells, of which 700(64%) have already been developed. Average EUR is 43MMBOE.
Up to 2009 the average EUR was 31MMBOE. Now the average has jumped to 90MMBOEPD based on gas discoveries in the eastern Mediterranean, Mozambique, and Mauritania and Senegal.
Woodmac anticipates that almost half of the oil and gas reserves being sanctioned for development over the next five years to be in deepwater. Exploration will doubtless add more. The sector’s outperformance stems from its reservoir fundamentals. Deepwater is no place to tackle marginal rock properties or difficult fluids. With few exceptions, the industry has chosen to develop only its best reservoirs. These allow high flow rates and exceptional estimated ultimate recovery (EUR) per well.
“The advantage versus non-deepwater is spectacular. Each deepwater well will produce an order of magnitude more reserves than development wells in shallow water or onshore. EUR in deepwater averages 12MMBOE for oil wells and 43MMBOE for gas wells. That compares with the global industry average EUR of less than 1MMBOE per well. This advantage is about to get even better. Future deepwater oil fields will enjoy twice the average EUR of fields already onstream. This is not a symptom of over-optimistic project plans overdue for a dose of reality. It reflects the industry’s recent exploration success, opening the best-performing reservoirs in new basins such as Guyana and Brazil’s Santos.”
According to the study:
”Technology gains and portfolio highgrading also help. Higher EUR means fewer wells are needed. That’s of critical importance because deepwater wells and associated subsea equipment are expensive and typically amount to more than half of project capital expenditure. Fields with fewer wells enjoy lower costs, faster cycle times and better breakeven prices.”
Scenarios facing the drillers and deepwater majors
Woodmac’s June 2023 study “Does the bull market in oil rigs signal a slower transition?”,raises some timely questions:
- …” a persuasive argument in favour of new builds. The latest eighth-generation rigs can deliver in ultra-deepwater, improve drilling efficiency and reliability, and help meet the industry’s goal to reduce emissions. We reckon current rig rates support new build economics.”
- …” while we expect to see some new orders, there are plenty of reasons why this upcycle will be more restrained than those of the past. As drilling costs rise, we expect operators will delay investment and reconfigure less advantaged new projects.”
- “Drilling companies, for their part, will be loath to commit to new builds without long-term contracts, which operators are reluctant to offer. Many rig owners will continue to manage and enhance margins on their existing fleet, while taking the lower-risk option of reactivating the most capable and viable stacked rigs under firm contracts.”
- ..”the industry’s appetite for drilling will be tempered by uncertainty around future demand. Deepwater exploration wells drilled in 2023 will, if successful, lead to new oil supply around 2030 with payback from perhaps 2035, at best. Investment horizons for deepwater gas exploration are even longer dated.”
Woodmac expects global oil demand to peak in the early 2030s in their base case (approximating a 2.5 °C pathway), gas demand a decade later. However, in the AET-1.5 (accelerated energy transition) scenario), the peak for both comes much earlier.
Woodmac concludes that rig market is a warning that the energy transition is moving slower than what is needed to limit temperature increases to below 1.5 °C.
Some Final Questions/Comments
Will dayrates for drillships and other units continue to skyrocket beyond the $500,000 ceiling?
Can drilling contractors resist starting a new cycle of newbuilds, which in the past helped send the dayrates in a downward trajectory?
Will the drilling contractors and the operators learn to co-commit to ensure that this important sub-market will survive?
The deepwater market is a highly specialized market with its own set of economic drivers: set within the Golden Triangle, consuming a sizeable chunk of exploration budgets and manpower and requiring years of project planning for project realization. Within this setting can deepwater activities continue to be economically feasible in competition with renewable and possibly provide competitive energy costs?
Only if deepwater drilling can show its economic return is competitive with renewables can it survive in the short and medium term.
Will the deepwater market survive the looming energy transition? Much will depend on how the industry reacts within the coming decades.
Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report, and guest contributor to IEEFA(Institute for Energy Economics and Financial Analysis). His book ‘The 10 Commandments of the Energy Transition ‘is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition