Recent industry data shows that the offshore rig market is currently experiencing the biggest boom in new build activity since the late seventies and early eighties. In fact in each of the years from 2008 to 2012 more new builds were completed than in the entire five year period from 2003 to 2008. The order books of the major shipyards are overflowing with over 70 drillships and a similar number of jackups as the move away from the trend of building Semisubmersibles continues . More striking is the statistic that, at the time of writing, only half of the rigs on order or under construction have firm contracts – a throwback to the speculative build activity in the early 2000’s.
But what’s driving this activity? It’s certainly not getting cheaper to build these rigs with a drillship costing in the region of $650 million, a semisubmersible at $580 million, and a jackup topping $200 million, all of which are up by more than 15% over the costs 5 years ago. In fact the cost of building rigs has increased steadily through the last 40 years driven by the various peaks in demand for rigs that came in the 70s, 80s, 00s, and the one we are experiencing now.
Other factors have of course also driven these increases including
1. Cost increases for raw materials such as steel by around 50% between 2000 and 2013
2. Labour cost increases in the Asian markets, by as much as 30% between 2000 and 2013
3. An increase in technical capabilities driven by the ultra-deep water requirements and demand from the emerging markets that constrains the supply chain for equipment
4. Steeper regulatory requirements that dictates safety systems requirements, equipment redundancies, and certification
One thing is certain: replacement of ageing rigs is a major driver. As it stands, more than 65% of the current fleet of jackups will be more than 35 years old by 2022 and 273 will be more than 40 years old, which suggests a wave of retirements. With 225 jackups in the current build cycle, this ageing has certainly been recognised and is being addressed.
All of this means a number of things for the industry:
- 113 new build rigs are due to be delivered in the next 18 months, which will put pressure on rig delivery and rig start activity for drilling contractors and will mean that commissioning and acceptance programs will need to operate effectively
- With day rates increasing, the impacts of project delays and failure are magnified for all parties involved in getting a rig “drill ready”
- At the time of writing, less than half of the rigs being built have firm contracts in place (87 out of 177) so many of the rigs under construction may be lined up to replace some of the ageing rigs which will push rates higher and result in even greater financial and reputational risks