To the surprise of no one, operators are losing their appetite for offshore drilling these days.
Between 2020 and 2021, drilling contractors stand to lose an estimated $3 billion in aggregate revenue as up to 10% of contract volumes are cancelled in response to the coronavirus pandemic, according to a Rystad Energy economic impact analysis. Six-years-worth of rig contracts had been cancelled as of the April 9 analysis, translating to approximately $400 million in contract value, which Rystad projects will only increase as operators continue to slash capex and delay new drilling projects.
“More than $22 billion in contract value was wiped off the books as a result of contracts being canceled between 2014 and 2017,” said the report’s author Oddmund Føre, head of the Norwegian consultancy’s Offshore Rig Market Services. “Now, in the infancy of a new downturn, a market that was only beginning to return to a healthy level of contracting activity, contract volumes and day rates has seen its hopes crushed.”
At the time of the report, 18 rigs were still on contract in the U.S. Gulf of Mexico, according to Baker Hughes, unchanged from the week prior, but down from 23 in April 2019. In the first quarter of 2020, 15 new well permits for waters deeper than 500’ were approved, compared to 20 in the same period last year.
“Some operators are pulling back on their drilling programs, but we haven’t heard anything yet about specific rig cancellations related to the virus for those working in deeper waters (of the Gulf of Mexico),” said Liz Tysall, Rystad’s lead offshore rig analyst. “It has, however, become a little more difficult for crew changes if they have international crews.”
Globally, the Rystad analysis showed that without substantial capex cuts offshore drilling contractors, as well as vessel operators, will generally be unable to pay their total outstanding debt in 2020, based on cash flow from operating activities. “One of the trends seen five years ago was that E&P companies canceled many contracts and chose not to declare many contract extension options, and thereafter rehired rigs at lower rates. This, however, is not likely to be a factor in the current downturn. Rig rates had started to move upwards from opex levels in the months leading up to the coronavirus outbreak, but not enough to constitute any significant cost savings for E&Ps if they were to cancel and rehire a rig,” Føre wrote.
Meanwhile, Diamond Offshore Drilling became the latest casualty of the unprecedented market collapse, filing for Chapter 11 bankruptcy protection on April 26. In its filing, which followed the drilling contractor’s skipping of a semiannual interest payment due April 15, the company cited unprecedented market conditions that had worsened “precipitously in recent months.”