Offshore jack-up rigs are an essential feature of the oil and gas industry. Typically used in water depths between 25mto 150m, jack-up rigs are floated onto the drill site before retractable legs are lowered to the sea floor, raising the hull out of the water. Once in position jack-up rigs are capable of drilling to depths of up to 9,000+m.
Life Cycle Application
Jack up rigs are used throughout the oil & gas field lifecycle. The majority of activity is concentrated during the development and production phases of a field where operators are targeting the increase or maintenance of production levels.
Depending on the drilling parameters, for instance, water depth or drilling depth, different specification jack-up rigs will be considered for the operation. These are broadly categorised into three groups: i) standard, ii) premium, and iii) high specification.
Supply & Demand Dynamics
The offshore jack-up rig market is highly cyclical. Utilization and rates are quick to react to oil price and over the past 3-4 years, prices have been driven to record lows. With oil prices stabilizing around US$65 per barrel the short to mid term is likely to remain challenging for rig owners as investment levels remain restrained. Looking further ahead of any growth in investment will likely see higher specification jack-ups contracted first, leaving a large surplus of standard specification rigs (unlikely to work again) and a continuation of pressure on day rates.
Across the globe, few regions have maintained or increased jack-up rig activity since before the oil price crash in 2014. With the exception of the Middle East and India most regions have see significant reductions in jack-up rig count.
Porter's 5 Forces Analysis and Buyer's Power
Cost & Price Analysis
Current Price Trend
Jack-up rig prices continue to face downward pressure due to the supply and demand dynamics at play. Below is a summary of global jack-up rig rates as of mid-2018.
|Low Rate (US$/day)||90,000||70,000||50,000|
|High Rate (US$/day)||130,000||90,000||65,000|
|TargetRate (US$/day)||95,000 to 120,000||75,000 to 85,000||60,000 to 65,000|
Depending on the rig owner in question and how successful their cost-cutting has been since the oil price crash, many jack-up rigs will be operating close to break even with the estimated breakeven daily rate on a high specification being circa US$80,000 to US$100,000 per day. Below is a breakdown of the costs involved in running a high specification jack-up rig.
Total Cost of Ownership
In the current market environment, buyers must balance their competitive strength with building relationships that can foster higher performance. Offshore jack-up rigs are a major value contributor to oil & gas companies and small increases in performance can have a significant impact on oil revenues and well costs. Consequently, it is important to use the buyer’s competitive power to reduce costs and also to maximize value through improved performance.
Key strategic objectives are:
- Maximise cost savings/reductions
- Maximise added value through innovation and continuous improvement of performance
- Maintain a degree of flexibility
When approaching the market DALEEL recommend the approach outlined below:
Depending on the application, the operator's appetite for risk, and the commercial restraints of the project a number of contracting options exist as summarised below:
The performance of the jack-up rig owner has potentially major implications for the commercial and operational success of a project. DALEEL recommends placing significant contractual emphasis on: i) crewing, ii) rig maintenance, iii) continuous improvement, and iv) operation management. These all feature as important value drivers.
Buyer's should attempt to align all parties through measurable performance indicators centred around the value drivers identified above. Some examples are provided below.