Drilling rigs are some of the most important pieces of oilfield equipment. They are used during a number of stages throughout oil and gas fields’ lifecycles. See the summary below for descriptions of how offshore rigs are used throughout oil and gas fields lifecycles.
During the exploration stage, rigs are used to drill exploration wells and ‘wildcat’ wells for potential hydrocarbon-bearing geological structures after various geological studies and seismic surveys have identified locations in which these structures could be placed. Most of the time, vertical wells are drilled to ensure safety and well stability and to acquire sufficiently high-quality subsurface data and knowledge.
During the appraisal stage, rigs are used to drill several wells to understand flow rates and reservoir dynamics and to determine the size and limits of the reservoir in order to confirm the assumption that hydrocarbons can be produced economically.
During the development stage, rigs are used to drill wells (at a much higher level of activity) to the depth of a productive zone of the reservoir. At this point, wells can be vertical, horizontal or deviated, and they can be drilled on a grid or on a pad.
During the production stage, rigs are used to drill more wells, also known as repair/work-over wells, to fix existing wells. This practice is also known as infield drilling Depending on the complexity of the job, a smaller work-over rig may be used for a work-over program to repair wells, enhance production or provide other well treatments.
A number of rig types are used offshore. Each rig type serves a different purpose, and each one is best suited to a particular drilling environment.
The key differentiation factors in offshore drilling rigs are as follows:
- Rated water depth
- Drilling depth
- Leg length (for jack-ups)
- Lifting capacity
- Top drive system
- Number of mud pumps and the power and ability to circulate drilling fluid
Types of offshore drilling rigs ( source: Maersk)
Offshore drilling is more challenging than onshore drilling due to the lack of stability (particularly for floaters), the corrosive water environment, space constraints and the need for more complex logistics and support. Offshore drilling rigs are broadly divided into bottom-supported rigs and floaters.
Unlike floaters, bottom-supported rigs are anchored to the bottom of the sea floor. There are two main types of bottom-supported rigs: platform rigs and jack-up rigs.
Platform rigs consist of steel or concrete platforms standing on top of fixed columns that are made of tubular steel and driven into the seabed. Platform rigs are limited to water depths of about 150 meters.
Jack-up rigs are floated out to the drilling location, and they have retractable legs that are lowered down to the seafloor. Jack-up rigs can only work in water depths less than the length of their legs, typically limiting operations to less than 150 meters/500 feet. When drilling is completed, the legs are raised out of the water, and the rig becomes a floating barge that can be towed away (‘wet tow’) or placed on a large transport ship (‘dry tow’).
Jack-up rigs can be segmented by their specifications and water depth ratings. The three most common types of these rigs are standard, high specification and harsh environment.
Standard rigs are generally old, and they usually have low hook-load capacities and mechanically operated drilling equipment with little automation. These rigs operate at water depths less than 300 feet. However, standard rigs can do almost the same job as high-specification rigs at a much lower rate.
High-specification rigs are mostly used in Southeast Asia, but they are growing in popularity in GCC and GOM. The rigs are very robust, and they can drill at water depths of up to 400 feet due to their modern automation systems and drilling equipment.
Harsh-environment rigs are mainly used in the North Sea. These rigs are designed to withstand harsh weather conditions and water depths of up to 490 feet.
Floaters are not limited to the same water depths as jack-up rigs because they do not have to stand on legs. Floaters are ships with drilling equipment that are self-propelled. When the ship arrives at a location, the floating rig anchors with the help of anchor handling vessels and support vessels (AHTSV) in a complex, lengthy process. Unlike jack-ups, floaters move up and down with the tides, but the fixed wellbore does not move. This is achieved through hydraulic wave-motion and heave compensators.
The two different types of floater rigs are semi-submersible rigs and drillships.
- Semi-submersible rigs are supported (floating) by large pontoons, which provide enough buoyancy to keep the rig afloat or to move it from location to location. They are semi-submersible rigs (or ‘semis’) because the floaters operate in a ‘semi-submerged’ manner. While some semis use mooring lines to connect to the anchors on the sea floor, others have propellers that rotate to hold the rig in the exact location; these rigs are often referred to as dynamically positioned.
- Drillships are used in deepwater and remote fields due to their large load-carrying capabilities, mobility and ease of moving. Drillships use dynamic positioning systems to station at an exact position.
Risks & Opportunities
Over 60% of the jack-up rigs available will be over 30 years old by 2025. Hence, rig owners’ willingness to renew their fleets depends heavily on the overall industry climate. Coupled with anticipated efforts of rig owners to scrap excessive supply of rigs, to narrow the gap between supply and demand, this may mean an increase in day rates for operators. Making use of time when activities/preparation can be done off-line is a large area of extracting value and drilling more in the same period of time.
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$65 per barrel the short to mid term is likely to remain challenging for rig owners as investment levels remain restrained. Looking further ahead of any growth in investment will likely see higher specification jack-ups contracted first, leaving a large surplus of standard specification rigs (unlikely to work again) and a continuation of pressure on day rates.
Across the globe, few regions have maintained or increased jack-up rig activity since before the oil price crash in 2014. With the exception of the Middle East and India, most regions have seen significant reductions in jack-up rig count.
GCC’s demand for offshore rigs is affected by the discoveries of new fields and field re-development activities. In addition, the size of the fields has a direct effect on the number of rigs required. With growing activities in KSA, Qatar and UAE, it is expected that up to 30 rigs could be added between the end of 2018 and end of 2019, majority of them being in KSA and Qatar.
Offshore rig market is very competitive, follows cyclical pattern and highly sensitive to oil prices. The power balance is highly fluid, as during high times (high capacity utilization) suppliers are more powerful. Yet, in times of lower rig utilization, the power shifts to buyer.
Cost & Price Analysis
Operating rates for offshore rigs have always been driven by supply and demand and have been highly sensitive to oil prices and rig utilization. Therefore, day rates can fluctuate significantly within very short periods. Operating rates have little correlation to the actual cost of operating a rig, and rig owners adopt supply and demand pricing mechanism and sometimes more opportunistic approach.
Jack-up rig prices continue to face downward pressure due to the supply and demand dynamics at play. Below is a summary of global jack-up rig rates as of mid-2018.
|Low Rate (US$/day)||65,000||60,000||50,000|
|High Rate (US$/day)||120,000||65,000||55,000|
|TargetRate (US$/day)||70,000 to 90,000||55,000 to 60,000||50,000 to 55,000|
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$50,000 to US$70,000 per day. Below is a breakdown of the costs involved in running a high specification jack-up rig.
Total Cost of Ownership
The key category objective is securing access to capacity and ensuring service quality. In the accomplishment of this objective, it will be critical to understand supply market dynamics and establish strategies that address particular needs and segments.
- Demand planning – develop a multiyear rig demand based on drilling programmes
- Own vs. rent – access the right mix of owned vs. contracted rigs, to ensure secure supply and high-quality drilling services
- Long-term relationships with key rig owners
- Closely follow market conditions, capacity utilization, rig owners move in the market ( consolidation)
- Watching the global and regional rig status enables operators to better understand utilization trends and strategize accordingly.
- A detailed understanding of the Rigs capabilities, as well as operational conditions (e.g., date of last refurbishment and certifications), is critical in providing visibility on the supply-demand power.
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.
Buyers should attempt to align all parties through measurable performance indicators centred around the value drivers identified above. Some examples are provided below.