Are Deepwater Rig Companies Ready For The Future?

Authored by Leslie Cook, Principal Analyst, Upstream Supply Chain for Wood Mackenzie

Recovery is a double-edged sword. Despite the healthier offshore rig market there are headwinds. Cost inflation plagues the industry. Materials, logistics and labour are pressure points throughout the supply chain. Rig efficiency challenges the dayrate model and poses the question of whether risk and reward are adequately shared.

Operators are intent on maintaining strategies that favour short-cycle barrels while maintaining capital discipline. Rig companies, despite robust economics, are reluctant to add capacity, primarily due to contract utilisation risks. Achieving organic growth will be difficult as we expect very few, if any, newbuilds, unless emissions decarbonisation or a significant technological advantage is demonstrated. Reactivations will provide limited growth opportunities. Similarly, we believe that growth outside of the drilling sector is limited with the window of opportunity for offshore wind closing.

Energy transition, rig efficiency, automation and labour offer interesting challenges and opportunities for the future. Labour is and will remain a challenge. Advances in automation, artificial intelligence (AI) and big data have had a significant impact on offshore drilling and will address labour issues to some level.

Energy transition impact

The longer-term outlook in the market means significant changes to the size and structure of the offshore rig business. Changes in consumer preferences, client strategies, and government regulations are forcing rig companies to consider a future with less demand, fewer customers, and higher scrutiny regarding ESG practices.

Climate change concerns are not going away. The solutions to reduce greenhouse gas emissions require new investments and wider collaboration, which up to now has been limited. Rig companies have been slow to move on offshore wind. While there is more demand for wind installation services to come, it will not be easy or inexpensive for rig companies to carve out market share organically. Offshore wind could provide an opportunity for stacked rigs, but a major move into offshore wind will likely require acquisitions.

Decarbonisation is now firmly at the top of the agenda for the industry and regulators. Many of the newer generation rigs are equipped with emission monitoring which, until very recently, wasn’t used. Decarbonisation technology is costly and the return on investment is not obvious. A more holistic and longer-term view of these investments can go a long way to advancing technology that lowers emissions on rigs.

Challenges of organic growth

There are no newbuilds on the horizon, and reactivations are providing only limited supply-side relief. While we see several supportive factors, including favourable day rates and a strong demand outlook, there are also several inhibitors.

Reactivation costs: the longer the rig has been stacked, the higher the risk and uncertainty around costs. Our analysis indicates demand for oil will peak in 2032. If we consider fleet age and the need for incremental rigs to meet our supply forecast through 2032, we expect a relatively low number of rig additions (<20) and we believe that reactivations will be sufficient.

Previous downturns have cut capacity for physical assets and skilled labour and reactivation levels are not at a point where yard owners will look to expand.

Automation, robotics, and AI are starting to find their way onto the rigs. But technology alone is not where the value lies. The next big step for rig companies and their stakeholders involves integrating the technology into the broader system. This includes new processes, workflows and, most importantly, new skill sets among the humans who will interact with the technologies. This leads us to ask the question of whether the current rig fleet can assimilate these technological advances, or will we need new rigs to take us to the next level? Will this be enough to drive a newbuild cycle?

Attracting a younger workforce

The workforce has gone through substantial reductions over the last five years and many of those who lost their jobs will not return. Younger workers are less interested in being part of the future of offshore drilling. Lifestyle choices and expectations clash with working in challenging and sometimes remote conditions. A new mentality among senior leadership is required to attract and retain the next generation.

Essential considerations include:

· Holistic competency development to move people up more quickly

· Visible and meaningful Environmental, Social, and Governance (ESG) goals

· Earlier recruitment from outside the traditional academic programs

· Emphasis on technology – AI, robotics, automation – to make the work “cooler”

Deepwater rig companies are slowly coming to terms with the structural shifts taking place in the upstream industry. Real change will require more investment, wider collaboration, and a new mindset for recruitment and retention. For the rig market, more of the same is not a sustainable strategy for the future. The broader challenges of decarbonisation and green technologies also need shrewd adaptations, but true change needs an industry-wide focus.