Rig Market Feels the Heat: Westwood
The offshore rig market has come under pressure as operators rein in spending in response to the market downturn and Covid-19 creates crew and logistical challenges, Aberdeen-based Westwood Global Energy said in a research note on March 23.
With upstream companies announcing typical capital expenditure reductions of 20-30% and Covid-19 making it harder to mobilise personnel and equipment, the number of idle rigs will increase substantially in the near future, Westwood warned.
Rig operations continue in most areas of the world where travel bans and quarantines are not yet in place, but this is starting to change as operators report that they will halt drilling and start stacking rigs. Operators have begun amending contracts and even declaring force majeure. Planned programmes will also be delayed and contract options not exercised if current oil prices and the Covid-19 situation persist, Westwood said, driving up the number of idle rigs. Day rates will also come under substantial pressure.
Westwood said its database RigLogix had identified 75 rigs with 95 options where the terms are scheduled to begin his year. It estimates the options' revenue worth at $1.6bn. Many of them will not be actioned, but some not due to start until later in the year could still proceed. Half of the $1.6bn sum relates to options on contracts in Africa, southeast Asia, and the Middle East.
Most of the almost 300 drilling programmes slated to start this year will be delayed, Westwood predicts, while the number of new contract awards in the next few months will be minimal.
"The world has been transformed in the past month. Many are predicting a prolonged downturn in the oil market but there remains much uncertainty over its duration and depth," Westwood said. "Covid-19 is having a catastrophic impact on oil demand and how long the various travel bans and lockdowns continue is anyone’s guess."
Meanwhile, Russia, Saudi Arabia and other Opec+ members are preparing to expand output next month to force higher-cost competitors to shut down production.
"Even a reconciliation there will not be enough to reverse the damage caused by the many millions of barrels a day of demand being taken out of the market," Westwood said. "History tells us that eventually, the markets will recover but in the meantime, operators, rig owners and services companies will once again have to “hunker down” and ride out the storm."