Page 12: of Marine Technology Magazine (April 2020)

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Offshore Drilling: It’s Going to Get Worse Before It Gets Better

The Offshore Rig Market – At $30 Oil Offshore Drillers May Be Out of Options

By Terry Childs, Head of RigLogix, Westwood Global Energy Group

COVID-19 and low oil prices are already of which were in the early stages of mak- included shortening existing programs having an impact on the offshore rig mar- ing their way back to proftability, the wait or contract suspensions, while others in- ket as contractors face crew & logistical will be longer, and some will be impacted volved options not being exercised, and challenges and E&Ps attempt to prioritize more than others. With many companies even the start of force majeure declara- drilling campaigns staring at debt payments due in 2021, one tions. Other reports of operators planning

Contract scrutiny has already led to a few source at one major rig owner said he be- to shut down drilling operations once contract cancellations and the frst claims lieves most every public driller will be in a casing point is reached are also now of Force Majeure Chapter 11 this year or next, not the kind coming in, and that list is getting longer,

However, contract options are at most of thing anyone wants to hear. quickly.

risk. Over $1.6 billion in contract value Currently, rig operations in most areas of Assuming low oil prices and COVID-19 is at stake for options that are due to be the world, where no travel bans or quaran- continue in the coming months, the num- exercised this year. Africa, Southeast Asia, tines are in place, continue to be supported ber of rigs going idle will be a key metric. and the Middle East make up over 50% of by rig owners, albeit with very strict pro- Contracts where options are not exercised, the total tocols in place regarding crew, equipment, delays to currently planned programs, and

With the oil price crash and COVID-19, supplies, etc. However, as reports flter in Force Majeure declarations and other con- the near-term outlook for the offshore rig from operators, more are saying they will tract termination options will all result in market is on a lot of minds. RigLogix has shut down drilling soon and warm stack idle rigs.

contacted a number of rig owners and the rig. In most of these instances, it is the The Force Majeure option will become operators and the consensus seems to be COVID-19 impact on logistics that is creat- more prevalent in the next few months. that it’s going to get worse before it gets ing the problem. If more countries end up How much so will depend on the precise better, especially if current conditions per- adopting no travel bans or lockdowns, it wording in any given contract, but you can sist. Announcements of operators cutting will only extend the list of idle rigs. be sure drilling company and operator le- 2020 capital expenditure plans are coming Less than one week ago, there were only gal teams are poring through contracts to fast and furious with a 20-30% reduction a handful of instances where rig contracts review the language. typical. COVID-19 is also impacting the had either been suspended or contracts According to some, a pandemic could ability to get personnel and equipment/ terminated. However, during the 1-2 days be deemed to fall under an “Act of God”, services to and from rigs. Combined, the of writing of this report, several additional a clause written in many rig contracts, so number of idle rigs will increase substan- reports of contract amendments have sur- there no doubt will be much discussion tially in short order. For rig owners, some faced in various parts of the world. Some around this topic. In a Force Majeure, a rig usually goes on a reduced rate for a set number of days, often followed by a contract termination or in the best case a rate renegotiation. In this instance, it may not be sickness caused by COVID-19 that brings a force majeure declaration, but rather rig downtime due to inability to get crews and/or supplies and equipment to and from the rig.

Closely aligned with Force Majeure, some recent contract awards for work starting later in the year are expected to be terminated before the work begins. To that end, there are reports that a contract award made just last month for a semi- submersible to work offshore Norway has been withdrawn, but that has yet to be confrmed.

Many operators will not be inclined to © Mike Mareen/AdobeStock April 2020

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