Seadrill took time out from a detailed outlook of the near and medium-term global deepwater rig market to take a sideways swipe at oil companies during its latest results presentation.

The deepwater-focused rig player flagged up the continuing strong oil market fundamentals, with high and stable oil prices which have seen them remain largely above US $100 per barrel for the past 3.5 years, along with the continued recovery of the global economy.

But the Norwegian company couldn’t resist adding: “Even with these strong macro fundamentals, oil companies seem to be unable to generate free cash flow to grow their businesses, and have entered into a period of selectivity on projects as costs escalated across their entire portfolio of projects. The current situation has some similarities to the situation in 2002-2003 when oil companies had limited free cash flow to develop new reserves. This led to an increase in oil price between 2003-2008 when Brent moved from approximately $40 to $100 and resulted in increased investment by the oil companies.”

Long-term view
However, it quickly moved on from seemingly questioning the ability of oil companies to make money in a good environment to give its long-term view on the rig market. “Today the majority of low cost inventory has been produced and oil companies are entering a new phase in which recently discovered oil must be developed in order to grow production. These reserves are in the deep and ultra-deepwater and are far more complex than reserves discovered in prior periods. We can thereby assume that the amount of rig capacity which is needed to produce a barrel of offshore oil in the future will increase.

“Over the long term, return on invested capital will be the ultimate driver of capital allocation decisions and the attractive economics of the deep and ultra-deepwater will lead to increased exploration and development spending in these regions. This view is supported by most of the major oil companies.”

Specifically discussing the ultra-deepwater drilling market, it admits the near-term “continues to be challenging” and that “competition is fierce”, saying this is partly driven by a reduction in exploration drilling which has led to a slower growth rate in overall upstream spending. The reduced activity level for the majors has also led to a number of sublets, which again puts further pressure on the market.

However, there is evidence of positive developments in the number of tenders that have materialized for 2015 and 2016 projects, it said. Independent E&Ps could also potentially fill some of the exploration gap that has been created by the cuts in exploration spending from the majors.

It stated: “After a year with very few fixtures we have started to see some increased tendering activity, however this has not influenced dayrates, where the trend is still negative. 2014 and 2015 will be challenging years; however Seadrill Group has only one unit currently without contract and only 14 rig years uncommitted for 2015 out of a total fleet of 57 rig years, which translates to 76% contract coverage.”

Bifurcation trend
The sector’s continued bifurcation was also highlighted by Seadrill, with preferential demand for newer rigs a clear trend, it said. “The reported overall contracting activity has increased, however we see some industry participants, especially those with older units and significant portions of their fleet requiring renewal in the short term, driving prices down. The uncertain cash flow profile of these older units is forcing contractors to make difficult decisions and lock up their best assets in order to gain some clarity on the near term outlook for their business.

“Older 4th and 5th generations assets are quickly losing pricing power and rates are falling faster than high-specification units. Many of these units are facing high capital expenditure requirements in order to remain part of the active fleet and owners of these assets face decisions to upgrade, swap out with a new unit, or retire the asset. We have seen two examples of this recently in Norway that may prove to be a leading indicator for trends in the global market.”

Seadrill pointed out that globally, out of a total active floater fleet of approximately 300 units, there are 128 that are more than 25 years old. It is estimated that 70 of these will be required to have 5-year classing surveys between now and 2017, it added, saying the total cost for such classifications can easily be in excess of $100 million.

The number of newbuilds being announced has also declined rapidly in recent months, and existing newbuild projects are also extending their delivery dates. Oil majors continue to focus their activity on 6th generation units with high variable deckload capacity, dual BOPs, and dual activity capabilities in a bid to advance the safety and efficiency of the rigs they employ, it said. Several are also now introducing requirements for managed pressure drilling equipment.

According to Seadrill: “This is not simply a matter of preference that can dissipate if customer preferences change. This migration to a higher specification fleet is in part dictated by the increasingly challenging project requirements of recent discoveries. Oil companies must now develop the challenging reserves discovered in recent years in order to replace reserves and grow production.”

Development well drivers
The rig contractor highlighted the anticipated need by the industry to drill development wells to bring ultra-deepwater production onstream as a main driver, going forward. Ultra-deep production needs to be raised from its present level of approximately 1.3 MMb/d to 5 MMb/d forecast for 2020.

“The delivery of 73 ultra-deepwater newbuildings from today until 2018 will increase capacity. However, it can be anticipated that a significant part of the 128 rigs that are more than 25 years old will be retired from service as they come up for classing surveys due to uneconomic classification budgets. At the same time, ordering of new rigs has more or less stopped, which sets the framework for a sharp upturn when demand and supply again are balanced.”

Geographical markets
Activity in Brazil has also shown the most notable improvement, it said, as Petrobras tendered its first new rig in three years and is progressing through the acceptance process for 2015 extensions.

According to Seadrill: “Following a year when the market saw a number of rigs leaving the country this is certainly a step forward. Although a seemingly-bearish sign to see rigs leaving the biggest operator, it was in fact a very natural market development and a perfect example of the bifurcation and fleet renewal that is occurring on a global scale today.

“In addition to Petrobras’ initial tender and expected extension of six rigs that have contracts expiring in 2015, it is expected that an additional three to four assets will be needed in the short term to meet drilling requirements on the Libra field, with up to 10 units expected to be required in total.”

The West African market also continues to be an active region for tendering activity, it added, with opportunities in Nigeria, Angola, and Ghana. The US Gulf of Mexico is also flagged up as a primary market that could see a pickup in short-term exploration activity, while in Mexico it also predicts that the energy reform process should see demand for floaters follow. “Seadrill continues to be well positioned with Pemex having operated the West Pegasus for the last 2.5 years with a high degree of success, and more recently mobilizing five jackups to the region. In the intermediate term, prior to the awarding of licenses to major oil companies there may an opportunity for a number of additional floaters based on the current budgeted spending from Pemex”.

The demand outlook for Arctic regions has also improved materially over the course of the last year, it said, as Rosneft firmed up drilling plans for the Russian Arctic, Caspian and Black Seas. In order to retain drilling permits approximately 100 wells must be drilled over the next decade. Seadrill is well positioned with its North Atlantic Drilling activities and the recent cooperation agreement with Rosneft. “Over time we expect the Russian Arctic to transform into one of the most unique and interesting opportunity sets globally. However, all is not bullish in the harsh environment areas. In Norway, Statoil is currently high-grading its fleet and forcing older units out of the region. It will take some time for this process to complete and rig owners may face difficult decisions around upgrading units. During this period it is likely that the bifurcation in pricing between more capable and less capable units will be exacerbated.”

Newbuild program
Seadrill itself currently has 18 rigs under construction, with that line-up including seven drillships, three semisubmersibles and eight jackups.

The West Saturn drillship was delivered in late August while the West Neptune drillship was expected to be delivered as DI went to press, with its sister drillship the West Jupiter also expected to be delivered in the next few weeks. All have been or are being built by Samsung in South Korea.

Total remaining yard instalments for the company’s newbuilds are approximately $5.5 billion, with $1.4 billion paid in pre-delivery instalments. With 18 newbuilds still to be delivered, Seadrill says it is well positioned for future growth but will “refrain for the time being from ordering additional rigs until a clearer direction can be seen in the market”.

It also warned that, as it highlighted earlier this year, due to the high volume of deliveries taking place this year and bottlenecks with equipment suppliers and subcontractors, it is likely several shipyards will not be able to meet contractual delivery dates for rigs. It is likely that the West Carina and several of its ultra-deepwater drillships scheduled for delivery in the second half of 2015 will be delayed by up to six months from their original delivery date.

Additionally, construction continues to progress for the Sevan Developer, however significant equipment delays from Cosco subcontractors will likely result in a delivery date in October 2014, it added.

Recent contracts
Recent contract wins in the deep and ultra-deep sector for Seadrill include the company securing a contract with Total for its newbuild drillship West Jupiter on the Egina field offshore Nigeria, with a firm 5-year deal worth approximately $1.1 billion. It also sealed, via North Atlantic Drilling, five binding contracts with Rosneft worth approximately $4.1 billion. The executed contracts include 5-year contracts for the West Navigator, the West Rigel, the West Alpha, two harsh environment jackup rigs, and a Gusto class jackup. These contracts start in Russian and international waters from 2015 through 2017. The West Alpha last month spudded the first well in the Kara Sea for Rosneft.

Just last month Seadrill also won a contract for Esso E&P Nigeria for the use of the newbuild drillship West Saturn on the operator’s deepwater Erha North Phase 2 project. That contract is for two years plus a one-year option and is worth an estimated $497 million.

Total order backlog as of 26 August, 2014 was $18.2 billion, including backlog related to Rosneft but excluding backlog related to its pipelay vessels and Sete Brasil newbuild drillships. The total estimated contract backlog of the excluded contracts is $12.5 billion. The order backlog for Seadrill’s floater fleet is $12.6 billion.

• Seadrill also highlighted that its efforts to improve operational uptime are paying dividends. Its floaters segment (drillships and semisubs) achieved an economic utilisation rate of 96% in the second quarter compared to 94% in the first. The utilisation for the floaters segment on a consolidated basis was 94%, an improvement over the 88% utilisation in the first quarter. A total of 93% of Seadrill’s floater fleet are 6th generation units.