Category Description: During The Exploration Stage, R

CATEGORY DESCRIPTION
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)
 Accommodation
 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

Market Summary
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.
Heat Map
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.
EXTERNAL SCANNING
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.
PORTFOLIO POSITIONING
COST & PRICE ANALYSIS

Price
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 early 2019.
Rates High Specification Premium Standard
Low Rate (US$/day) 65,000 60,000 50,000
High Rate (US$/day) 120,000 70,000 60,000
TargetRate (US$/day) 70,000 to 90,000 55,000 to 60,000 50,000 to 55,000
Price Pressure High High High

Cost Analysis
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

STRATEGY
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.
Contracting Options
PERFORMANCE MANAGEMENT
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.

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CATEGORY DESCRIPTION

The key differentiation factors in offshore drilling rigs are as follows:

RISKS & OPPORTUNITIES

SUPPLY & DEMAND DYNAMICS

COST & PRICE ANALYSIS

Low Rate (US$/day) 65,000 60,000 50,000

High Rate (US$/day) 120,000 70,000 60,000

TargetRate (US$/day) 70,000 to 90,000 55,000 to 60,000 50,000 to 55,000

Price Pressure High High High

TOTAL COST OF OWNERSHIP

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