Owners must remove 60 oil drilling rigs to beat glut -analysts

OSLO (Reuters) - Rig owners must mothball or scrap 60 additional drilling units to end a supply glut in the offshore oil and gas exploration market as low crude prices continue to push hire rates down towards the level of operating costs, industry analysts said.

An offshore oil platform is seen in Huntington Beach, California September 28, 2014. REUTERS/Lucy Nicholson

So far some 40 drilling rigs of a total of around 350 units globally have been taken out of the market as day rates have plunged because of falling crude prices and cost pressure amongst oil companies.

“During this cycle, up to 100 units need to go, but it’s drifting out in time. We have seen 42 rigs removed from the market so far, so there are still up to 60 rigs missing,” analyst Joachim Bjorni of consulting firm Rystad Energy said.

Analysts at brokerages Danske Markets and Fondsfinans both gave similar numbers. So far most firms have parked unused rigs rather than scrapping them altogether, but this is expected to change in 2016.

“There are a lot being cold stacked, but less scrapping. We anticipate that this will increase substantially in the first quarter next year,” analyst Sondre Stormyr at Danske Markets said.

Expensive upgrade work for older rigs without contracts is seen as the main driver, the analysts said.

“Some can be cold stacked, but a lot will go straight through and sold as nails. They will never return,” Rystad’s Bjorni said.


Last week Norwegian oil explorer Det norske oljeselskap signed a deal with Transocean Offshore for the lease of a semi-submersible drilling rig equal to a daily rate hire of $179,000.

The previous rate this rig achieved on a contract was $373,000 dollars per day, according Transocean.

“In absolute terms it’s the lowest point ever recorded for a floater in Norway. That says something about how bad the market currently is,” Bjorni said.

In 2013, rates for ultradeep water drilling rigs peaked at around $700,000 per day while semi-submersible drilling units were signed at above $600,000 dollars per day.

Rig analyst and head of oil services research at Fondsfinans, Knut Erik Lovstad, said he expected rig rates to come down towards operational costs going forward.

“They will rather have the rigs go break even than to cold stack them. We don’t believe that the older rigs being cold stacked will return to the market because of high capex,” he said.

Rig companies are among the worst hit by the oil downturn with shares in Seadrill, Fred. Olsen Energy and Songa Offshore losing 30 percent to nearly 50 percent in value so far this year, compared to a rise of 8.3 percent rise in the Oslo benchmark index.

Since its peak in 2013, Seadrill’s shares are down 84 percent.

Reporting by Henrik Stolen, editing by Terje Solsvik