Market Overview

Rising Oil Prices and Cost Efficiencies Driving Greater Global Demand for Offshore Drilling Rigs through 2020, IHS Markit Says

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Consistently higher oil prices are driving operators to make
longer-term plans as offshore projects become more cost effective,
particularly in deepwater

Consistently higher oil prices and greater cost-efficiency in offshore
projects are driving increased demand for offshore drilling rigs through
2020, particularly for deepwater projects, according to new analysis
from IHS Markit (NASDAQ:INFO), the leading global source of critical
information and insight.

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Global forecast floater demand 2018-20 (Source: IHS Markit)

Global forecast floater demand 2018-20 (Source: IHS Markit)

In its first worldwide mobile rig forecast for 2020, IHS Markit, which
relies on data from its Petrodata
RigPoint
database
, estimates the average global demand for
mobile offshore drilling units, comprising jack-ups and floating rigs,
is expected to increase by approximately 13 percent between 2018 and
2020 as the offshore market slowly emerges from its prolonged downturn.
The company recently published its outlook for customers, entitled IHS
Markit World Rig Forecast: Short-Term Trends
.

IHS Markit expects global offshore rig demand will average 521 units in
2020, which exceeds the average of 453 units expected through 2018.
These demand figures account for the entirety of 2018 through 2020,
including seasonal fluctuations and regional trends.

"Broadly speaking, much of this increase in global demand can be
attributed to the price of oil being sustained at a higher level than
when the downturn was in full swing," said Justin Smith, offshore rig
analyst at IHS Markit and an author of the rig forecast. "In addition,
costs associated with the offshore industry have been slashed in recent
years. This has led operators to reconsider exploration, appraisal, and
development programs that were not economically viable while the market
was bottoming-out."

While the demand for jack-ups, which work in shallow water, will improve
during this period, the increase will primarily be driven by floating
rigs, specifically semi-submersibles and drillships, as operators step
up activity in deepwater areas around the globe, IHS Markit said.

"The vast majority of this offshore rig demand increase will come from
the Middle East, led by Saudi Arabia, and other notable additions in
Qatar and the United Arab Emirates," Smith said. "Saudi Aramco alone
will account for roughly a third of this increase as the operator
continues its push for more offshore production, a sentiment echoed by
Qatargas, which is aiming to increase its liquefied natural gas (LNG)
exports."

For jack-ups, demand is expected to climb from an average of 321 rigs
this year to an average of 352 in 2020, which would be an improvement of
9.7 percent during the period. Meanwhile, smaller upticks in the jack-up
rig segment are expected for several regions, including Northwest
Europe, Central America, West Africa and the Indian Ocean.
Interestingly, the U.S. Gulf of Mexico has made a considerable rebound
from its lowest point of the downturn of four contracted units in
October 2016. This year, the U.S. Gulf jack-up sector is expected to
average about nine units, increasing to 11 by 2020, with potentially
more on top of that, should local operators decide to undertake
additional drilling programs, Smith said.

In the floating rig market, average annual semi-submersible rig demand
is forecast to increase substantially in the short-term—by more than 25
percent—from an average of 71 units in 2018 to 89 units in 2020.
Northwest Europe is responsible for a third of this expected
improvement, but it should be noted that the semi-submersibles typically
used in the region need to be equipped for harsh environments, for which
fewer units are suited, thus making the region more competitive, IHS
Markit said.

This has resulted in charter rates for the top echelon of units in this
segment increasing by approximately 65 percent in some cases during the
last year. In Norway, operators are increasingly focusing on securing
high-specification, sixth-generation rig capacity, while U.K. operators
still keep the market going for 1980s-built, third- and
fourth-generation semi-submersibles.

"Fairly significant contributions to the semi-submersible rig demand are
also coming from North and South America, as well as in the Asia Pacific
market," Smith said. "While not as busy as some other regions,
semi-submersible demand for Australia/New Zealand and the Indian Ocean,
especially Myanmar, is anticipated to increase, but the numbers for
Southeast Asia and the Far East are likely to stay flat going into 2020,
if not fall very slightly."

Similarly, a significant increase is anticipated for the drillship
portion of the floating rig market, for which demand in 2020 will
average 79 units, marking a more than 27 percent increase from the
average demand of 62 units for 2018. North and South America will be
responsible for most of this growth, but for different reasons. In North
America, the increase is mostly attributable to operators being
reinvigorated to invest in development programs, while South America is
benefiting from ExxonMobil's exploration successes in Guyana and an
influx of new operators in Brazil's pre-salt areas, IHS Markit said.

Deepwater rigs, which are defined by IHS Markit as units that can
operate in more than 3,000 feet of water, will see the most improvement
with a number of longer-term programs set to begin in 2019 and to run
throughout 2020 and beyond, particularly the drillship segment. In West
Africa, the focus of the deepwater market will continue to be Nigeria,
Angola, and Ghana, but high-profile campaigns continue to come to light
for up-and-coming players, such as Namibia, Mauritania and Senegal, IHS
Markit said.

"While fewer rig contracts have been signed during the last several
years, we know that operators are making more plans for the future, and
that growth is indicated in our forecast," Smith said. "Once companies
release their 2019 budget, we expect greater clarity as to how their
leaders perceive the long-term health of the offshore market. Even
without seeing their budgets yet, it is understandable that operators
would want to take advantage of current cost reductions, which is being
borne out as the number of tenders in the market for rigs has grown
significantly this year," Smith said.

Ahead of that, rig utilization rates have been slowly-but-steadily
improving this year, a trend that is expected to continue. The total
utilization of jack-ups, semi-submersibles, and drillships, which is
defined as the share of all of the rigs that are contracted regardless
of whether the rigs are actively being marketed as available for future
contracts, hit a floor of 51 percent at the end of 2017 after more than
a year at this level. The total utilization level is now at 56 percent
and should keep climbing steadily, albeit very slowly, as market
conditions continue to improve, IHS Markit said.

Marketed utilization, which is the proportion of units actually offered
for work that are contracted, has also been edging up since early 2017,
and has increased from more than 69 percent to nearly 74 percent.
However, that number will need to be closer to 85 percent before
contractors can start pushing significantly higher day-rates, Smith said.

"As available rig time for 2019 and 2020 begins to diminish, we expect
operators that have not yet secured their rig slots will follow suit
more rapidly so as to avoid paying higher day rates later in the
market's recovery, when rig availability is tighter," Smith said.
"Additionally, while contracts during the downturn tended to be for
shorter terms, it is likely that oil companies will endeavor to lock in
rigs for extended terms to secure units at lower rates for as long as
possible."

However, "despite a relatively robust improvement in demand during the
next two years, the offshore rig market is still significantly
oversupplied," Smith said. "While growing demand will help improve
day-rates in the future, this excessive supply will continue to hinder
that progress."

Rig contractors have accelerated the pace at which they are removing
rigs from the global fleet in recent years, which has played a
significant role in improving the global utilization rate. Since 2014,
at least 189 rigs have been removed from the fleet, most of which have
been older jack-ups and semi-submersibles, but still more units will
need to be scrapped before day-rates can increase significantly, IHS
Markit said. For reference, during that same period, a total of 133 new
rigs were delivered. To that end, the total number of marketed offshore
rigs currently stands at 647, and of those, 225 are at least 30 years
old, according to IHS Markit.

"Still, it may be premature to assume that a huge portion of these older
units will be scrapped during the next few years since 64 percent of
them are currently drilling," Smith said. "Some operators will use
expiring contracts as an opportunity to get newer rigs, but those units
will continue to compete with older ones that can generally offer lower
rates, particularly as the availability of premium jack-ups tightens.
The reality is that cost is key—not every operator needs or wants the
highest-specification rig on offer."

Compounding the issue, another 132 jack-ups, semi-submersibles and
drillships are currently under construction, and only two of those
already have contracts in hand. While the delivery dates for many of
these will be delayed and some may be cancelled outright—in particular
the floating rigs ordered by Sete Brasil—their mere presence will
continue to have a downward pressure on day rates until the market
achieves more balance, IHS Markit said.

"Regardless of whether it is with an old rig or a new one, operators
will have a plethora of rigs from which to choose to satisfy their
demand going into 2020," Smith said.

(While not addressed in this report, information regarding tenders,
contracting backlog, day rates and other offshore rig-market data also
are tracked by Petrodata
RigPoint
.)

To speak with Justin Smith, please contact Melissa Manning at melissa.manning@ihsmarkit.com.
For more information about the Petrodata
RigPoint database by IHS Markit, or World Rig Forecast: Short
Term Trends
, please contact Paul Large at paul.large@ihsmarkit.com.

About IHS Markit (www.ihsmarkit.com)

IHS Markit (NASDAQ:INFO) is a world leader in critical information,
analytics and solutions for the major industries and markets that drive
economies worldwide. The company delivers next-generation information,
analytics and solutions to customers in business, finance and
government, improving their operational efficiency and providing deep
insights that lead to well-informed, confident decisions. IHS Markit has
more than 50,000 business and government customers, including 80 percent
of the Fortune Global 500 and the world's leading financial
institutions. Headquartered in London, IHS Markit is committed to
sustainable, profitable growth.

IHS Markit is a registered trademark of IHS Markit Ltd. and/or its
affiliates. All other company and product names may be trademarks of
their respective owners © 2018 IHS Markit Ltd. All rights reserved.

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