Stronger Offshore Activity

The offshore rig market recovery has been extremely prolonged, and is now picking up slowly and steadily – certainly a relief to the remaining rig owners who have weathered through this most recent downturn. As offshore rig rates and utilization inch upward, additional rigs for both exploration and developmental drilling will be activated. Offshore rig rates appear stable for the next couple of years, due to oversupply. This is positive for the floating production sector, as drilling typically accounts for 1/3rd or more of development costs.

While any exploratory drilling activity is likely to have some positive impact on future oil and gas production, and an overall increase in installation of floating platforms, any direct correlation is nearly unquantifiable. Successes in exploratory drilling typically take 4 to 5 years to reach FID and contract award, followed by another 2 to 4 years to reach production. Variables that include field size, complexity, region, proximity to existing infrastructure, company experience, financing, oil price, development costs, etc., must be considered and included in the project development timeline.

Therefore, aside from generalities, upticks in offshore drilling activity today should not be directly linked to any specific amount of increased floating production activity years from now. It is the quality of the exploration that matters, not just the quantity. ExxonMobil’s huge find in Guyana will require at least 5 FPSOs.

Although operators report a surplus of cash flow, they remain disciplined about which projects to invest in and have been sanctioning only the best. Deepwater developments, particularly offshore South America and the Gulf of Mexico are among the most attractive projects today, with break-evens in the $35-40 range.

Recently, service company executives at Halliburton and Schlumberger made positive remarks about the current state of the offshore drilling market. Halliburton’s CEO commented on their Q2 2019 call, “As to the broader offshore market, we've seen enough size to anticipate future growth…However, the majority of large offshore projects being sanctioned or awarded today have a 2020 or 2021 start date.”

All indicators are positive for an expected increase in upcoming field development activity and additional project sanctions.

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