Offshore rigs face shorter lives in oil bust
Hundreds of jobs are at risk as even newer platforms get tossed
The Noble Jim Day dwarfed the small tugboats pushing the hulking offshore oil rig down the Corpus Christi Ship Channel and out into the Gulf of Mexico.
The floating rig — one of the world’s largest at 40,000 metric tons — had been moored for five years in Port Aransas after its drilling contract with Royal Dutch Shell ended in 2016. When it was moved in early March, the rig wasn’t going back into the Gulf ’s deep waters but to Turkey to be dismantled, its steel and other metals sold.
“Scrapping rigs is not something we like to do,” said a spokesman for Noble Corp., which owned the rig. “As we re-evaluated our business and forward cash-flow potential after the utter collapse in energy markets last year, (Noble Jim Day) no longer met the test for keeping it in the fleet.”
The rig named for a former Noble chief executive was built just 11 years ago and, like most, had another 20 years of reliable service ahead of it. But in the wake of the pandemic and the worst oil bust in decades, offshore companies are discarding ever newer rigs — some less than a decade old — and threatening hundreds of jobs.
The Gulf Coast, where most of the nation’s 60,000 offshore workers are based, is the center of the offshore industry, and Houston is home to some of the largest offshore operations, such as Transocean, Schlumberger and Halliburton.
Noble’s rig was among 26 oil rigs scrapped since the start of the pandemic in March 2020, including half in service for about 10 years, according to global energy research firm IHS Markit. By contrast, just two of the 69 rigs discarded during the 2014-16 oil crash were as new.
“We’ve reached a point where quite often we see rigs built in 2011 and 2012 scrapped,” said Matthew Donovan, IHS Markit’s principal research analyst. “Anything a decade old is now a candidate for scrapping.”
No future
Offshore companies have idled rigs, laid off hundreds of workers and, in some cases, sought bankruptcy protection to weather the pandemic, which slashed demand for crude and petroleum products such as gasoline and jet fuel.
Even though oil prices have rebounded to above $60 a barrel, the outlook for the sector remains uncertain. Offshore oil is among the most expensive to produce globally, requiring massive upfront capital and many years to recoup the investment, making it less competitive than oil produced on land.
Adding to the sector’s troubles, demand for oil could start waning this decade, some analysts say, with the rise of electric vehicles and a societal shift from fossil fuels amid concerns about climate change. The Biden administration’s climate policies, including a one-year moratorium on new offshore leases, has only added to offshore’s troubles. If producers can’t get new leases to drill in the Gulf of Mexico, the pipeline of offshore drilling contracts will dry up.
In light of these challenges, it’s no surprise offshore companies are evaluating their fleets of rigs, scrapping those that are unlikely to secure a drilling contract after the pandemic ends, said Tom Kellock, IHS Markit’s director of offshore rig market consulting. In total, 159 floating rigs and drillships have been pulled from service since 2014.
“They don’t see a future for them,” Kellock said, referring to companies that have scrapped rigs. “There’s absolutely no point in hanging on to something that won’t see work again at day rates that are attractive.”
Transocean, the world’s largest offshore drilling contractor, has scrapped 61 rigs, more than half of its fleet since 2014. Houston-based Diamond Offshore has scrapped 22; Sugar Land-based Noble, 13; and U.K.-based Valaris, 8, according to IHS Markit data.
Over the past year, Noble scrapped four rigs that had been in operation for 11 years or less. In the same time, Valaris has scrapped five rigs in operation for a decade or less, including one after just eight years.
Transocean said it is now focused on offshore rigs that have deepwater and harsh environment capabilities. The Switzerland-based company owns or has partial ownership interests in 37 mobile offshore drilling units, including 27 ultra-deepwater rigs and 10 harsh environment rigs.
“Certainly, moving forward, there’s fewer and fewer ability or desire to keep those rigs warm, somewhat active,” Roddie Mackenzie, Transocean’s senior vice president of marketing, told analysts last year. “So scrapping or retiring, it really is the name of the game.”
Declining returns
Oil majors, such as Shell and Exxon Mobil, hire offshore companies to drill for and extract oil from reservoirs deep under the ocean. Producers pay daily rates to rent the crew and rigs.
When crude prices were over $100 a barrel, offshore drilling rigs commanded high daily rates that justified the construction of new rigs. Companies rushed to build floating rigs and drillships early in the last decade.
When crude prices crashed in 2014, 2018 and 2020, however, it made less economic sense to produce oil from expensive deepwater wells. Producers cut short contracts or didn’t renew them, forcing offshore companies to mothball rigs and lay off hundreds of workers.
The number of floating rigs under contract worldwide has fallen to 110 from 261 in 2014, according to IHS Markit. There are 13 offshore rigs operating in the Gulf of Mexico, down from 19 a year ago, according to oil field services firm Baker Hughes and research firm Enverus.
Fewer then than 2,300 offshore wells were drilled in 2020, down from nearly 2,500 worldwide in 2019, according to Rystad, a Norwegian energy research firm
U.S. oil production in the Gulf last year fell by 13 percent to 1.65 million barrels per day compared with 2019, the largest decline of any major American oil field on land or at sea, according to the Energy Department.
Seadrill, which in February filed for its second bankruptcy in four years, last month began laying off 162 workers on its West Neptune drillship after a contract ended in the Gulf of Mexico. The U.K.-based offshore company last summer laid off 135 workers on its Sevan Louisiana Rig and 168 workers on its West Auriga Rig, both in the Gulf of Mexico. Transocean last year laid off a combined 220 workers on its Deepwater Asgard and Discoverer Inspiration drillships in the Gulf of Mexico.
Even idled rigs cost about $4 million a year to maintain at port. And when rigs are called back into service, it can cost $50 million to $80 million to make them seaworthy again. The longer the rig is mothballed, the more it costs to reactivate it.
When the 2014-16 oil bust ended, offshore companies were hopeful they could put idled rigs back to work. But last year’s crash left them questioning whether the cost of maintaining and reactivating idle rigs can be recouped with future production.
“In order to justify spending $50 million to $80 million, you need pretty robust day rates,” a Noble spokesman said.
“It’s a financial decision when it comes back,” IHS Markit’s Donovan said. “You’re looking at the market now and what it will be and deciding if it’s worth it to keep it around.”
‘Scrap prices’
Most retired rigs end up in large scrap yards in Turkey and India; some are scrapped in Brownsville.
Others have found new life in different industries. SpaceX, for example, acquired two semisubmersible rigs last year from Valaris to convert into floating commercial rocket platforms. Some rigs end up being sunken to the ocean floor to be reused as marine life habitats.
Meanwhile, most scrapped rigs aren’t being replaced. There are 25 floating rigs under construction, according to IHS Markit, and few orders for new ones since 2014. One of the largest marine manufacturers, Singaporebased Keppel Corp., recently said it will exit the rig building business.
The longer the downturn lasts, the more pressure offshore companies will be under to keep scrapping rigs.
“Selling rigs to a scrap yard is not a big moneymaker,” Donovan said. “You’re getting scrap prices.”