After drilling contractors posted record levels of earnings in the period from 2004 to 2008, the year 2009 marked the beginning of an earnings descent likely to continue over next year or two. When exploration and development spending was curtailed in 2009, rig utilization was quick to follow and leading edge rig day rates deflated. For the drilling market, 2009 was in many respects a transition period as market participants adjusted to a new reality defined by lower commodity prices, rig demand, day rates and utilization. In the second half of 2009, some positive developments have emerged in most rig markets as crude oil prices have recovered materially off their lows, and the broader economy appears to have stabilized.

The following table illustrates the global jackup market facts.

2009 2008
Average jackups deployed under contract335375
Average global jackup utilization75%88%
New jackup contracts signed for competitive fleet180430
Newbuild jackup deliveries2428
Newbuild jackup construction orders1119
Jackup removed from services54
Jackup sold610
Average crude oil price$ 61$100
N.G. Price during the year$2.5 – $6$5.3 – $13.6
Average N.G. price$4$ 8.9

With oil prices recently stabilizing to an average of $70-$80 and some exploration and production spending budgets likely to rise from 2009 levels this year, many offshore rig markets around the globe appear to either experience stabilization or stage some sort of recovery in 2010.

Jackup Market 2009 Review
The market stabilization, which has come sooner than many industry observers expected, was due to the fact that crude oil prices have more than doubled since last March March.  Although day rates were low compared to 2008, some rigs have gone back to work and new contracts or extensions were secured for others as contracts expire. The worldwide jackup rig count began to plummet about five months after the price of crude oil began its sharp descent.  Nearly seven months after the fall of crude oil prices, the jackup rig count began to stabilize, that means that the count was to certain extent stable in the second half of 2009, ranging from 315-325. The contracted jackup count remained below the peak of just over 380 units in August 2008. In response to the absence of jackup demand earlier 2009, drilling contractors aggressively cold-stacked jackups, specifically in the Gulf Of Mexico.

Jackup Market in 2010
The new year of 2010 began with an average oil prices of $80- $85 and a likely rise of some exploration and production spending budgets. Compared to last year, the jackup market has much changed; global jackup utilization hovers around 76%, below levels in early 2009 (81%) and early 2008 (85%).
Outside of the U.S. Gulf Of Mexico, there are around 52 marketable units currently waiting for contractors, including ready stacked units and units enrooted or in the shipyard for short term work. A further 26 competitive, newbuild jackups are scheduled for delivery through the end of 2010. In addition, close to 140 jackup contracts are set to expire during 2010. The graph below starts with the number of uncontracted marketable units today and accumulates newbuild deliveries and jackup contract rollovers for the international fleet over 2010. The graph does not include U.S.GOM due to spot nature of the market minimal new builds targeting the region.

The regions facing the biggest supply challenges include Southeast Asia and the Middle East. Together, two regions alone account for over 60% of the international jackup contract rollovers through 2010 and are also likely target areas for many of the uncontracted newbuilds delivering this year.
Currently, the average age of uncontracted ready-stacked jackups and cold-stacked jackups are 24-29 years old respectively, compared to 22 years old for contracted jackups. Furthermore, utilization for jackups delivered in 2008 and 2009 stood at 75%, with more deliveries on the way over 2010 and 2011, it is expected that market share for high spec jackups delivered within the last 5-10 years will continue to grow. But, age is not everything when it comes to a rig’s desirability.

Newbuilds
According to RigLogix, 58 newbuild jackups worldwide are scheduled to be delivered over 2010 and 2011. However, delays and cancellations for some of these units are likely given the speculative nature of some of the rigs on order and financing for some of the more marginal contractors behind some of the orders. Rowan is no stranger to newbuild rig cancellations. Though its fleet is due to grow by five jackups, earlier in 2009, the company put two of those newbuilds on hold.

By Mostafa Mabrouk, Vice Chairman Assistant for Economic Affairs, Ganope

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