Jack-up Rigs

Offshore jack-up rigs are an essential feature of the oil and gas industry. Typically used in water depths between 25m to 150m, jack-up rigs are floated onto the drill site before retractable legs are lowered to the seafloor, raising the hull out of the water. Once in position jack-up rigs are capable of drilling to depths of up to 9,000+m.

High Spec Rig
Harsh Environment Rig
Cyber Rig
Standard Rig

IMPORTANCE

LEVERAGE STRATEGIC ROUTINE BOTTLENECK

BUYER POWER

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WEAK

BUYER POWER

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BALANCED

BUYER POWER

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STRONG

Category Description Image

Category Description

Drilling rigs are some of the most important pieces of oilfield equipment. They are used during a number of stages throughout oil and gas fields’ lifecycles. See the summary below for descriptions of how offshore rigs are used throughout oil and gas fields lifecycles.

During the exploration stage, rigs are used to drill exploration wells and ‘wildcat’ wells for potential hydrocarbon-bearing geological structures after various geological studies and seismic surveys have identified locations in which these structures could be placed. Most of the time, vertical wells are drilled to ensure safety and well stability and to acquire sufficiently high-quality subsurface data and knowledge.

During the appraisal stage, rigs are used to drill several wells to understand flow rates and reservoir dynamics and to determine the size and limits of the reservoir in order to confirm the assumption that hydrocarbons can be produced economically.

During the development stage, rigs are used to drill wells (at a much higher level of activity) to the depth of a productive zone of the reservoir. At this point, wells can be vertical, horizontal or deviated, and they can be drilled on a grid or on a pad.

During the production stage, rigs are used to drill more wells, also known as repair/work-over wells, to fix existing wells. This practice is also known as infield drilling Depending on the complexity of the job, a smaller work-over rig may be used for a work-over program to repair wells, enhance production or provide other well treatments. 

A number of rig types are used offshore. Each rig type serves a different purpose, and each one is best suited to a particular drilling environment.

 

The key differentiation factors in offshore drilling rigs are as follows:

  • Rated water depth
  • Drilling depth
  • Leg length (for jack-ups)
  • Accommodation
  • Lifting capacity
  • Top drive system
  • Number of mud pumps and the power and ability to circulate drilling fluid

Types of offshore drilling rigs ( source: Maersk)

Offshore drilling is more challenging than onshore drilling due to the lack of stability (particularly for floaters), the corrosive water environment, space constraints and the need for more complex logistics and support. Offshore drilling rigs are broadly divided into bottom-supported rigs and floaters.

Unlike floaters, bottom-supported rigs are anchored to the bottom of the sea floor. There are two main types of bottom-supported rigs: platform rigs and jack-up rigs.

Platform rigs consist of steel or concrete platforms standing on top of fixed columns that are made of tubular steel and driven into the seabed. Platform rigs are limited to water depths of about 150 meters.

Jack-up rigs are floated out to the drilling location, and they have retractable legs that are lowered down to the seafloor. Jack-up rigs can only work in water depths less than the length of their legs, typically limiting operations to less than 150 meters/500 feet. When drilling is completed, the legs are raised out of the water, and the rig becomes a floating barge that can be towed away (‘wet tow’) or placed on a large transport ship (‘dry tow’).

Jack-up rigs can be segmented by their specifications and water depth ratings. The three most common types of these rigs are standard, high specification and harsh environment.

Standard rigs are generally old, and they usually have low hook-load capacities and mechanically operated drilling equipment with little automation. These rigs operate at water depths less than 300 feet. However, standard rigs can do almost the same job as high-specification rigs at a much lower rate.

High-specification rigs are mostly used in Southeast Asia, but they are growing in popularity in GCC and GOM. The rigs are very robust, and they can drill at water depths of up to 400 feet due to their modern automation systems and drilling equipment.

Harsh-environment rigs are mainly used in the North Sea. These rigs are designed to withstand harsh weather conditions and water depths of up to 490 feet.

Floaters are not limited to the same water depths as jack-up rigs because they do not have to stand on legs. Floaters are ships with drilling equipment that are self-propelled. When the ship arrives at a location, the floating rig anchors with the help of anchor handling vessels and support vessels (AHTSV) in a complex, lengthy process. Unlike jack-ups, floaters move up and down with the tides, but the fixed wellbore does not move. This is achieved through hydraulic wave-motion and heave compensators.

The two different types of floater rigs are semi-submersible rigs and drillships.

  • Semi-submersible rigs are supported (floating) by large pontoons, which provide enough buoyancy to keep the rig afloat or to move it from location to location. They are semi-submersible rigs (or ‘semis’) because the floaters operate in a ‘semi-submerged’ manner. While some semis use mooring lines to connect to the anchors on the sea floor, others have propellers that rotate to hold the rig in the exact location; these rigs are often referred to as dynamically positioned.
  • Drillships are used in deepwater and remote fields due to their large load-carrying capabilities, mobility and ease of moving. Drillships use dynamic positioning systems to station at an exact position.

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Supply & Demand Dynamics

Market Summary

The offshore jack-up rig market is highly cyclical. Utilization and rates are quick to react to oil price and over the past 3-4 years, prices have been driven to record lows. With oil prices stabilizing around US$45 per barrel the short to mid-term is likely to remain challenging for rig owners as investment levels remain restrained. Looking further ahead of any growth in investment will likely see higher specification jack-ups contracted first, leaving a large surplus of standard specification rigs (unlikely to work again) and a continuation of pressure on day rates. 

 

Demand

  • Both, NOCs and IOCs, cut capital spending and continue to maintain such low levels given the current oil price environment. 
  • No significant demand increase expected unless a robust increase in oil price
  • Deferred demand is expected to come back in 2022
  • During the recovery, jackup rigs are likely to respond first, given lower risk and investments in shallow waters. 
  • We expect the Middle East and Indian market to remain busy, but highly competitive 

 

Supply 

  • Supply hugely outweighs demand
  • Current global jack-up rig utilization is hovering around 65-80% ( as of Q3 2020), with the Middle East being the busiest area. 
  • Globally, there is around 500 units available and over 40 jack-up rigs under construction. 
  • The largest number of rigs are located in the Middle East, India and Asia, with the Middle East being the largest market for jack-up drilling rigs. 

 

GCC’s demand for offshore rigs is affected by the discoveries of new fields and field re-development activities. In addition, the size of the fields has a direct effect on the number of rigs required. With growing activities in KSA, Qatar and UAE, it is expected that up to rigs could be added in 2022 the majority of them being in KSA and Qatar.

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External Scanning

Offshore rig market is very competitive, follows cyclical pattern and highly sensitive to oil prices. The power balance is highly fluid, as during high times (high capacity utilization) suppliers are more powerful. Yet, in times of lower rig utilization, the power shifts to buyer. 

 

 

 

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Portfolio Positioning

 

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Cost & Price Analysis

Price 

Operating rates for offshore rigs have always been driven by supply and demand and have been highly sensitive to oil prices and rig utilization. Therefore, day rates can fluctuate significantly within very short periods. Operating rates have little correlation to the actual cost of operating a rig, and rig owners adopt supply and demand pricing mechanism and sometimes more opportunistic approach. Jack-up rig prices continue to face downward pressure due to the supply and demand dynamics at play.  We expect the Middle East and Indian market to remain busy, but highly competitive. Below is a summary of global jack-up rig rates as of Q3 2020

Rates  High Specification  Premium  Standard 
Low Rate (US$/day) 60,000 55,000 40,000
High Rate (US$/day) 120,000 70,000 60,000
Price Pressure  High  High High

 

Cost Analysis

Depending on the rig owner in question and how successful their cost-cutting has been since the oil price crash, many jack-up rigs will be operating close to break even with the estimated breakeven daily rate on a high specification being circa US$50,000 to US$70,000 per day. Below is a breakdown of the costs involved in running a high specification jack-up rig.

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Total Cost of Ownership

 

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Strategy

The key category objective is securing access to capacity and ensuring service quality. In the accomplishment of this objective, it will be critical to understand supply market dynamics and establish strategies that address particular needs and segments.

  • Demand planning – develop a multiyear rig demand based on drilling programmes
  • Own vs. rent – access the right mix of owned vs. contracted rigs, to ensure secure supply and high-quality drilling services
  • Long-term relationships with key rig owners
  • Closely follow market conditions, capacity utilization, rig owners move in the market ( consolidation)
  • Watching the global and regional rig status enables operators to better understand utilization trends and strategize accordingly.
  • A detailed understanding of the Rigs capabilities, as well as operational conditions (e.g., date of last refurbishment and certifications), is critical in providing visibility on the supply-demand power.

Contracting Options 

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Technical Insights

The performance of the jack-up rig owner has potentially major implications for the commercial and operational success of a project. SCM DALEEL recommends placing significant contractual emphasis on i) crewing, ii) rig maintenance, iii) continuous improvement, and iv) operation management. These all feature as important value drivers. 

Buyers should attempt to align all parties through measurable performance indicators centred around the value drivers identified above. Some examples are provided below.

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