Upstream E&P companies shift focus to contracts with longer duration, lead times: Transocean

Upstream companies appear to be shifting their focus to longer-term durations for offshore deepwater contracts, with a further trend of longer lead times also seen until the contract start dates, top executives at deepwater driller Transocean said Feb. 20.

And, despite a "strong" year of contracting in 2023, some investors have been concerned by a less-brisk pace of contracting awards in the last few months, Transocean CEO Jeremy Thigpen said in the company's fourth-quarter earnings conference call.

"The extended duration [of contracts], with longer lead times to contract commencement ... tends to result in prolonged contract negotiations," Thigpen said. "It also demonstrates our customers' confidence in the longevity of this upcycle and their commitment to the offshore market."

"We remain extremely encouraged about the current and future demand for Transocean's assets and services," he said.

As an example of contract durations, the company's active contracts for drillships and semisubmersible in 2023 averaged 569 and 404 days, respectively, compared with 353 days for drillships and 326 days for semisubmersibles in 2022. In 2019, durations were 231 days for drillships and 241 days for semisubmersibles.

The lead times—the time between contract signings and start dates—has also risen in the last couple of years, reflecting operator optimism on long-term commodity prices as well as the duration of the current upcycle, Transocean executives said.

Lead times lengthen 5% on year in 2023

In 2023, drillship contracts were signed 319 days ahead of their start dates on average and semis were signed 284 days in advance, compared with 359 and 214 days for the respective rig classes in 2022. The percentage reflects combined drillship/semisubmersibles days in both years.

That compares with 209 days for drillships and 206 for semis in 2021, and 210 and 227, respectively, in 2019.

"Most of the negotiations taking place right now are for longer-term contracts, and thats where you can really start to ... generate a lot of cash," Thigpen added.

He said 2023 also marked "the beginning of the widespread transition" to Transocean's rigs to higher revenue-generating contracts.

"Throughout the year, the average daily revenues of our ultra-deepwater fleet increased 20% from $360,000 [in Q1] to $432,000 in [Q4]," he said, adding "key contributors" to that increase were the operations startup in May 2023 of the Deepwater Titan rig for Chevron and the Deepwater Atlas, which Beacon Offshore Energy is leasing.

Both are the only two eighth-generation—state-of-the-art—drillships operating in the world, and both are working in the US Gulf of Mexico in high-pressured fields of 20,000 psi. Those fields require newly developed technology to allow production at very deep water depths and total depths.

So far, no 20,000 psi fields are yet producing, although both Chevron's Anchor and Beacon's Shenandoah are two such fields that are scheduled to come online in 2024.

Transocean Executive Vice President and Chief Commerical Officer Roddie Mackenzie noted that four operators are active in the 20,000 psi market, and "a few more are looking to perhaps expand into that market.

20K market 'never looked so good'

"The 20K [psi] market has arguaby never looked so good," Mackenzie said.

The Deepwater Atlas rig contract with Beacon expires in April 2025 and "we ... think there's plenty of room for [it] to pick up work in the foreseeable future," he said, adding he expected an announcement on it "soon."

Mackenzie also confirmed a positive view of the current upcycle and added that if Transocean is proportionately successful in its contracts currently in negotiation, 23 of the 25 active rigs in its fleet—18 ultra-deepwater and seven harsh-environment—will be contracted toward the end of 2025.

"It's been a long time since we've been able to say that," he said.

Meanwhile, Keelan Adamson, Transocean president and Chief Operating Officer, said the outlook for rigs looks positive around the world.

Positive regional global outlook for rigs

• Brazil, for instance, continues to see "strong demand" with seven more rig awards expected over the next 18 months. If that materializes, the rig count in that country could rise to 36 by the end of 2025 from 31 currently, Adamson said.
• The US Gulf continues to be a source of steady demand, with several tenders and negotiations ongoing, he said, and additional demand for long-term work has materialized from several major operators as they seek to secure high-specification assets for their ongoing developments, he said
• West African demand is encouraging and Adamson currently expects that up to 13 programs will start work in the next 18 months—half of which are at least two years long.

"Namibia continues to exhibit significant potential with recently announced discoveries by Shell, TotalEnergies and Galp Energia and we expect most of the four rigs contracted in-country to be extended," Adamson said.

• Rigs in the harsh-environment semisubmersible market in Norway are fully utilized until the end of 2024, and most are largely contracted thru 2025. Day rates continue rising, with recent fixtures in the high $400,000s, and Adamson expects a need for incremental supply in the region starting in H2 2025.
• And, the outlook for Australia remains "strong," with a number of additional programs set to start in 2026, he said: "Our rigs Transocean Endurance and Transocean Equinox are contracted, with options through early 2026 and 2028, respectively."