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Subsea drilling could help buoy struggling oilfield services sector in 2020

Demand for offshore drilling services and equipment is poised to bump higher in 2020 as U.S. shale activity continues to slow. But industry observers say it could take several more years for significant recovery and for pricing leverage to return to providers.

The total oilfield services market contracted by 2% in 2019 as the result of cuts made in U.S. shale investment, Rystad Energy said in a December 2019 report. "As 40% of the global well service and commodities market is comprised of shale activities, the sector will deflate the most in 2020, falling from $225 billion down to $213 billion by year-end," the research and consultancy firm said.

However, the subsea sector could provide a counterbalance for oilfield services companies beginning in 2020, Rystad said. The subsea market will grow from $25 billion to $27 billion with as many as 330 Christmas trees — an assembly of valves, spools and fittings used to regulate the flow of pipes in an oil well — expected to be awarded this year.

A Jan. 14 update from Rystad showed free cash flow for all public offshore exploration and production companies globally reached $90 billion in 2019, down slightly from the prior year but still the third highest on record and a marked improvement from 2010-2014.

"This shows that the cash flow situation for offshore players is very robust, underlining the point that E&Ps have enough cash in hand to invest in new projects after several years of restrained capital expenditure," Rystad Head of Upstream Research Espen Erlingsen said Jan. 14.

Shale oil production in the U.S. topped 9.1 million barrels per day in November 2019 and is expected to grow further, according to the U.S. Energy Information Administration's monthly Drilling Productivity Report released Dec. 16, 2019.

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However, as the rate of U.S. shale oil production growth and well-productivity gains begin to slow, producers are looking to increase their exposure to the international and offshore markets.

While producers have been dumping assets in the North Sea, a ramp-up in deepwater drilling activity portends an increasing workload for offshore drillers and equipment providers as Exxon Mobil Corp., Tullow Oil PLC, Apache Corp., Hess Corp. and TOTAL SA focus their efforts offshore Guyana and Suriname, as well as in the Gulf of Mexico.

"Unsurprisingly, this rising tide of approval activity has carried with it an increase in offshore investments in 2019," Erlingsen said. "Total offshore capex grew by 5% versus 2018, with a 7% rise in deepwater spending and a 3% boost in investments on the continental shelf. For 2020, offshore investments are on track to grow 8%, with deepwater up 12% and shelf spending up 2% ... This illustrates that a new offshore investment cycle is in the making."

Ahead of rising demand for offshore drilling, by the end of 2019 and into early 2020, rig count data from Baker Hughes Co. shows the number of rigs operating in U.S. waters remains depressed.

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Conversely, the international rig count is rising.

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Marketed utilization of offshore drilling rigs was reduced to a range of about 62% to 69% by the end of the first half of 2019 as companies stacked and retired large portions of their rig fleets, according to McKinsey & Co. "Some rig owners are growing their inventory of high-specification fleets through mergers and acquisitions while retiring the older generation fleets," the advisory firm said in an outlook to 2035 released in June 2019.

McKinsey said utilization of jack-up rigs would recover to above 80% by 2023 driven by retirements and deferments, as retirements of older and lower-specification rigs will lead to a 9% decline in the overall jack-up fleet to 485 rigs by 2035.

For floating rigs, McKinsey expects demand to grow 6% per annum between 2019 and 2027, then 2% per annum until 2035.

While day rates for offshore rigs remain depressed, the market is optimistic for 2020 day-rate improvement, according to respondents of a March 2019 survey by Bassoe Offshore, a Norwegian-based offshore rig brokerage, advisory and project development company.

Of the 300 oil and gas industry professionals that participated in the survey, 60% said day rates for harsh environment semisubmersibles would be in the $350,000 to $400,000 range in 2020, up from $300,000 for new fixtures in 2019. Over 30% of respondents said they think rates will not make it to $350,000.

For ultra-deepwater drillships, 45% of respondents said they think day rates will be in the $250,000 to $300,000 range in 2020, up from the $150,000 to $200,000 range at the time of the survey, while over 40% think they will still be under $250,000.