The information below is a round up of the recent discussions and publications in the Asia Pacific region, and an overview of what OCS Group is observing.
Recent indications are that the Chinese shipyards have roused themselves from their inertia as the realities of a “lower for even longer” oil price hits home and that waiting out the downturn may not now be a viable option. The daily cost to the shipyards to maintain the seventy (70) odd drilling rigs they have either still under construction or which are completed and awaiting acceptance, plus payments on loans taken out to finance their construction, has to be crippling even with government support. They do seem still to be holding their line in that they will not sell them off at fire sale prices, but there are signs that after a couple of years of inactivity, in the true Chinese tradition of playing the long game, they are now making some early efforts to mitigate the situation. However, there have still not been any actual sales and very few deliveries.
There are reports of interested buyers visiting China, who, given the prevailing low day rates, require at least a 50% discount to make a purchase economically viable. But the yards, with their heads in the sand, have apparently not been prepared to offer anything more than a 10% discount on the original contractual value of their jack-ups. They are priced anywhere between $170-200 million. Egyptian based driller ADES is typical, having publicly announced its interest in acquiring distressed premium and new build units on a lease purchase basis but then stated categorically that this will only happen if they can get distressed prices.
Meanwhile CIMC, COSCO Dalian and CSSC have taken owners to arbitration, respectively with Coastal, Atlantica and ESSM, in the hope of salvaging something from cancelled contracts.
China Merchants have touted their jackups in the USA and Norway without much success but have now ratified a bare-boat agreement with Singapore’s I-Ships for two of their own speculative jackups and have already mobilized them to the Middle East where they are destined to work in Iran. I-Ships also have an understanding to potentially take four more units from CMIC, likely to be four (4) of the six (6) Bestford units. It is not known if these are lease-purchase agreements or just bare-boat charters but I-Ships are not asset owners. In any case the bare-boat rate is unlikely to be very enthralling given the prevailing jack-up dayrates, especially in Iran with their famously tardy payments, but it does save on stacking costs. The shipyard, who have at least a dozen jack-ups to offload plus a couple of tender rigs, have also struck an agreement with Singapore based Energy Drilling to allow the latter to market tender rig MTR-3, rejected by Mermaid, and jack-up Bestford 5 with potential to operate the rigs, presumably on a bare-boat basis. Looks good on paper and on your marketing profile but the chances of Energy Drilling finding work for the rigs in a saturated market is highly unlikely especially for the jack-up when the company has no experience of operating anything but tender rigs and is competing with the big boys with significant jack-up operating experience.
CIMC Raffles appear to be considering taking a different path. After forming a subsidiary, Bluewhale Drilling, to operate the two Frigstad UDW semis which Frigstad sold back to the yard, it is strongly rumored that Bluewhale might also incorporate stranded jack-ups Cerebus, Phoenix and Coastal JU2 together with harsh environment semis Beacon Atlantic, Beacon Pacific and North Dragon, into their fleet. Evidently, they are thinking international, as they have set up an office in Singapore.
The Shipyard Alliance formed last year between the seven foremost Chinese yards involved in drilling rig construction have proposed to the Chinese government that they press national drillers COSL and Sinopec to replace their aging jack-ups with their unwanted new builds. However, this was estimated to cost $6.4bn to replace some fifty-six (56) drilling rigs that are over twenty (20) years old and COSL, barely able to break even at present, understandably refused, as did Sinopec.
There have been a slew of cancellations this year as owners terminated their construction agreements and more are inevitable. Since January CIMC Raffles have lost the contracts for jack-ups Cerebus, Phoenix and Coastal JU2, the latter now in arbitration; China Merchants had tender rigs MTR-3 and MTR-4 cancelled; CSIC Shanghaiguan had three of the four Falcon jackups terminated (three of TS Coral, TS Opal, TS Jade and TS Emerald) and Yangzjiang admitted that it was unlikely that MENA would take delivery of jackup Explorer 1 thus were looking for buyers. CPLEC jackup Paragard 200 was sold to Iranian buyers in 2013 but remained in the shipyard until now and CPLEC have just announced the transaction has fallen through, some four years later.
And more agreements have been reached with some owners to further delay deliveries. Dynamic Drilling have pushed back delivery of jackup Dynamic Momentum at COSCO Dalian until March 2018, KS Drilling delayed its F&G JU2000E jackup at ZPMC until end 2018 and the KS Orient Star II by two years until December 2019, Northern Offshore have delayed all six of their under construction jackups at COSCO and SWS into 2018, Energy Drilling pushed delivery of semi-tender EDrill-3 to Q4 this year at COSCO who also had the delivery of UDW semi Sevan Developer pushed back once again this time to June 2020. Seadrill, who have twelve (12) rigs under construction in China and South Korea, keep maintaining they are not obligated to accept their rigs and keep pushing back delivery dates. It is noticeable that these owners are all bone fide drilling contractors who are likely to accept delivery of their rigs at some point in the future and are probably making judicious use of the threat to cancel the contracts to get deliveries delayed until the market improves. However, this is really just the tip of the iceberg when you consider that there are over forty (40) speculative jackups whose owners are not drillers and have been noticeable only by their silence. They have no intention of coughing up the 90% final payment needed to take delivery of an asset that they cannot offload. In many cases the shipyards have offered to try to find buyers on behalf of the owners to stave off cancellations but with little or no success.
Of course, Singapore and South Korea are not immune from such issues. This year has seen Fred Olsen terminate an UDW contract at Hyundai and Stena cancel a harsh environment semi at Samsung who are also involved in arbitration with Pacific over the cancellation of an UDW drillship as well as having to accept further delays to the delivery dates of two Seadrill drillships.
Over in Singapore, KeppelFELS have not yet experienced any cancellations but have had to agree to postponing deliveries on jackups Hakuryu 15, Paraiso II, TS Topaz, three Fecon units and Clearwater’s jackup. At least any uncertainty over delivery of the five (5) Transocean jackups was alleviated when Borr Drilling purchased them, in the process agreeing on new delivery dates for which they have paid a premium. Sembcorp have not done quite as well; an arbitration case ongoing with Marco Polo, further delays on UDW semi West Rigel and the jackup Hakuryu 14 plus continuing uncertainty over the future of three Oro Negro and two Perisai jackups.
In summary, the problem is still a serious one especially for the Chinese shipyards, but there are baby steps taking place to try to alleviate the situation.
It could just take a lot of steps.