Growing Backlog For Offshore Drillers Points To Coming Boom

Earlier in the year, we reported that the offshore oil and gas sector has been witnessing robust growth across the board, with full-year 2023 data points released by Clarksons Research painting a picture of a sector in the pink of health. Global offshore oil and gas markets posted impressive growth in 2023, with the proprietary Clarksons Offshore Index that tracks rig count as well as offshore support vessels (OSV) and subsea day rates climbing 27% to a multi-year high of 106 points. Even better for the bulls, the Clarksons Offshore Index is projected to reach an all-time high in 2024. Rig, OSV and Subsea markets are particularly robust, with oil and gas vessel rates now higher than 2014 levels in the majority of sectors/regions.

Activity remains particularly strong in the Middle East, Brazil and West Africa. Offshore drillers endured a tough decade as many outfits filed for bankruptcy between 2014 and 2016 with oil prices collapsing as U.S. shale production boomed.

Unfortunately, the overwhelmingly bearish sentiment that has ruled oil markets in 2024 has taken a toll on the offshore sector as traders worry whether oil prices will remain high enough to support offshore drilling. Stocks of deepwater drilling specialists have seen mixed fortunes in the current year, with TechnipFMC Plc. (NYSE:FTI), Oceaneering International Inc. (NYSE:OII) and Norway’s Odfjell Drilling (OTCPK:ODFJF) outperforming the market with year-to-date gains of 41.7% , 33.2% and 39.5%, respectively. However, the sector’s other big names are deeply in the red: Transocean Ltd. (NYSE:RIG) -32.4%, Seadrill Ltd. (NYSE:SDRL) -17.0%, Noble Corporation Plc (NYSE:NE) -27.6% and Valaris Ltd (NYSE:VAL) -28.3%. Meanwhile, offshore shallow-water drilling contractor Borr Drilling Ltd (NYSE:BORR) has tanked -45.1%. From some perspective, the energy sector’s favorite benchmark, the Energy Select Sector SPDR Fund (XLE), is up 12.4% in the year-to-date, trailing the 25.8% return by the broad market S&P 500.

Contrarian investors might, however, consider buying these beaten-down stocks with the growing backlog by offshore drillers suggesting that boom time is not far off. According to Offshore Energy, Transocean, Noble Corporation, Valaris, Borr Drilling and Odfjell Drilling ended Q3 2024 with a combined total backlog of $23.22 billion, up from $22.7 billion in Q3 2023. All five companies have issued bullish outlooks.

According to Precedence Research, the offshore drilling market will hit $80.64 billion by 2033 from $36.60 billion in 2023, good for a healthy CAGR of 8.22%. The Asia Pacific offshore drilling market size is estimated to be worth around $35.08 billion by 2033 from $15.74 billion in 2023, thanks in large part to spending boost by the region’s oil giant, China and India.

One notable trend in the ongoing offshore revolution is a large increase in deepwater and ultra-deepwater drilling. Deepwater oil and gas production is set to increase by 60% by 2030, to contribute 8% of overall upstream production, according to a new report from Wood Mackenzie, as cited by Rig Zone. Ultra-deepwater production is set to continue growing at breakneck speed to account for half of all deepwater production by 2030. Deepwater production remains the fastest-growing upstream oil and gas segment with production expected to hit 10.4 million boe/d in 2022 from just 300,000 barrels of oil equivalent per day (boe/d) in 1990. Wood Mackenzie has predicted that by the end of the decade, that figure will pass 17 million boe/d.

In the oil and gas exploration and production (E&P) industry, deepwater is defined as water depth greater than 1,000 feet while ultra-deepwater is defined as depths greater than 5,000 feet.

Last year, the China National Petroleum Corporation (CNPC), the government-owned parent company of PetroChina, and Cnooc (OTCPK: CEOHF), kicked off ultra-deepwater exploratory drilling for oil and gas as the country looks to wean itself off foreign oil. According to Chinese news agency Xinhua Global Service, CNPC will drill a test borehole of up to 11,000 meters (36,089 feet), the country’s deepest ever, which will help it better understand the Earth’s internal structure better, as well as to test underground drilling techniques.

CNPC’s borehole depth is not far from Qatar’s world record of 12,289 meters (40,318 feet) for a petroleum well depth that was drilled in the Al Shaheen Oil Field in 2008 or Russia’s Kola Superdeep well that reached a depth of 12,262 meters (40,230 feet).

But China is not the only country willing to drill to ridiculous depths in the pursuit of energy security. India had its first foray into deepwater exploration in the Bay of Bengal earlier this year in the Krishna-Godavari Basin, courtesy of India's state-run Oil and Natural Gas Corporation (ONGC). ONGC said it was planning to spend over $10 billion developing multiple deepwater projects in its KG-DWN-98/2 block in that basin. Meanwhile, state-owned upstream company Oil India Ltd is looking to start exploration activities in Nagaland

“We have a total of 30 blocks under the OALP. We have already drilled all wells under the awarded OALP blocks, except in Nagaland. We are pursuing the ministry and they have set up a high power committee involving OIL, ONGC, government officials, to discuss the issue with the Government of Nagaland and resume exploration,” the official said.

Unlike neighboring Pakistan, India is likely to have little trouble attracting the oil and gas majors. Indeed, British energy giant BP Plc (NYSE:BP) is holding a board meeting in India this week, as it hunts for more opportunities in the country. BP has forged a joint venture with Indian multinational conglomerate Reliance Industries to operate 1,900 fuel retail stations across India and produces oil and gas from a deepwater block in the Krishna-Godavari basin. The JV has teamed up with ONGC to bid for exploration rights for an offshore block in India.

Norway's Aker BP (NYSE:BP) (OTCQX:AKRBF) is the latest oil major to make an ultra-deepwater discovery. At a total depth of 8,168 m, Aker BP says the well is the longest exploration well drilled in offshore Norway. The much bigger than expected oil discovery was made in the Yggdrasil area of the North Sea.

Preliminary estimates indicate a gross recoverable volume of 40 million-90 million barrels of oil equivalent (boe), much higher than the company’s earlier projection of between 18 million and 45 million boe. The discovery will significantly enhance the company’s resource base for the Yggdrasil development, which previously was estimated at 650M gross boe. The oil discovery is located within production licenses 873 and 442: In license 873, with Equinor ASA (NYSE:EQNR) and PGNiG Upstream Norway as partners. The plan for development and operations (PDO) for this project was submitted to Norwegian authorities in December 2022, with production scheduled to start in 2027.

By Alex Kimani for Oilprice.com