WSJ Article: The Offshore Oil Business is Gushing Again

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The $1.2 billion Deepwater Titan sat idle in a Singaporean shipyard for five years, looking like an abandoned cruise ship with a derrick attached to its deck. Soon this vessel that spans nearly three football fields will depart for the deepest waters of the Gulf of Mexico, where its crew will be able to drill 8 miles below the seafloor in search of oil for Chevron Corp.

The hunt for offshore petroleum is on again, fueled by a surge in global demand for energy, supply disruptions triggered by the war in Ukraine and crude prices that remain above prepandemic levels. Other giant rigs such as Titan that were dormant near the end of the last decade are also now operating in deep waters along the coast of Brazil, while rigs lacking propulsion are mining shallower waters in the Middle East after hitching rides to that part of the world on tugboats.

Of roughly 600 rigs worldwide that were available to lease for offshore projects in December 2022, about 90% were working or under contract to do so, according to research firm Westwood Global Energy Group. That was up from roughly 63% five years earlier.

Some beneficiaries of the new offshore drilling boom are companies such as Transocean Ltd., Valaris Ltd. and Noble Corp. that own and staff the rigs, the most coveted of which are massive drillships such as Titan that are prized for their ability to work deftly in deep waters. These contractors are now charging the oil companies that lease drillships more than $400,000 a day, up from around $300,000 early last year and less than $200,000 two years ago. Analysts are forecasting rates will exceed $500,000 next year.

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Many new offshore bets are gravitating to South America and the Mideast. The Atlantic Ocean coastlines of Brazil, Guyana and Suriname are bristling with drillships due to a big production push from Brazil’s national oil company as well as several significant oil finds made in neighboring waters in recent years. Saudi Arabia and the United Arab Emirates are each relying heavily on offshore drilling to increase their oil production capacity by 1 million barrels a day as of 2027, bringing their totals to 13 million and 5.5 million, respectively. As much as 80% of Saudi Arabia’s new capacity will come from offshore sources, according to research firm Evercore.

Rig contractors say they learned their lessons from past boom-and-bust periods, including a 2014 downturn that forced some companies to declare bankruptcy, and won’t overextend themselves this time around.

They still have to grapple with plenty of risks. Offshore projects are typically more expensive than drilling on land, so it takes longer for production to repay those costs. Demand for oil could plummet in the coming years if the worldwide transition from fossil fuels speeds up and more countries take steps to reduce their emissions. And they face opposition from environmental groups that worry about drilling’s impact on the climate as well as the danger of unexpected disasters.

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The last boom came to an end in 2014, when oil prices crashed due to a surge of supply from U.S. shale oil producers and a refusal by the OPEC cartel to cut its petroleum output. Many drillers either went bankrupt or had to restructure their debt. Rigs of all types were stranded mid-construction in shipyards, scrapped or cold-stacked—meaning shut down and stowed. Drillships as young as 11 years old were sold for scrap, and the fleet of rigs that contractors were ready to lease was slashed by more than 35%, according to Westwood.

But now that market is back. Offshore drilling got a boost as the pandemic subsided and prices and demand for energy surged while the growth of U.S. shale production slowed, encouraging oil producers to invest in new offshore projects. The war in Ukraine and sanctions against Russia then disrupted oil and gas supplies, prompting searches for new energy sources around the world that might spur even more offshore exploration and production.

A dearth of drillships is buoying the prices oil companies pay to lease them. Of the 82 drillships that survived the culling of the last decade and are being marketed now, only four aren’t drilling or in contract for later this year, according to Westwood. Even though crude prices have fallen recently, they are still higher than prepandemic levels and are well above what companies say they need to turn a profit on offshore wells.

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The untapped potential of deep-water reserves offers new appeal since shallower fields have been more thoroughly exploited. Deep-water drilling has long been dominated by the so-called Golden Triangle of Brazil, Gulf of Mexico and West Africa. Of approximately 100 deep and ultra-deep water drillship contracts signed in 2022, nearly two-thirds were for projects in these three regions, according to data from S&P Global.

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The Gulf of Mexico remains a major offshore oil source, but because its shallower waters have already been thoroughly harvested it is less profitable to drill there than it was in decades past. There are currently about 20 jackups operating in Gulf waters, down from more than 140 in 2001, according to Westwood. In deeper waters the number of floating rigs in the Gulf is just over 20, down from more than 60 in 2015.

“The overarching trend is definitely rigs moving from areas that were once very busy like the North Sea and the Gulf of Mexico,” says Teresa Wilkie,a rig analyst with Westwood. They are moving to “frontier regions” such as Guyana or those controlled by national oil companies, such as Saudi Arabia and Brazil, she added.

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The push from a number of countries and companies to reduce their reliance on fossil fuels, as well as opposition from environmental groups, offers the biggest uncertainty to offshore drilling’s future. When the Biden administration floated a plan last year to block new offshore drilling in the Atlantic and Pacific oceans while allowing limited expansion in the Gulf of Mexico and Alaska’s south coast, environmental groups blasted the plan and said they would push for an option with no new leasing. Some voiced concern the administration was backing away from a pledge to block new drilling on federal territory.

Industry executives say changing views on fossil fuels may help break the boom-and-bust cycles of the past, as will their own plans to rein in borrowing and spending. Transocean CEO Jeremy Thigpen says near-term deep-water needs can likely be met with the current drillship fleet, plus another two dozen or so drillships that are still cold-stacked or stranded in shipyards.

“We as an industry have had a tendency to overbuild,” Mr. Thigpen says. “I don’t think we are capable of doing that now even if we wanted to,” he added.

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