The drilling and subsea engineering industries provide key services for the exploration, development and production of the global supply of oil and gas products. Moreover, the demand for such services is driven primarily by investments made into these types of activities, as well as the level of activity in the exploration, development and production of crude oil and natural gas. The investment level depends on oil companies' cash flow, revenue and financing, the availability of new areas for exploration and development, and oil and gas prices.
The overall state of the global economy and rates of regional economic growth aff ect the operating environments of all players in the oil and gas industry. The fact that economic growth has picked up after the recent recession has been a factor in firmer oil and gas prices during 2010, which is turn has boosted investment levels in the oil and gas industry.
But this is the broad picture. Regionally, the picture is diff erent. A company such as Mermaid Maritime Public Company Limited ("Mermaid" or "Company") operates mainly in those regions that have some of the highest GDP growth rates in the world: Asia Pacific and in particular South East Asia. The International Energy Authority ("IEA"), for example, expects global oil demand to grow 1% annually, from 85 million barrels per day in 2008 to 105 million barrels per day in 2030 and this will be driven by energy growth in emerging markets like South East Asia, which has experienced CAGR energy growth of 5.5% for the past 29 years1, and remains the fastest growing energy market in the world. We expect this level of demand to be maintained as the region weathered the recent financial crisis without a significant downward shift in demand.
This is an important advantage for the Company because energy growth in these markets is likely to provide a solid base for future business opportunities.
Chart 1: Regional overview of oil and gas energy consumption growth
As oil prices have firmed during 2010, breaching the $80/bbl mark in October, oil and gas companies, particularly International Oil Companies ("IOCs") and National Oil Companies ("NOCs"), have started to increase their spending on exploration and development. Industry analysts suggest that off shore exploration and production spending will increase by 7% in 2010 and by 15% in 20112. This spending growth, along with low interest rates, has led to new tenders and re-sanctioning of stalled projects.
Chart 2: Percentage change in E&P spending vs oil price
Exploration and production ("E&P") budgets grew at double-digit levels during 2003 to 2008, which led to a number of new field development projects, boosting demand for drilling and subsea services. However, at the beginning of 2009, the industry was hit by the global economic slowdown, much higher financing costs and a sharp decrease in oil prices. As a result, E&P spending in 2009 slowed dramatically from previous levels. We have seen that growth has returned in 2010, albeit at a more modest pace than in the period up until 2008, but it is unlikely to reach the more than USD$450 billion spent in 20083. We expect this upward trend to continue in 2011.
Industry intelligence suggests that higher oil and gas prices do not always result in sudden increased demand for subsea services. The process may involve a lag time between high prices and increased demand which would indicate that this year's demand growth for services may not rise as quickly as oil prices have. However, we expect the trend for gradual improvement in demand for subsea services to continue in 2011, particularly in the Company's main markets in South East and East Asia, both of which have some of the highest GDP growth rates in the world. Moreover, we believe that companies, such as Mermaid, with high-specification vessels and rigs are better positioned to take advantage of new tenders.
There have been knock-on effects from this E&P spending downturn: over-supply has plagued certain sectors like large vessel leasing, day-rates have declined and some orders for newbuild vessels and rigs have been cancelled. However, some markets have suff ered more than others, with ("UKCS") the United Kingdom Continental Shelf being hit the hardest.
While the global market is recovering, we believe that the Asian market in general for drilling and subsea engineering services continue to off er the potential for high utilisation and favorable day-rates, as a result of stronger demand for oil and gas in the region; continued strong growth in regional economies, especially in China, India and ASEAN; and new projects planned by exploration and production companies in Asia.
The current oversupply problem for the off shore support vessels ("OSV") and subsea engineering sector worldwide is the result of a boom in newbuild orders during the peak in oil prices in 2008. The newbuild OSVs coming on to the market now were ordered during this period but since then, companies have postponed or cancelled orders and this is likely to improve the demand/supply balance, as demand (activities) absorbs excess supply (newbuild vessels and vessels without contracts). Industry estimates suggest that orders after the recent economic crisis are about 107 vessels, compared to the 487 vessels ordered pre-crisis.
Chart 3: Newbuild vessel orders post crisis not alarming
Another indication that the demand/supply balance is moving into more positive territory is the change in the OSVs (jack-up, semi or drillship) to one rig ratio, which is estimated to decline to 2.9 in 2012 from 3.0 during 2010-11. As OSV growth begins to slow and new rigs come on to the market, demand is likely to pick up in 2012, boosted by increased activity from higher E&P spending.
Moreover, asset prices for vessels, both newbuild and secondary, have stablised in the second half of this year, and several large global players have been active in the secondary OSV market. New fixtures in markets such as Brazil, UKSC and Australia are absorbing additional OSV capacity, and, in the process, supporting rates. At the same time, NOCs such as Petrobas have expressed a preference for younger vessels – a positive for the Group, which has a young fleet.
While the markets in Asia generally track those elsewhere, a recent influx of capital into the region has led to high liquidity in the market and the availability of low cost funding. This could spur the kind of market consolidation we have seen in the US and Europe as companies look to increase synergies by mergers and acquisitions.
On the one hand, international players such as US-based Tidewater are moving into the Asia-Pacific region, looking closely at markets in Thailand, Malaysia, Indonesia, Vietnam, China, India and Australia. Vessel acquisitions are the first sign of interest but company acquisitions and joint-ventures are likely to follow.
On the other hand, more Asian companies are moving up the off shore value-chain and entering the deepwater market segment (a growth area); this may well necessitate tie-ups between these and companies already established in some of these fields. As some of the country markets in Asia are protected (by cabotage rules) and often dominated by NOCs, international companies are at a disadvantage if they try to penetrate these markets alone. Asian-based companies, such as Mermaid, have established links with local operators and shore bases in the region and are therefore in a position to facilitate market access. In turn, international companies can transfer technology and expertise relevant to those parts of the market that are under-developed. Going forward, we expect increased M&A and joint-venture activity.
In South East Asia, the OSV market is highly competitive; there are many operators but few that have 10 or more vessels. This limits the ability of smaller operators to expand to other regions. Mermaid, with a young fleet of eight OSV vessels, is an exception: it is one of the largest independent operators in South East and East Asia but it also has a growing presence in South America, UKCS, Middle East, Russia and India.
Chart 4: Known offshore projects in South East Asia with first oil from '10e
The market for tender rig drilling services (semis, drillships and jack-up rigs JUs) in Asia is challenging as many rigs have completed their contracts this year: 11 rigs are hot stacked and 35 are off -contract5. Nonetheless, the overall outlook into 2011 and 2012 is good for high-end JUs and drillships as rates and utilisation have recovered some ground: day rates globally for the international jack-up market are now stable at around US$110'-125'/day for premium modern jack-ups, down from the peak of US$200'/day in 2008. Utilisation for the same market has risen to 86% from 81% last summer; however, as mentioned previously, day rates will not improve until utilisation reached 90%. But the improved utilisation figures have been driven by increased demand and not reduced supply, mainly from higher E&P spending and, as funding becomes cheaper, the return to the market of smaller independent oil companies and increased activity by IOCs and NOCs.
The international jack-up market is unusual in that many units were built during the building boom of the 1970s and 1980s; as a result, many rigs are more than 25 years old. This skewed age profile will benefit new rig owners as some cold-stacked older rigs or those in yards may not return to the market at current day rates. It would also reduce oversupply in the market.
Chart 5: Rig fleet overview
The international 'floater' (i.e. buoyant vessels) market segment can be divided into semi-submersibles and drillships. Semis and drillships operate in shallow, midwater, deepwater and ultra-deepwater conditions (for a description of drilling vessels in all marine conditions see 'Types of Drilling Units' below). As of February 2010, there were an estimated 233 rigs, consisting of 186 semis and 48 drillships. The table below gives an overview of the worldwide floater fleet.
Chart 6: Worldwide floater fleet
In Asia, the market is dominated by shallow and midwater units; some midwater units are, due to size and quality issues, only available for work in the region. Nonetheless, activity in midwater, deepwater and ultradeepwater has improved throughout the year, with, for example, midwater utilisation for the past few months has stabilized at 88%. Firmer oil prices, greater oil company activity and new rig availability off er good potential for Asian operators over the medium-term. As with the segment for JUs, new, high-specification rigs will find contracts quicker than those in an aging fleet. We believe that the market will improve steadily before utilisation reaches 90% in both the above sectors; once this utilisation level is reached, the market will once again move into a stronger building cycle, thereby driving demand not only for drill rig services but also for subsea engineering services.
The market for rig drilling services is both cyclical and volatile, ranging from the highly volatile exploration sector to the more stable oil and gas production services market. However, tender rig drilling and subsea engineering services, the two main business lines of the Mermaid Maritime Group, cater to the more stable highend niche of the oil and gas production market.
A tender rig is a barge moored alongside a platform and contains crew quarters, mud tanks, mud pumps, and power generation systems. The only equipment transferred to the platform for drilling operations is the drilling equipment set. A tender rig carries its own drilling equipment and has a crane capable of erecting the derrick on the platform, thereby eliminating the need for a separate derrick barge and related equipment.
The tender rig was developed for production from a central platform, which serves a number of smaller wellhead platforms. A tender rig is able to from platform to platform using its own drilling equipment set. A typical tender barge has dimensions of 300 feet by 80 feet with a gross tonnage of about 4,500 tons. Typical water depths it can operate in are between 30 to 400 feet. Tender rigs can also be moored in up to 6,500 feet by use of a pre-laid mooring arrangement. Accommodation is in excess of 100 beds.
A jack-up rig is a mobile self-elevating drilling platform equipped with legs that can be lowered to the ocean floor until a foundation is established to support the platform. Once a foundation is established, the drilling platform is then elevated up the legs so that it is above the highest expected waves. When the rig is relocating, the platform is lowered to sea level and towed by a supply vessel to its next location.
A modern jack-up rig will normally have the ability to move its drill floor aft of its own hull (cantilever), so that multiple wells can be drilled without re-positioning the rig. Ultra premium jack-up rigs have capabilities enabling them to work in water depths in excess of 300 feet.
A semi-submersible rig is a floating vessel that can be submerged by a water ballast system such that the lower hulls are below the water surface during drilling operations. This reduces the rig's exposure to ocean conditions (waves, winds, and currents) and increases its stability. A semi-submersible rig is capable of maintaining its position over the well through the use of an anchoring system or a computer controlled dynamic positioning ("DP") thruster system. Some semi-submersible rigs are self-propelled and move between locations under their own power, although most rigs are relocated by supply vessels.
Drillships are generally self-propelled and shaped like conventional vessels, and are the most mobile of the major rig types. Drilling operations are conducted through openings in the hull ("moon pools"). Drillships normally have a higher load capacity than semi-submersible rigs and are well suited to off shore drilling in remote areas due to their mobility and high load capacity. Like semi-submersible rigs, drillships can be equipped with conventional mooring systems or DP systems to maintain position over a well.
Furthermore, tender rigs have their own demand niche where jack-ups cannot be used, such as areas restricted by subsea congestion preventing safe jack-up leg penetration, areas comprising deep layers of soft soil or mud which makes it difficult for a jack-up's legs to find a firm foundation or to remove its legs upon completion, or areas with greater water depth beyond the physical length leg penetration capability of a jack-up but which a tender rig can access through use of pre-laid mooring. Notwithstanding this, contracted day rates in the tender rig market generally track rates in the jack-up market, as both these market segments are driven by cycles in the oil and gas industry.