Offshore Rigs Hold Ground despite Weak Crude Oil Prices



Offshore rig count increases

In the week ending June 12, 2015, the US offshore rig count increased by two to 29 compared to the previous week. The offshore rig count has touched this level three times in the past four weeks. Offshore rig counts have averaged ~32 over the past two months.

With last week’s fall, the average four-week US offshore rig count drop is one. In comparison, the rig count reduction averaged two in the four weeks ended June 5, and a drop of one in the four weeks before that.

The offshore rig count is nearly 56% off its four-year high of 66 in August 2014. In the 12 months to June 12, the offshore rig count fell by 30. Despite this, the current offshore rig count is still strong compared to its mid-2010 low of ~12 following the Deepwater Horizon disaster.

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Offshore rigs are different

Offshore wells are more expensive than onshore wells, but they have much longer production lives. Offshore projects also have long lead times. Falling crude oil prices don’t affect planned offshore production in the short term.

The Louisiana section of the Gulf of Mexico accounts for almost all US offshore drilling. According to the EIA (U.S. Energy Information Administration), 13 projects are expected to start in the Gulf of Mexico in the next two years, eight in 2015 and five in 2016.

Jack-up rig utilization

According to the industry news organization Rigzone, utilization of jack-up rigs stood at 61.4% on June 12, 2015. In comparison, utilization was ~77% a year ago. Offshore rig counts indicate how busy rig operators like Transocean (RIG) and Ensco (ESV) are at any given time.

Jack-up rigs are mobile offshore drilling units that perform drilling and workover operations to lift energy. Rigzone estimates that jack-up rig use will likely fall below 50% in 2015 due to lower crude oil prices.

Trends in the offshore rig count also indicate offshore energy activity by upstream and integrated energy companies. ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) have offshore operations. ExxonMobil accounts for 15.5% of the Energy Select Sector SPDR ETF (XLE). It also accounts for 1.92% of the SPDR S&P 500 ETF Trust (SPY).


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