To paraphrase Charles Dickens: these are the best of times,these are the worst of times. The fate of the offshore rig marketis inexorably linked to oil prices. And since Russia made itsincursion into Ukraine in February 2022, Brent has consistentlypushed well above USD 100 a barrel, giving hope to a rig industrythat has been languishing since the offshore downturn in 2014, thata meaningful turnaround lies ahead.

But these are also different times. The last two years has seenthe world turned upside down by the pandemic and the climatecrisis, and this turbulent period has made it increasingly clearthat the Energy Transition is, as planet-busting movie villainThanos calls himself, inevitable. In response to these globalupheavals, pivotal shifts in the social, policy and market arenasare driving fundamental change towards a low-carbon world. The wartoo, has clarified to some countries like Germany that it might bebetter to be weaned off oil and gas.

As it affects the rig market, however, these two forces - EnergySecurity versus Energy Transition - pull in opposite directions. Onone hand, the high oil price and improved economics for oil and gasexploration beckons oil operators to go forth and drill. At thesame time, these C-suite decision makers are facing pressures fromstakeholders, activist investors and the public alike for moreclimate accountability. It is a balancing act for oil companies, tomaintain or increase profitability while decreasing emissions andre-structuring towards a more sustainable portfolio.

In the near term, the choice is clear as energy security is theimmediate concern. With Russian energy supplies uncertain and theneed to alleviate pain at the pumps urgent, governments like theUnited States' have been imploring oil and gas producers toincrease their output. Offshore projects are expected to pick up,but they will take time to put together and cost inflation - forcrew, equipment and other services - is already setting in.

The chart above shows how closely offshore rig demand tracks oilprice over the last decade. The rig market - comprising drillships,semisubmersibles and jackups - fell hard from its last height in2014, but has remained relatively resilient over the last two yearsdespite the logistical chaos caused by the pandemic and the 2020oil price crash. That year alone, there were 79 rig contractcancellations. The lone region that saw demand grow during thistrying period, while the rest shrank, was Latin America, which isrecording strong demand from Brazil, Guyana and Suriname.

The Middle East, too, is forecast to see incrementalrequirements from Saudi Arabia, Qatar and the United Arab Emiratespush rig numbers from 126 jackups to about 140 units over the nextyear. On aggregate, for the unfolding 12 months ahead, IHS MarkitPetrodata anticipates worldwide jackup demand to improve fromaround 332 units now, to 361 units; semis from 39 units currentlyto 56 units; and drillships from 63 units to around 72.

Even when the going was tough, many rig contractors took measureof the times and worked to get their rigs 'greener'. Since 2020,they have been exploring different ways to optimise drilling, aswell as utilise alternative energy systems and innovate with newcleantech to improve efficiency and reduce emissions. An example isthe Selective Catalytic Reduction (SCR) system, an emissionscontrol technology that injects ammonia to convert noxious oxidesinto harmless water and nitrogen, now installed on 16 rigs. So far,the progress is mostly limited to rigs working in Northwest Europewhere more governments offer support for such green initiatives. Todate, just 36 out of the over 700 rigs worldwide have greennotations by classification societies.

The momentum for the Energy Transition has already resulted inreduced investments in upstream oil and gas projects, prompting anumber of traditional oil and gas operators like Chevron todiversify into greener ventures like offshore wind. Even yards likethe newly merged Keppel-SembMarine are jumping on the bandwagon.Keppel is spinning off its remaining unsold drilling assets, whilethe new combined entity has pledged to focus on buildingsustainable offerings like floating carbon capture storages andhydrogen-driven vessels.

In the long run, there will no doubt only be more cutbacks ondrilling projects. But in the meantime, the road to a net-zeroworld is a long one. Green tech is still relatively nascent andwill take time to become commercially viable at scale. And withglobal oil inventories at an all-time low, the world still needs tofuel its energy requirements while the world figures out the pathto meet optimistic temperature targets.

For now, the robust oil price will definitely help invigoratethe rig market, even though any up-cycle potential for increaseddrilling will likely be tempered by the opposing push to reduce ourcarbon footprint through efficiencies and power generation.Ultimately, how things pan out will also depend on the geopoliticallandscape after the dust settles when the war in Ukraine is over.Hopefully, it is not one where partisan blocs dominate and lessco-operation takes place, for while such an unstable outcome mayprop up the oil price that supports offshore drilling, it couldwell accelerate the world towards a truly unimaginable worst oftimes.

For more data and insight on the global offshore drillingmarket, usePetrodataRigs by IHS Markit.

Posted 11 May 2022 by Yun Yun Teo, Principal Analyst, Offshore Rigs, IHS Markit

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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Energy Security and Energy Transition: Highs and Lows in the Offshore Rig Market - IHS Markit