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SEMTECH 2018NCS rig market overview

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Things aren’t that bad (sort of)Main themes

• Oversupply isn’t as bad as it looks• Contracting activity increasing• Dayrates will start to rise• New rigs will get contracts• Middle East, Southeast Asia for jackups• South America for deepwater• North Sea for midwater growth

Photo by Svein Åge Berge

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20

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140

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US GOM Middle East Far East SE Asia Mexico Indian Ocean S America W Africa Med/BlackSea

NW Europe

# of rigs on contract, 2000-2018

Regional focus has shifted since year 2000

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Dramatic fall in rig count in US Gulf partially offset by Middle East; deepwater regions haven’t lived up to their potential

131 rigsfrom 2000

66 rigsfrom 2000

36 rigsfrom peak

30 rigsfrom peak

49 rigsfrom peak

38 rigsfrom peak

35 rigsfrom peak

19 rigsfrom 2000

9 rigsfrom peak

13 rigsfrom peak

Data from IHS

On paper, utilization hasn’t picked up much yet

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0

50

100

150

200

250

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350

400

450

Jan

2010

Apr 2

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Jul 2

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Oct

201

0Ja

n 20

11Ap

r 201

1Ju

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1O

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Jan

2012

Apr 2

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201

2Ja

n 20

13Ap

r 201

3Ju

l 201

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Jan

2014

Apr 2

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Oct

201

4Ja

n 20

15Ap

r 201

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2016

Apr 2

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6Ja

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17Ap

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2018

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50

100

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Rigs on contract 2010-2018

Jackup Semisubmersible Drillship

40

50

60

70

80

90

100

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50

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70

80

90

100

Jan

2010

Apr 2

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r 201

1Ju

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2012

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2Ja

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13Ap

r 201

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2014

Apr 2

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4Ja

n 20

15Ap

r 201

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Apr 2

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6Ja

n 20

17Ap

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Jan

2018

Total utilization 2010-2018

Jackup Semisubmersible DrillshipData from IHS

And neither have dayrates

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0

100,000

200,000

300,000

400,000

500,000

600,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Average contract fixture rates 2010-2018

Jackup Semisubmersible Drillship

Higher number of undisclosed rates

recently

Data from IHS; photo is author’s own

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100

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800

Jan

2010

Mar

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May

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Jul 2

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Sep

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Jan

2011

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1

May

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Jul 2

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2012

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Jul 2

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Jan

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Jul 2

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Sep

201

3

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Jan

2014

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4

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Jul 2

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2015

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Jul 2

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6

May

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Jul 2

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2017

Mar

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7

May

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7

Jul 2

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Sep

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7

Nov

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7

Jan

2018

Mar

201

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Bifurcation - rigs on contract 2010-2018

Total demand Old rigs (pre-2000) New rigs (post-2000)

But rig age makes a difference

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When market declined, old rigs

suffered more

Data from IHS

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20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Jackups

Jackup (pre-2000) Jackup (post-2000)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Semisubs

Semisub (pre-2000) Semisub (post-2000)

0

100,000

200,000

300,000

400,000

500,000

600,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Drillships

Drillship (pre-2000) Drillship (post-2000)

New rig dayrate differential hasn’t come back yet, but it’s coming

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But contracts are shorter And floater rates have dropped by higher % than jackups due to long term contracts at high rates ending

Data from IHS

Oversupply is decreasing as number of competitive rigs declines

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65% utilization

57% utilization

58% utilization

Data from Bassoe Analytics; photo is author’s own

582 493 426151

89 67

275

Total supply Underconstruction

Current supply Uncompetitive Current comp.supply

Rigs on contract Uncontractedsupply

Current jackup fleet status

148 139 12152

9 18

69

Total supply Underconstruction

Current supply Uncompetitive Current comp.supply

Rigs on contract Uncontractedsupply

Current semisub fleet status

134 114 10142

2013

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Total supply Underconstruction

Current supply Uncompetitive Current comp.supply

Rigs on contract Uncontractedsupply

Current drillship fleet status

The best will thrive as the rest leave

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• Operator quality reputation trumps everything – efficiency, better management systems

• Working rigs are preferred

• New rigs are preferred

• The longer rates stay low, the number of non-competitive rigs will increase

• Doesn’t matter what the published stacking status is

• Rigs are discreetly leaving the fleet

Photo is author’s own

Nearly 200 rigs have left the fleet since 2014

10Data from Bassoe Analytics; photo by Roy Luck (Creative Commons)

• Up to 50 more rigs to be scrapped this year

• Remaining inactive Paragon rigs will go (up to 14 rigs)

• 200-300 additional retirements possible by 2021

• Most old drillshipsare already gone

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39

34

48

15

4 46 7

5

2014 2015 2016 2017 2018

Recyling and conversion sales 2014-2018

Recycling Conversion

Nobody really knows what “real supply” is anymore

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Real supply: 340-518?

Real supply: 87-130?

Real supply: 117-121?

Data from Bassoe Analytics; Photo by Maersk Drilling

All-time high demand

397(2013)

163(2013)

86(2013)

Potential real supply based on current competitive fleet plus newbuilds

264 76 125 15 38

0 100 200 300 400 500

Potential real supply - jackups

New rigs Newbuilds Old rigs, drilling Newbuild non-deliveries Old rigs, no future contracts

78 9 32 11

0 20 40 60 80 100 120

Potential real supply - semisubs

New rigs Newbuilds Old rigs, drilling Old rigs, no future contracts

97 20 3 1

0 20 40 60 80 100 120

Potential real supply - drillships

New rigs Newbuilds Old rigs, drilling Old rigs, no future contracts

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Pool of 163 old rigs 38 (stacked) 125 (drilling)

Pool of 43 old rigs 11 (stacked) 32 (drilling)

Pool of 4 old rigs 1 (stacked) 3 (drilling)New rigs likely to be retired

85% utilization is possible

Data from Bassoe Analytics; photo by Maersk Drilling

?

518 397 467

51 90

Total competitivesupply

Expected demand Required supply for85% utilization

Oversupply Estimated attrition

Jackups - 85% utilization scenario

130 107 126

4 25

Total competitivesupply

Expected demand Required supply for85% utilization

Oversupply Estimated attrition

Semisubs - 85% utilization scenario

12186 101

20 4

Total competitivesupply

Expected demand Required supply for85% utilization

Oversupply Estimated attrition

Drillships - 85% utilization scenario

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Bright spots in the market will support rig demand growth

Brazil/South America:deepwater

Southeast Asia:deepwater/jackups

North Sea:HE semisubs

Middle East:jackups

Rodrigo Soldon

Hoi An

Hans Juul Hansen

Dorinser

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Rig values on the rise, but still well below replacement cost

...except for MWHE

...and nobody’s going to build anything else anyway

Data from Bassoe Analytics/Rig Valuation Tool, photo by Svein Åge Berge

220

575 550600

100

250 250300

140

275 300

425

180

450 425 450

Premium 400ft jackup 7th gen drillship 6th gen semisub -benign

6th gen semisub -harsh/SUT

Rig value development 2014-2018 (USDm)

2014 2016 2018 Current replacement cost

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Norway part of non-OPEC supply growth domination

mb/day

Data from IEA, photo by Svein Åge Berge

-1

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UnitedStates

Brazil Canada Iraq Iran Norway Colombia Indonesia China Mexico Angola Venezuela

Changes in global oil supply capacity 2017-2023

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0.0

0.5

1.0

1.5

2.0

2.5

2013 2014 2015 2016 2017 2018 2019 2020 2021

NCS Oil production (mBOE/day)

Historic production Reserves Resources in fields Resources in discoveries

Rising Norwegian production from J. Sverdrup and Barents

Data from NPD, photo by L.C. Nøttaasen (Creative Commons)

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Barents Sea growth will drive demand for winterized rigs

Photo by Max Dawncat (Creative Commons)

• Over 4 Bboe of oil & gas discovered so far

• 2017 was disappointing, but operators aren’t giving up

• The Barents will be a key region in maintaining Norwegian production through the next decade

• Annual spending could reach $8 billion by 2024

725 7401165 1370

4000

0500

10001500200025003000350040004500

North Sea NorwegianSea

Barents(south)

Barents(north)

NCS

Estimated undiscovered resources - NCS (m3)

Data from NPD, Rystad

NCS production costs have reached their lows – efficiency will be in focus and favor new rigs

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100 102 99 95 95100 10287

74 69

020406080

100120

2013 2014 2015 2016 2017

Cost development for operating fields (2013 = 100)

Forecast autumn 2013 Autumn 2017Data from NPD, Photo by Svein Åge Berge

Jack-ups in the NCS sector

• Existing jack-ups can operate in up to 150 meter water depth only• There are 11 Jack-ups in the NCS sector with 10 units are operating

for Statoil, AkerBP, Lundin and ConocoPhillips– 9 of these are GustoMSC CJ70 design including the two Cat J for KCA Deutag– One is GustoMSC CJ62 and one Keppel FELS N Class

• Long term contracts with dayrates from USD 270 000 to USD 425 000

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Quick overview of contract status –jackup market is not as interesting. There are no new rigs, and existing

rigs have long term contracts. Newbuilds unlikely, some attrition, basically boring. Semis are where

it’s at.

• 18 NCS rigs (6 in UK/Denmark)• 10 out of 12 drilling or with future contracts in

Norway = 84% utilization• No newbuilds on the way• Attrition of 2 rigs expected• Stable to positive outlook on rates and demand

NCS jackup market to remain stable

Data from Bassoe Analytics

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1 12

11 1 1 1

Norway UK Denmark

18 jackups with SUT

CJ70 KFELS N Class CJ62 CJ50 Hitachi Giant

Survey 1

• Go to bassoe.no/st1

• Will leading dayrates for NCS semisubs reach $350k by 2019?

• Yes• No

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NCS semi demand picking up • Access to vast new acreage in the Northern region of Norway and into the Barents

• Reduced break even cost for field development

*Representing the average level of demand in the 10 year period pre the 2014 oil price fallData from IHS, Bassoe AnlayticsPhoto by Svein Åge Berge

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Oil

Pric

e U

SD

Rig

cou

nt

NCS rig demand vs. oil price

Peak rig count Average Demand 2005-2016: 19 Units Annual Average oil price

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Current NCS semisub fleet profile

Data from Bassoe Analytics, Photo by Svein Åge Berge

42 SUT semisubs in fleet

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5

1

10

3

8

Drilling on NCS or withfuture NCS contract

Drilling (Canada/UK) Warm stacked (NCS) Cold stacked (NorthSea)

Cold stacked(elsewhere)

Newbuilds

NCS semisub fleet status

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Nearly all hot SUT rigs have backlog through 2018

Data from Bassoe Analytics

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North Sea Floater rates rising• Rates in Norway and the UK fell sharply in 2014

• Rates today about USD 140,000 in the UK and about USD 250,000 in Norway, and rising

• Operating costs down significantly to around USD 65,000 in the UK and about USD 120,000 in Norway

• Rate increases expected as market improves and squeezes out remaining viable oversupply

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100,000

200,000

300,000

400,000

500,000

600,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

North Sea semisub average fixture rates

UK NorwayData from IHS, Bassoe Anlaytics, Photo by Svein Åge Berge

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• 9-16 rigs likely to be non-competitive within 2-5 years

• Those which stay in the market likely to move out (UK)

• Short drilling jobs don’t support investments in old rigs

• Safety, environmental risk profiles higher

• Generally lower operational efficiencies

Data from Bassoe Analytics, Photo by Svein Åge Berge

Older NCS rigs to be phased out as cost, obsolescence, and oil company preferences prevail

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4

Cold stacked Drilling

16 NCS semisubs 16 years of age or older

Only 3 newbuild rigs left

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West MiraMarch/December 2017

Bollsta DolphinMarch 2017

Stena MidmaxSeptember 2017

West RigelDecember 2017

CS-60 GM-4D

North Dragon

Beacon Atlantic

Beacon Pacific

Survey 2

• Go to bassoe.no/st2

• Do you think there could be a shortage of semisubs for the NCS which would create the need for more newbuilds?

• Yes• No

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Potential shortage of NCS semis?

Data from Bassoe Analytics, Photo by Svein Åge Berge

42

27

16

15

4

6

1

NCS compliantsemisubs

Likely non-competitive

Competitive Cat-D NCS rigs outsideNorth Sea

Competitive supply Future newbuildsupply

NCS-compliant semisub supply forecast

Premium NCS rigs earn higher average day rates than Tier-2 rigs

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Tier-2 rigsPremium rigsGraph shows historical earned day rates and future day rates based on current contracts and/or recent fixtures

Data from IHS, Bassoe Analytics, Photo by Svein Åge Berge

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2000 2005 2010 2015 2020 2025

Premium vs. Tier 2 NCS semisub dayrates

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Will there be more newbuild orders?• Awilco’s got 3 options

• Upgrades of existing rigs not likely

• Reduced premium yard capacity Korea (HHI and DSME not focusing on drilling rigs)

• Few yards in China with experience: CIMC Raffles & COSCO - completion risks?

• Singaporean yards likely to remain market leaders, but at high prices

• Next generation SUT rig orders expected, but no boom

• Consolidation likely

Photo by International Labour Organization/Creative Commons

But next generation rigs will be built as technology takes over

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Next generation NCS semis will focus on:

• Battery technology and zero discharge – no DP

• Intelligent Green Future (IGF) technology

• Digitalization, Artificial Intelligence and Integration

• Production drilling and handling horizontal trees on deck

• Optimized, modern hulls; sufficient weight and deck space Photo by John Seb Barber/Creative Commons

Survey 3

• Go to bassoe.no/st3

• When will the first “next generation” rig be ordered?

• This year• Before 2020• After 2020• Never

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Oslo London Houston Rio

+47 2300 1000erland@bassoe.nosimen@bassoe.notore@bassoe.no

david@bassoe.no

+44 207 352 0496chris@bassoe.nohans@bassoe.no

+1 713 850 9002stefan@bassoe.nopeter@bassoe.no

+55 21 9988 95264joao@bassoe.no

www.bassoe.no