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Last Updated: May 18, 2017
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uploads1495070882425-logo132.jpgAfter historical highs in 2014, jackup demand plunged by 25% from 409 units in 2014, to 308 units in 2016. With 72 newbuilds scheduled to come into the market in the next few years and only 63 units retired since 2014, the jackup market is in the midst of an oversupply situation, resulting in low utilization levels and depressed rates.


Rystad Energy forecasts a small increase in jackup demand this year, compared to 2016 levels. In line with this view, we have seen increased tendering activity during the first quarter of 2017.

Based on contract fixture data from Rystad Energy’s RigCube, Figure 1 shows the development in contracting activity from Q1 2016 to Q1 2017 for competitive rigs. We see that contracting activity picked up in the first quarter of 2017, with 36 new mutual contract fixtures. This is a 50% increase from the previous quarter and a 33% increase compared to the first quarter of 2016. Tendering activity is still low compared to the peak period between Q1 2012 and Q1 2013, when the number of fixtures for new mutual contracts averaged 77 quarterly.


The blue line in Figure 1 shows the trend of average contract duration per quarter. Durations for contracts signed in Q1 2016 averaged 19 months as compared to Q1 2017 with an average duration of 6 months. This is a 68% decrease in average contract duration for the first quarter of 2017. Eighty-three percent of new mutual contracts signed in Q1 2017 are intra-year contracts. In other words, only six of the units contracted in Q1 2017 will have a contract extending past 2017. This is a large drop compared to Q1 2016, when intra-year contracts accounted for only 42%. While the total backlog for the first quarter of 2016 added up to 25 rig years, Q1 2017 was significantly lower with approximately 18 rig years of backlog. While our forecast calls for a slight uptick in jackup demand, it will still be a very competitive market for the rig owners with units rolling off contract this year.


Taking a deeper look at contracting activity for the competitive fleet during Q1 2017 (sublet, exercised options and new mutual contracts), we see that 33% of the units were already under contract at the time they received additional work. The other 67% of rigs awarded work in Q1 2017 were not under contract at the time of fixture, and on average, had been idle for 11 months. This compares with Q1 2016, where 35% of the jackups receiving new work were already contracted, while the remaining units had, on average, been idle for 7 months. Aside from the “lower for longer” environment and operators “re-tendering”, slow approval processes and revisions to the scope of work required only add to the time it takes to secure a contract.


Over the last decade, the Middle East has been the largest market for jackup rigs. Looking at the first quarter of 2017, 30% of the awarded contracts are for work in the Middle East. Saudi Aramco is out in the market with a multi-rig requirement for incremental units as well as renewal against existing units with a start date during Q1 2018 and a duration between three and five years. Elsewhere in the region, Dubai Petroleum is also out with a requirement for term work against the renewal of two incumbent rigs. During Q1 2017, Southeast Asia and North America were slightly behind the Middle East in awarded contracts, with 25% and 22%, respectively. In Q1 2016, tendering was dominated by the Middle East (38%), with South Asia (15%) a distant second.

Figure 2 shows the development in rig rates per quarter in the last year. In order to understand the global trend in rig rates, North Sea jackup rates have been excluded from the quarterly averages. Declining rates persisted throughout Q3 2016, however during the last quarter of 2016, rates appear to be flattening out and even showed signs of a resurgence in Q1 2017 with contracting activity increasing. Rig rates averaged near $69,000/day during Q1 2017, compared to the peak period for jackup rates, between Q1 2013 and Q3 2014, when rig rates averaged $142,000/day. A situation that can still be seen as depressing for the drillers.


Towards 2020, Rystad Energy believes that jackup demand will increase, with an anticipated yearly average growth of 4%. However, the oversupply of existing units in the market, an expected influx of newbuilds and the short-term nature of contracts, contribute to our opinion that rig rates will remain at low levels going forward.

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High Oil Prices and Indonesia’s Ban on Oil Palm Exports

Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.  

A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.

Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.

Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.

And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.

That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.

Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.

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Market Outlook:

  • Crude price trading range: Brent – US$110-1113/b, WTI – US$105-110/b
  • As the war in Ukraine becomes increasingly entrenched, the pressure on global crude prices as Russian energy exports remain curtailed; OPEC+ is offering little hope to consumers of displaced Russian crude, with no indication that it is ready to drastically increase supply beyond its current gentle approach
  • In the US, the so-called NOPEC bill is moving ahead, paving the way for the US to sue the OPEC+ group under antitrust rules for market manipulation, setting up a tense next few months as international geopolitics and trade relations are re-evaluated

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