Gulf of America upstream: our view on rig rates

The rig market in the Gulf of America has been on quite a journey over the last 15 years. Exuberance and spec building of rigs in 2010-2014 was followed by a reset and tapering of rig count in the second half of the last decade, and then a collapse of rig demand in the Covid period. Since 2022, contractor consolidation and costly reactivations have tightened rig supply, putting pricing power in the hands of rig owners. But can high prices prevail as oil prices continue to soften?

The facts

• Analysis based on data from our Offshore Rig Tracking Tool indicates that Gulf of America rig rates are priced for a US$89 per barrel oil environment, yet the price of Brent Crude now hovers around US$65 per barrel.
• Gulf of America rig rates north of US$450,000 per day are driven by complex and competing factors, with softer demand offset by operator contracting preferences, high rig utilisation, and a more consolidated rig market.
• Despite these drivers, high day rates cannot last forever; a continued softening of oil prices will eventually lead to reductions, once utilisation rates fall and the balance tips in favour of hirers.

Our view

Our rig-rate implied Brent price tracked closely with actual Brent pricing through the 2014 price collapse, then remained below it until the 2020 Covid shock. Day rates rose as oil rates recovered in 2021, but since 2022 rig rates have remained stubbornly high despite the gradual three-year decline in oil  

Prevailing day rates are high to Brent: Current oil prices suggest optimal rig rates of around US$380,000-400,000, indicating that prevailing day rates of US$450,000-500,000 are inflating well costs by roughly 13%.

Barriers to entry are supporting high prices: Short-term contracting has created barriers to new rigs entering the market in recent years, since operators are unwilling to amortise the cost of bringing rigs into the region.

Market consolidation is also a factor: M&A activity has reduced the overall number of rig suppliers in the Gulf of America from ten to five since 2014, so there are fewer companies (which have the advantage of strong balance sheets) to hold the line on rig pricing.

Looking ahead

While rig rates in the Gulf of America have held firm for the past three years, we expect that to change in the long term. Deepwater rig demand in the region will shrink next year relative to Latin America, leading to lower utilisation rates. While this will put pressure on rig contractors to keep rates high in the short term, in the long run, continued oil price softness – or the perception of future softness – will drive rates down.

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