Plunging oil prices hit offshore drillers

(Credit: CBS News)

Plunging energy prices aren’t only shaking up U.S. oil producers on land — more offshore oil rigs also are going idle.

According to research firm IHS, just over 78 percent of all offshore rigs in the Gulf of Mexico were in use as of last week, down significantly from more than 95 percent last year. Worldwide, that figure stood at just below 90 percent of market utilization, also down roughly five percent compared with the year-ago figures.

As the energy news site Oilprice.com notes, taking oil rigs out of production is a sign the oil exploration companies are cutting back. That is likely to hurt future offshore production and in turn harm growth projections at some oil companies.

Companies that supply oil rigs are also getting slammed by the slowdown in oil production.

When, as recently as last summer, oil prices were at $100 a barrel or higher, oil rig companies were living large. According to Reuters, operational rates for ultra-deepwater rigs peaked in 2013 at around $650,000 per day. But by this past September rig costs had fallen to between $375,000 and $500,000 per day as demand tumbled.

Benchmark crude prices have fallen by more than half in recent months, sliding from roughly $107 in June to less than $50 today as global oil supplies surged and demand waned.

Already by November, oil and gas industry website Oilpro.com was reporting that Hercules Offshore (HERO) was laying off hundreds of workers while “stacking,” or shutting down, four of its rigs due to weak market conditions.

“We had expected activity levels to improve towards the tail end of this year and to some degree they had for some private operators,” company CEO John Rynd said at the time. “However, based on our latest discussions with leading operators in the region, we do not anticipate much demand growth in the near term.”

The news for offshore drilling companies is not expected to get better in the near future.

“We believe the fundamentals of the offshore drilling markets remain difficult and will continue to materially worsen given current oil prices,” analysts with UBS Securities recently said. They also predicted that up to 70 percent of “floaters,” or mobile offshore drilling rigs, up for contract renewal this year will stay idle for extended periods, while many new rigs could be mothballed.

Given the cyclical, boom-or-bust nature of the oil industry, however, analysts believe the latest slowdown in rig orders is temporary. Last month, Reuters cited a forecast from Pareto Securities projecting a nine percent increase in the global fleet of jackup rigs, the type that has legs reaching to the ocean floor, this year.

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