CHICAGO--(BUSINESS WIRE)--Fitch Ratings anticipates a continued preference by upstream producers for newer equipment with the latest safety features, a trend expected to increase following the BP plc (BP)/Macondo spill. This will drive additional newbuild orders and increase capex levels for offshore drillers.
Demand for rigs in the Gulf of Mexico (GoM) remains a key driver of industry conditions going forward. Regulatory uncertainty and the limited issuance of drilling permits in the region are expected to result in upstream spending being diverted to other markets during 2011. As a result, a large number of assets in the region are being marketed to other regions around the world. This increased supply of assets into international markets could limit upward price movements in these markets.
Market conditions for offshore drillers are impacted by two key themes in 2011:
--Regulatory Uncertainty: Following the BP/Macondo oil spill in the U.S. GoM, regulatory uncertainty is resulting in a significant overhang to future drilling and service sector industry conditions. While the drilling moratorium has ended, only limited issuance of drilling permits has occurred, and permit issuance is expected to remain a bottleneck to activity in the GoM in 2011.
This is resulting in rigs currently working in the U.S. GoM being marketed to leave the region for work in other international basins. Additionally, rigs coming off contract as a result of cancellations due to claims of force majeure are being re-marketed internationally. Further pressures to the supply of rigs is driven by regulatory uncertainty and a clear understanding as to what liabilities for future accidents in the GoM may mean for all parties operating in the region.
Delays in establishing a robust regulatory and liability framework for operating in the region will affect production profiles for companies operating in the region. The U.S. Energy Information Administration (EIA) anticipates that 2011 U.S. offshore oil production will fall by 13% compared to 2010 levels. Should activity levels remain slow in returning to pre-spill levels, this could begin to affect oil prices for U.S. consumers as decline rates for existing deepwater production are steep, requiring continued drilling to maintain existing production levels.
--Heightened Counterparty Credit Focus: The BP/Macondo accident in the U.S. GoM highlighted counterparty credit issues across the drilling and service sectors in 2010. As contracts come up for renewal in 2011, this issue is expected to remain at the forefront of contract negotiations. Drilling and service companies will need to ensure they are not exposed to risks that have been highlighted as a result of the accident in the GoM.
Key issues include expanded indemnification of drillers/service companies related to any accident, stronger force majeure language to prevent contract cancellations, and a continued review of exposures to low rated upstream companies. Since the protections for drilling and service contractors are contingent upon indemnifications by upstream companies, many of the large drilling and service companies are expected to limit their exposure to weaker upstream companies for fear of being exposed to large liabilities.
Additional information is available at 'www.fitchratings.com'.