Still, around 50 new-build rigs* remain in shipyards, often referred to as ‘stranded’. They are stranded as the original party which placed the order has either terminated the contract or transferred ownership to another party, which in turn is waiting for the right market conditions to reactivate the rig.
As rig utilisation rises, there is no doubt these stranded rigs are of interest, with parties such as private investors, shipyards and shipbrokers seeing a unique commercial opportunity or a drilling contractor looking to add to its existing fleet.
From a perspective of an oil & gas operator, the challenge with contracting a stranded rig is the ability of the responsible party to reactivate the rig and satisfy a robust rig intake process.
ModuSpec has been involved in numerous reactivation projects of stranded rigs and below, we share our perspective on the challenges that an operator may face if it opts to contract a stranded rig – with a key observation being the success of the reactivation is underpinned by the experience and competency of the party which owns the rig and/or manages the reactivation.
Understanding rig status
It’s likely the stranded rig is partially completed, and equipment is in cold or warm stack maintenance mode. The operator should understand the status of the rig, extent of reactivation required and feasibility within the project timeframe as there can be numerous challenges to address during the rig intake process.
Stranded rigs are often left to the elements therefore in-depth checks are required to confirm that the physical condition of equipment has not degraded due to environmental factors and prescribed maintenance tasks and equipment testing has been carried out whilst in cold or warm stack maintenance mode.
- It is common that capital equipment such as the drilling systems and well control equipment, has not been installed. Understanding lead times and ensuring QA/QC processes are integrated into the reactivation project plan is important to meet the reactivation deadline.
Where capital equipment is installed, part of the rig readiness activities should include an understanding of the commissioning process, the punch list of items from the past and what the future (re)commissioning is needed to have the rig achieve class and completion from each individual Original Equipment Manufacturer (OEM).
It is important to check that all software updates have been considered and confirm that all applicable OEM equipment bulletins have been addressed.
The status of the Maintenance Management System (MMS), whether the previous owner has historical records to transfer or an entirely new MMS must be developed, is key. The status of statutory certification, in the case of idle capital equipment such as a blow out preventer (BOP), is also of note. ModuSpec has already highlighted a market trend with rig owners assigning OEM responsibilities to a Current Equipment Manufacturer (CEM)**.
Understanding the status of the rig will help validate if the project plan and date of sail is realistic. ModuSpec has experienced the date of sail being continually delayed due to poor understanding of the initial status and condition of the rig. This can be a major challenge for an operator which is also project managing other rig-related services and logistics support for the intended well programme, often with cost-specific consequences.
Expertise and capacity
We see challenges during the rig intake process related to expertise and capacity of the organisation which reactivates the rig. Particularly in the case of a private investor or ship broker (utilising a bareboat contract), which is largely related to the immaturity of the organisation and speed at which they can increase capacity.
- During the early phases of reactivation, project teams are compiled and subsequently grown at short notice, meaning as an organisation the processes and procedures are immature, although likely with several experienced individuals working to develop them during the reactivation project.
- The QHSE organisation including processes and procedures in place during the early phases is generally not suitable for the operational phase. The risk to the operator is the lead time to mature the QHSE organisation for commencing operations.
- Tendering processes are not well established, therefore getting suppliers, vendors and service providers onboard takes longer.
- Poor project planning results in critical steps during the reactivation being taken too late. For example, we have experienced OEMs being brought in late for condition assessments – meaning results are not factored into the project plan – ultimately causing delays.
- Underestimating time is a common issue, particularly line-item activities on a reactivation project plan being poorly understood. The result is delay and loss of efficiency, which ultimately adds cost to the budget or opportunity cost of income for the rig.
- Pressure to meet the budgets and the milestone date of handover/acceptance can create a culture of cost minimisation during the reactivation project. It is common to see scenarios where greater upfront investment would result in time and cost savings in the future. However due to the budget being inflexible, operational efficiencies that can be gained later or increase level of safety are missed.
Challenges with expertise and capacity can be mitigated if an experienced party with an established organisation and existing capacity is appointed to manage part of or all the reactivation and operation phase.
Multi-party approach - responsibilities, bareboat charters, and acceptance
In a multi-party model, it is common to see the owner or ship broker (using a bare boat charter) appoint an established organisation (drilling contractor) with capacity to reactivate the rig. From the perspective of the operator, there are still some key nuances to be aware of during the rig intake process.
- Under a multi-party model, it is likely that roles and responsibilities for the asset, the people, management systems and the equipment are split and will transfer at some point during the reactivation project. These arrangements are important to understand in terms of any risks for the operator. In one instance we experienced the owner providing crew to maintain the rig equipment during the reactivation period. At the point the rig is ready, it becomes the drilling contractor’s responsibility to provide crew for operations. There is undoubtedly a loss of knowledge and familiarity with the changeover of crew especially if the reactivation period involved major maintenance tasks and the development of a new MMS.
- Where there is a bareboat charter in place, the operator will want to be assured that the multi-party arrangement does not affect the forward well/drilling programme. In our experience, a bareboat contract should entail several steps to be executed:
- Terms need to be clearly defined at the outset of the charter - who is responsible for maintenance costs, including what is defined as wear and tear, who pays for failures and repair, and who pays for consumables. Upgrades for complying to the operator requirements also need discussed and agreed.
- Having a robust verification process will seek to avoid disputes arising from modifications, undue wear and tear, damages etc. This applies not only to the cost of reinstatement but also the expensive legal processes needed to come to a final agreement.
- There is a trend in the market where shipyards opt to reactivate stranded assets and then agree bareboat charters with a drilling contractor. This arrangement can be seen as an opportunity to avoid purchasing the asset and rather ‘rent’ it (or agree exclusive rights to market) and be protected from any market fluctuations as the bareboat charter will be subject to having a contract in place from an operator. Otherwise, the asset will go back to the shipyard.
- Defining what constitutes ‘acceptance’ between the multi-parties and then the operator can be complex. Acceptance between owner and drilling contractor should be defined as well as drilling contractor to operator.
In our experience there is a significant discussion required as each party has its own drivers for what constitutes acceptance. For example, the drilling contractor will be looking to comply with the operator’s own compliance requirements, particularly for an international oil company (IOC) such as TotalEnergies, bp or Eni. The owner may not be so considerate of the IOC compliance requirements as it doesn’t have a vested interest in who the operator is. This is common where the drilling contractor maintains the right to market the rig to any client. Ultimately for the IOC, it wants the rig to be ready to operate and clear definition of acceptance between the multiple parties supports to achieve that objective.
As rig market demand continues to rise, we foresee that stranded rigs will meet that demand in the short-to-medium term and there will be more multi-party models in the market, beyond the owner of the rig being the drilling contractor.
These models will undoubtedly be enablers to get the rigs operational. As the end user, the operator signing the contract should be aware of the different nuances around the expertise and capacity of the multiple parties involved, and how responsibilities for manpower and acceptance are defined to ensure to the greatest extent possible that the rig can commence operations and meet the performance levels expected including regulatory compliance.
In the midst of a growing market trend to contract stranded rigs, ModuSpec will continue to support multi-party models and offer our experience to the industry. There is no doubt we can all learn something and keep our industry moving forward as safely and efficiently as possible.