China: A closed rig market with global reach

Just as how Google and Facebook are banned in China, even as Chinese-owned Tik Tok is the world's most downloaded mobile app, so it is with the Chinese rig market. Like the popular video service, Chinese rig contractors and China-made rigs have met with some success venturing beyond the country for work. However, its own offshore rig market is mostly a closed and domestic one that is hard for foreign firms to pierce.

Few international contractors even bother to take part on the rare occasion when a rig tender emerges, as it is usually assumed a local unit will be assigned the job. Hence, hardly any foreign-owned rig has drilled offshore China in the last decade. The last units to have done so was drillship Dhirubhai Deepwater KG2 in 2019, when it undertook three wells for CNOOC.

There are currently 104 rigs located in China, of which 26 (including three tender-assist rigs) are yet-to-be delivered. Of these, the working fleet usually numbers under 70 units. It is mainly a shallow-water market, with jackups making up the bulk of the delivered fleet. There are just a few offshore rig contractors and they are all state linked: CNPC subsidiary China Petroleum Offshore Engineering (CPOE), Sinopec-linked Shengli Offshore and Sinopec Offshore Oilfield Services, and CNOOC's China Oilfield Services Ltd (COSL). The biggest player on the block is COSL, which operates about 40 rigs in China, followed by CPOE with 13, Shengli with seven and Sinopec Oilfield services with five.

The country did not use to have such a huge fleet (see chart). In the mid-1980s, there were less than 10 offshore rigs contracted rigs in China. In the late 1990s, this number began to climb, reaching 20 units by 2007 and doubling to around 40 units in 2015. After a few years of zero growth during the offshore downturn starting 2014, the contracted fleet started increasing again in 2019.

Even when Brent fell to under USD 20 a barrel in 2020 due to the pandemic plus the price war between Saudi Arabia and Russia, China's rig demand defied oil prices and hit a sharp growth spurt to reach the 70 or so units today. Marketed utilisation of the fleet there is currently around 87.7%.

COSL generally makes available its China fleet to CNOOC for use as and when demand arises. The operator is said to renew a shortlist of COSL's fleet that it can call on every year - usually around 30 units - for at least three years each.

This growth of China's offshore fleet is not surprising as it required to support the country's push for increased exploration and production in the last decade. And as China's reliance on energy increases with its rapid growth, the importance of energy security to ensure it can weather any immediate disruptions to supply or markets also became clear. It has been working to bolster domestic supply to address the imbalance.

China is not alone in seeking to be self-reliant when it comes to the energy sector. Other countries, from Malaysia and Vietnam in Southeast Asia to Brazil and Saudi Arabia, have also sought at separate times to back or build their own rig providers and support their local offshore market. However, none of them are also a major rig-building nation like China. Of the 684 delivered fleet in the world today, almost a fifth or 121 units were constructed at Chinese yards. Most were delivered in the last decade.

At the height of rig orders in 2011, some yards like Shanghai Waigaoqiao Shipyard were enticing customers - mostly speculators by then - by offering, notoriously, just 1-5% down payment. When the offshore market tanked in 2014 after the oil price crashed, it all seemed like a bad idea as over 120 undelivered rigs remained stuck at Chinese yards.

For years, orphaned rigs languished and rusted away quayside in China until in 2019, when SinoOcean (also called Guo Hai Offshore Asset Management) was set up to manage distressed offshore assets at the nation's state yards. The entity worked behind the scenes to broker contracts for undelivered rigs, everything from bareboat agreements, charters, sales to even conversion. The state outfit has been so successful, today there are just 23 newbuild rigs left at Chinese yards that are still up for grabs.

Since 2019, over 40 rigs have left China to undertake contracts elsewhere. Most were newbuilds constructed at Chinese yards. Some were sold, like jackup Mehzem (ex-Shelf Drilling Fortune) that was acquired by ADNOC Drilling in 2021. Others like Perro Negro 12 and Gulf Driller VI were marketed by international contractors like Saipem and CP Latina respectively, and then taken on bareboat once contracts were secured.

COSL: World's largest offshore rig contractor

COSL, too, has successfully expanded its fleet beyond the maritime backyard that is Southeast Asia. It is currently the largest offshore rig contractor in the world. Of the 68 drilling rigs it now operates, almost a third or 20 units are working in countries ranging from Mexico to Great Britain and, most notably, the Middle East. In 2022 alone, the contractor secured long-term charters from Saudi Aramco for seven jackups.

As a multi-service offshore provider, COSL can offer not just drilling rigs, but also integrated services as it runs its own well services, marine, transportation and geophysical segments. Hence, it is well placed to take part in drilling cum integrated services tenders sought by some operators that most other rig contractors may eschew.

Furthermore, as a state-owned firm, COSL also has the resources to take on terms its competition cannot. One interesting example was in 2016, when it entered into a 'vendor-financed offshore drilling contract' with Sirius Petroleum offshore Nigeria that would have seen COSL extend delayed invoice and payment terms, or a significant cost of the rig, until production commences - simply put, it would be paid only upon successful drilling and when production kicks in. The deal, however, fell through in the end.

But with China being one of world's largest military and economic powerhouse, COSL also inherits the complexities of the nation's relationships with other countries. There are places, such as in Iran, where Chinese rigs are among the few that can operate because of sanctions by Western countries. There are yet others where a vessel or rig flying its flag will not be welcomed, like off the Philippines and Vietnam in the South China Sea where China's maritime sovereignty claims with the littoral states remain unresolved.

It can be a tricky road with additional roadblocks that Chinese rigs have to navigate to operate overseas. Even the wildly popular TikTok may well be banned or sold soon in the US if it is to be allowed to continue operations there. Still, even if the global rig market crashes again, there is always the large and growing domestic market that Chinese rigs can fall back on.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.