This post is the first of a two-part series on rig stacking. Part 2 will cover stacking in onshore drilling.
Are you actively tracking which Oil & Gas service providers have made the decision to stack their rigs? While rig stacking was the farthest consideration from our minds just three years ago, today it’s a concern of grave importance for E&P’s.
In today’s post, we cover the different methods of rig stacking, why they matter to E&P’s, and what impact they can have on your operations and cost structure.
Two Methods of Rig Stacking
Since the market downturn in mid-2014, stacking of rigs has become a strategy commonly employed by service providers to save money, helping weather the storm that is low-cost oil. For those new to the world of stacking, it can take two different forms:
- Hot (or Warm) Stacking involves paying a skeleton crew to stay on the rig and conduct regular maintenance to ensure a smooth reactivation when the equipment is once again in demand and brought back online.
- Cold Stacking is the equivalent of shuttering a factory in manufacturing—rigs and equipment are packed up and stored, and employees tied directly to the operation of the equipment are laid off.
Costs and Risks
In offshore drilling, the considerations for whether to cold stack equipment are quite clear. Service providers can either cold stack, saving on operational costs while taking on future risk, or they can warm-stack, choosing to spend cash to mitigate these operational risks.
With the high level of technical complexity associated with offshore drilling rigs, it is not entirely clear what will happen when equipment is turned back on following an extended shut-down. There are ways to mitigate these operational risks by intelligently cold stacking, but proper planning and preparation can only mitigate a portion of the risk.
This is not a trivial decision for service providers. Per a 2016 article in Bloomberg, it costs roughly $40,000/day to warm stack a rig, while cold stacking costs significantly less, coming in at $15,000/day. On an annual basis, service providers can save over $9MM by making the decision to cold stack a single rig. Although this savings potential does not account for the costs to reactivate a cold-stacked rig, it’s clear there is cash to be saved (at least in the short term) by cold stacking.
Contrasting Strategies Adopted by Offshore Leaders
Despite the potential to save millions of dollars a year, a number of offshore service providers have decided they will not turn to cold stacking. Pacific Drilling is one of the companies making such a decision. Pacific’s CEO, Chris Beckett, recently noted that “the unknowns of cold-stacking are just too great and the cost to keep the ships running too manageable to turn them off.”
But of course, there are always others adopting the opposite strategy. For instance, TransOcean, one of the largest off-shore service providers in the world, recently decided to cold stack nine rigs off the coast of Trinidad and Tobago. Not only did this decision result in immediate savings, but it was also applauded by both investors and analysts, including Citigroup Inc. analyst, Scott Gruber:
"I don’t think a simple congrats on this quarter’s cost beat is really sufficient,” said Scott. “A big kudos to all of you.”
Will this turn out to be a cautionary tale about chasing short-term savings? Or will providers like TransOcean, who have already made their bet that operational savings far outweigh the potential risks associated with cold stacking, be considered the heroes of the industry?
Why it Matters
With such a broad range of approaches to rig stacking, many E&P’s are wondering which strategy they should align with. As such, we’ve pulled together some possible considerations that we’ve seen other E&P organizations asking about:
- Develop a Perspective on the Cost vs. Risk Tradeoff – We recommend engaging with service providers early on to develop a perspective on your firm's appetite for reducing costs by engaging with vendors who have cold-stacked rigs vs. taking on unknown operational risks.
- Prepare Counter-Arguments to Address Price Increases: We've seen a number of service providers recently argue for price increases to either (1) recoup some of the costs incurred from hot stacking or (2) cover the costs of reactivating cold-stacked rigs. E&P supply chain teams can counter those arguments with data on credible substitute providers, rig costs, and price trends.
- Understand the Experience of the New Rig Crew – As we all know, the downturn led to lay-offs and, as such, an exodus of industry experience. We encourage operators to ask detailed questions about crew experience as rigs come back online.
- Consider Using Performance-Based Contracts — Basing service provider contracts on performance-based metrics can lead to greater incentives for your providers to implement high-quality rig reactivation and labor force training.
Want to learn more about rig stacking? Check out Part 2 of this series, which will take a closer look at cold stacking of onshore drilling and completion rigs. In the meantime, don’t hesitate to reach out to us here with any questions!