Oil & Gas

Market analyst notes ‘fall away’ in North Sea rig tendering activity on windfall tax ramp up

A top rig market analyst has laid bare the impact of the UK Government’s windfall tax hike on the UK’s drilling sector.

Teresa Wilkie, of research body Westwood Global Energy Group, says there has been a definite “fall away” of tendering activity in recent weeks.

“It’s certainly not as positive as it was at the start of the year when it comes to the UK rig market,” she said.

“Unfortunately it (the windfall tax) has put a spanner in the works of operators plans, and we’ve seen a lot of companies of differing sizes confirm that they’re going to have to rethink projects and cut back on their spending.

“That’s bad news for what’s left of the UK’s rig market; we’ve already seen several units leaving over the past couple of years for jobs elsewhere.”

A step change in sentiment

Fears are rife currently that a lack of upcoming work on this western side of the North Sea could push contractors to send their units to more buoyant waters.

The UK wing of the International Association of Drilling Contractors (IADC) has warned of a rig exodus, and have called on governments to support the sector.

A number of operators, including some of the region’s biggest players, are reconsidering their planned spend after Westminster doubled down on its energy profits levy (EPL), increasing the headline rate of tax to 75%.

Adding fuel to that fire is the Scottish Government’s presumption against new North Sea exploration and drilling, unveiled at the start of the year.

© Supplied by aspectus group
Teresa Wilkie

Ms Wilkie, part of Westwood’s RigLogix team, says there has “definitely” been a change in sentiment between Westminster’s initial windfall tax, announced in May, and the escalation in November.

“The first one was unwelcome, but the investment relief meant that although operators acknowledged it was going to be more difficult, there were certain way to get around it. Off the back of that, the drilling contractors were still seeing tenders coming out and the market getting busier.

“This time around; it’s a fairly bleak picture at the moment. Operators are holding off on their tendering plans or rethinking their developments, and waiting to see if the government makes any more changes or offers up any sort of relief.”

Worries materialising

Crucially, the IADC’s concerns about the knock-on impact of government policies on the drilling sector are already being borne out.

It is understood Aberdeen-headquartered Dolphin Drilling (OSLO: DDRIL) is tendering its Borgland rig, which it had planned to bring to the UK, for work overseas.

Meanwhile, Apache (NSADAQ: APA) blamed the windfall tax as it confirmed the cancellation of a deal with Diamond Offshore for the Ocean Patriot that was due to run until 2024.

© Supplied by Fredrik Helliesen/Do
The Borgland Dolphin

“I could potentially see that” being replicated, said Ms Wilkie.

She added: “A couple of big operators in the UK North Sea have already come out and said that they’re going to cut down on their plans. But they have long-term campaigns in place, so it does make you wonder if there are more (cancellations) to come. We haven’t heard anything confirmed, but there’s definitely potential.”

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