The offshore rig markets, coming to terms with the worst downturn in more than a decade, still have a lot to digest as contracts continue to be cancelled and the oversupply of oil and gas continues.

"Rig dayrates have plummeted as a function of significant oversupply," Douglas-Westwood (DW) analyst Mark Adeosun said Monday. "Many of these rigs were ordered in the previous upcycle but have only recently entered the fleet at a time when the appetite to drill is poor."

Rig cancellations are taking a big bite out of drilling contractors' budgets.

Transocean Ltd. said Royal Dutch Shell plc has cancelled a rig that was contracted for the Alaska offshore drilling program, which was scrapped earlier this year (see Daily GPISept. 28). Shell agreed to compensate Transocean for early termination of the Polar Pioneer docked in Alaska, whose average dayrate was estimated at $593,000/day. Shell agreed to pay an undisclosed sum to cover reduced operating costs and the expense of moving the rig to Norway, Transocean said Monday.

Earlier this month, Shell also terminated its contract with Noble Corp. for the Noble Discoverer, which was to be used for the Alaska offshore drilling campaign. Noble was expected to receive a contract termination payment estimated at 90% of its remaining dayrate.

Transocean has locked in some short-term work for other rigs, but more than 40% of its 18 ultra-deepwater floaters are not contracted. That number does not include rigs the Swiss drilling contractor already had stacked or idled.

The long-term future of offshore rigs also is bleak, as the number of offshore oil and natural gas discoveries made this year dropped by 45% from 2014 and 60% from 2013, according to DW research.

"The market for newbuilds has evaporated," Adeosun said. With the continuing oversupply, "rates are unlikely to recover any time soon and rig owners around the world will continue to defer the delivery of new rigs and consider scrappage of non-competitive units."

A backlog of subsea orders supported a high level of offshore installation activity this year around the world. But that backlog now is falling rapidly with only a handful of projects sanctioned this year.

Notable final investment decisions (FID) made this year include Shell's Appomattox field in the deepwater Gulf of Mexico (see Daily GPIJuly 1). Appomattox is to be Shell's eighth and largest floating platform in the U.S. offshore. It initially would produce from the Appomattox and Vicksburg fields, with average peak production estimated to reach 175,000 boe/d. Startup of the project offshore Louisiana is scheduled for about 2020. Statoil SA also announced an FID for the Johan Sverdrup field in the North Sea, while BP plc has sanctioned Shah Deniz Phase 2.

"DW believes subsea installation activity is yet to bottom out, with current backlog disguising the reality of the industry," Adeosun said. "A decline of at least 15% is forecast in global subsea tree installations next year."

The "undeniably bleak assessment should be tempered with acknowledgement that, while it is often hard to be positive in the depths of a downturn, current oil price levels are not sustainable," he said.

As to when the recovery may begin, however, most industry observers now expect the supply overhang that has suppressed prices through 2015 "will linger well into 2016. However, there are signs that the supply/demand gap may start to narrow toward the end of next year."

The forecasts are all over the map as to how much production may grow or fall in 2016, he said. The most recent International Energy Agency Oil Market Report projected earlier in December that oil demand will increase by 1.2 million b/d in 2016. However, DW's most recent drilling and production analysis highlights net additions of only 250,000 b/d.

There is a reason to see some light at the end of the tunnel, Adeosun said, "but we should expect that it might take time to reach it."