Not getting any younger - a perspective on Ageing Rigs

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1 Building boom in 1980s has created an Ageing Rig issue 295 Rigs reach 35 years old in the next 7 years Jackups in particular face issues with almost 70% of the Ageing Fleet Modification and Upgrade costs will increase significantly Market has already moved to address the problem with a surge in new build orders Fleet of Rigs aged 35 years or younger has not grown by much Not getting any younger - a perspective on Ageing Rigs

2 Introduction Today almost 25% of the MODUs in the world are more than 35 years old, and another 26.5% are between 31 years and 35 years old. This means that in the next 10 years the issue of ageing rigs will loom large. By 2020 more than 400 of the Jackups, Semisubmersibles, and Drillships in the world will be more than 35 years old as the rigs built in the 1980s boom approach the end of what we believe to be their useful life both economically and practically. Build Year Reaches 35 Years Rigs Drilling Contractors now face the options of investing heavily to upgrade and enhance the lives of their older rigs, investing in new build rigs to replace the ageing fleets or, as we ve already seen Transocean implement and Noble announce they are considering, sell off or spin off the older rigs into a separate company. Each option brings its own challenges and risks. This paper looks at the trends with regards to Ageing Rigs and the implications for the industry including How the fleet is ageing by Rig type What the industry is doing to replace the ageing fleet Focus on Jackups Focus on Semisubmersibles 2 Not getting any younger - a perspective on Ageing Rigs

3 Trends Analysis The issue of an Ageing fleet is predominantly driven by Jackups of which 225 reach 35 years old between 2013 and 2018, and by Semisubmersibles where 41 reach 35 years old between 2017 and At present this is less of an issue for the Drillship fleet, many of which will still be less than 25 years old in 2022 as there was no construction activity between 1987 and The chart below shows how the age profile of the MODU fleet develops between 2000 and 2022 and highlights some interesting trends Firstly, the fallow construction period between 1989 and 1998 where only 13 rigs were built is evident in 2020 as the small number aged Years means that once this current large spike in rigs reaching 35 years old is over in around 2022 the next time this happens won t be until 2035 Second is the fast rate of increase in 2017, 2018 and 2019 as the Semisubmersibles are added to the Jackup numbers from the high construction rates in 1982, 1983 and Finally the net position of the fleet under the age of 35 years old remains reasonably static between 2000 and 2020 growing by less than 5.1% in total over the period and only 0.2% compound annual growth rate. This is driven by the lack of confirmed Jackup orders past 2016 and so the drop from 729 to 536 is mostly driven by 174 Jackups reaching 35 years and older. 3 Not getting any younger - a perspective on Ageing Rigs

4 The table and chart below shows which of the Drilling Contractors face the biggest challenge and have the highest proportion of their fleet to address. Drilling Contractor Transocean ENSCO Noble Rigs greater than 25 years old 46 (48.4% of Fleet) 38 (50.7% of Fleet) 54 (69.2% of Fleet) Seadrill 0 Hercules Maersk Rowan Diamond Nabors Aban Offshore COSL Shelf 38 (95% of Fleet) 4 (16.7% of Fleet) 12 (35.3% of Fleet) 35 (77.8% of Fleet) 12 (100% of Fleet) 8 (47.1% of Fleet) 36 (38.9% of Fleet) 36 (97.3% of Fleet) In terms of volume, Transocean, Noble and ENSCO have a large share of Ageing Rigs due to their overall fleet size. On the other hand, Seadrill s strategy to invest in newer rigs means they will not face the issue with their fleet for many years. After selling their older shallow water rigs last year to Shelf Drilling, Transocean now face an Ageing Semisubmersibles fleet with 39 of the 51 they operate more than 25 years old. Diamond, Hercules, COSL and Shelf have a large volume of older rigs as well due to the makeup of their fleet and number of old Jackups and, in Diamond s case, the large number of Semisubmersibles in their fleet that were built in the 1980s 4 Not getting any younger - a perspective on Ageing Rigs

5 Replacing the Ageing Fleet The industry appears to already be acting on this trend with a major peak in new build activity currently being experienced, as shown by the chart below: Between 2009 and 2016 there will be 362 new Jackups, Semisubmersibles and Drillships built and as the chart above shows this will go some way to addressing the impact of the rigs reaching the 35 year mark. In the 20 years between 2000 and 2020 the net effect of newbuilds less ageing rigs will total just 29. This result is driven in the main by the fact that 135 Drillships will be built in that time with only 19 reaching 35 years old. The biggest effect is on the Jackup fleet with 309 units reaching 35 years, which is not completely offset by the 238 being built at present. However, with orders for 2018, 2019 and 2020 probably still to be confirmed and placed, the number of Jackup replacements may well change. Fleet Changes between 2000 and 2022 Build Year Newbuilds Ageing Rigs Net Result Jackups Semisubs Drillships Total Not getting any younger - a perspective on Ageing Rigs

6 Upgrading the Ageing Fleet The increase in new build activity is one avenue of addressing the Ageing rig issue; however, a peak in major modification and upgrade projects between 2014 and 2017 for those rigs that remain operational is another approach for addressing the issue. These projects will be complex in nature and in some cases exceed US$100m Capex. Upgrades and modification will include not just the drilling equipment but also the substructure and major infrastructure on the rig. There is also the challenge of shipyard capacity around the world and the availability of project expertise to resource them. The chart below shows the locations of these ageing rigs currently and the likely impacts by region. Asia, the Middle East and South America appear to be the regions in the world with the biggest challenges. Asia and the Middle East also have the infrastructure and shipyards that should be able to deal with the major modification projects, whereas Africa and Europe may present a challenge for the Drilling Contractors on this front. The North Sea has a high proportion of Semisubmersibles that are over 25 years old and need major modifications. Combined with rig utilization rates in the high 90% range, undergoing long shipyard stays for these Rigs will affect day rates. 6 Not getting any younger - a perspective on Ageing Rigs

7 Jackups By far the biggest impact of Ageing Rigs is in the worldwide fleet of Jackups with 309 reaching 35 years old between 2000 and In 2016 and 2017, 57 and 79 Rigs will reach that milestone respectively The Jackup trends raise some interesting questions for the industry. As a Jackup reaches 30 years and 35 years, the scope of work, timescales and costs of Special Periodic Surveys and Life Enhancement increases and becomes more complex. Decommissioning of large volumes of infrastructure in the North Sea and US GOM is set to coincide with these Rigs reaching 35 years, which will place additional strain on the fleet as the demand for Rigs to undertake P&A activity is likely to increase. If major Life Enhancement is not a viable option for many of the Jackups then conversion to non drilling, cold stacking or retirement are certainly options. And as no more orders are confirmed beyond 2016 for new Jackups, the 2017 number of 79 looms large on the horizon and must surely be in the sights of the Drilling Contractors who own them. Some of the major Drilling Contractors have already acted by selling off some of their fleet to smaller owners of start ups. 7 Not getting any younger - a perspective on Ageing Rigs

8 Semisubmersibles Although not on the same scale as Jackups, the fleet of Semisubmersibles will also be affected by age profiles. While the numbers are not as high with 116 reaching 35 years old as a percentage of the fleet age is still a major impact. Rigzone lists the Semisubmersibles fleet size as 239 and, factoring in the 28 Semisubmersibles that will be built between now and 2020, makes 267. So 43% of the fleet will be at least 35 years old by this time. The issue that the Semisubmersibles fleet faces is the current lack of any real new build activity in the current build boom. Of the 388 rigs being constructed between 2008 and 2020 only 77 will be Semisubmersibles, or 19.8% of the total. Therefore, as Semisubmersibles built in the relative boom from 1982 and 1983 advance to 35 years of age, the replacement rate for Semisubmersibles is far lower than for Jackups at the time of writing. 8 Not getting any younger - a perspective on Ageing Rigs

9 Conclusions The MODU fleet continues to age. Although construction is booming on the scale of the build activity in the 1980s, the next few years will not see much of an increase the number of rigs under 35 years old. Coupled with a probable increase in the demand for rigs due to the growth in developing regions and the renaissance in the North Sea, these older Rigs will be required to work past the 35-year milestone. The implications for the industry are Older Rigs do not necessarily perform at a lower level than newer Rigs and, with equipment upgrades and regular modifications, often only the substructure is left from the original build. However as drilling has advanced significantly in the last 30 years so have the Rig designs and often the older Rigs simply can t accommodate today s requirements without complex and costly modifications. Those complex and costly modifications, along with higher costs of Special Periodic Surveys for older rigs, mean that the economics of the projects and the implications of delays and problems are much greater and the emphasis on good project risk management becomes essential. To address the ageing fleet problem, 113 new build rigs are due to be delivered in the next 18 months, which will put pressure on rig delivery and rig start activity for drilling contractors and will mean that commissioning and acceptance programs will need to operate effectively. Even with the current construction boom, more construction will be required beyond 2017 and 2018 to address the problem fully, in particular on Jackup Rigs. With more than $75 billion being invested over the next 5 years in new build activity, the financial and reputational implication of project failure are high for the Drilling Contractors. Regardless of the strategy taken by the Drilling Contractor to address their issues with older Rigs, robust and rigorous planning and execution is needed and the risk to both schedule and cost need to be identified and managed. 9 Not getting any younger - a perspective on Ageing Rigs

10 The Epeus Group We are an international Project Risk Management Consulting Firm providing Advisory, Assurance, Technical Support and Project Rescue services to our clients in the Upstream Oil and Gas Industry. We work extensively on Drilling Rig and Specialty Vessel projects and help our clients to feel more secure about their prospects and to manage their financial and reputational risks. Our clients include those organizations that own, operate, invest in and hire Drilling Rigs and Specialty Vessels. Offshore rigs are dirty great beasts that demand respect. We understand exactly what s needed to get one drill ready We ve earned our spurs over many major engineering projects, gaining specific expertise in drilling rigs and specialty marine vessels. Couple this hard-won industry knowledge with our solid grounding in project risk management and you have an advisor who can see what s coming, long before it affects you. We also have considerable experience in the specialty marine sector, from support vessels to fullscale floating hotels for crews and FPSOs For more details visit our website at Contacts Mark Thompson mthompson@epeusconsulting.com Richard Walker rwalker@epeusconsulting.com Information, opinions, and analysis contained herein are based on sources believed to be reliable, but no representation, expressed or implied, is made as to their accuracy, completeness or correctness. The opinions contained herein reflect our current judgment and are subject to change without notice. We accept no liability for any losses arising from an investor's, lender s or any other person s reliance on or use of this publication. This publication is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. Certain information included herein may be forward-looking, including, but not limited to, statements concerning construction, utilisation rates, cost and rate increases, and the like. Such forward-looking information and associated comments involve important risks and uncertainties that could affect actual results and cause them to differ materially from expectations expressed herein. We do not have a financial relationship with any company whose stock is mentioned in this release, unless otherwise disclosed. We are not a registered investment advisor, and nothing in this publication is intended as a solicitation in connection with the making of any investment or lending decision, including without limitation buying or selling any security Not getting any younger - a perspective on Ageing Rigs