Publications

The contracting and procurement landscape for Jack-Up Drilling Rig Contracts is a complex interplay governed by the volatile Jack-Up Rig market. Historically, the principal determinants of this market have been oil prices and drilling activities, serving as pivotal factors for operators in conducting economic sensitivity analyses. Past market trends consistently correlated the Jack-Up Rig market and oil price fluctuations.

Contrary to this established theory, post-pandemic market dynamics have introduced unprecedented variables, decoupling the Jack-Up Rig market from traditional oil price metrics. The resurgence of oil prices, hovering between USD 75-85 per barrel after plummeting to USD 51/bbl during the pandemic, has not stabilized the rig market. Instead, several contributing factors have disrupted the status quo, such as the transition from survival to recovery modes, reinvigorated capital investments, and aggressive expansion strategies by prominent operators like Saudi Aramco. Notably, Saudi Aramco aims to bolster its production capacity to 13 million barrels per day by 2027, necessitating an expansion of its jack-up rig fleet, Saudi Aramco expanded its jack-up fleet to 92 rigs by November 2023, surpassing its initial goal of 90 rigs, most on multiyear contracts ranging from three to five years according to data from Westwood Global Energy Group. This trend is further supported by Rig Contractor ADES, which continues to acquire rigs under varied conditions and offers them to operators at competitive rates.

Consequently, the Asia Pacific Region, particularly Indonesia, faces a scarcity of available jack-up rigs. Unbalanced between demand and supply, granting rig contractors enhanced bargaining power in contract negotiations where most Rig contractors were adamant about applying their preference terms and conditions to be accepted by Operators. This shift is evident in the recent failed tender processes for Jack-Up Rig contracts at PHE ONWJ & PHE OSES after taking the process for almost 2 years from 2019 to 2022.

The current conventional procurement methods that are generally applied for all industries are frequently unsuitable for the intricate requirements of oil and gas projects and, to be more specific, for commodities like jack-up rigs. Operational organizations need to develop better frameworks for negotiating contracts since rig contractors have gained growing market dominance. The strength of operators in negotiation depends on their use of industry standards and flexible pricing models, as well as risk-sharing agreements within procurement strategies. A comprehensive overhaul of the current Standard General Terms and Conditions (GTC) is imperative to adapt to this shifting paradigm. Aspects such as Early Termination Fees, Suspension Rates, Force Majeure Rates, and Capped Liabilities need to be revisited and realigned to meet the demands of Rig Operators. Moreover, these terms are becoming standard practices accepted by operators outside Pertamina in Indonesia, adding urgency to this review. From a commercial point of view, given the market's bullish trends, it will be necessary to revisit project economics to reflect the current market condition by diving deep into strategic measures to ensure long-term planning and robust negotiation tactic. Additional administrative challenges, including PPKA (Persetujuan Penggunaan Kapal Asing/Approval of Use of Foreign Vessels), SKJLN (Surat Keterangan Jasa Luar Negeri/ Certificate of Overseas Services), and Temporary Import regulations specific to the PSC Gross Split contracts, warrant a well-coordinated strategy that integrates broader market considerations.