The worldwide offshore rig fleet is expected to expand in the near term to meet demand in the upstream oil and gas sector. This year alone will usher in some 57 newly built rigs ordered near the peak of the cycle several years ago. However, since the credit crunch and commodity price collapse, virtually no new rig orders have been placed since late 2008, the tail end of a peak period for newbuild orders.

While few datapoints are available with which to gauge newbuild pricing, anecdotal evidence and comments from rig contractors indicates that construction costs have come off their peak in the ordering frenzy of the 2005-2008 newbuild cycle. A newbuild rig today would likely cost anywhere from 15% to 20% below peak levels.

In the chart below, average offshore rig costs by year of order for the existing fleet show the inflation in the latest newbuild cycle -- one of the largest in offshore history. An estimation of where costs would be if a typical rig were ordered today is also charted below.

Besides the obvious supply chain impacts of lower finished product costs, it is worth noting that new construction, or replacement, costs also factor into determining leading dayrates as returns on capital are considered while negotiating rig contracts.