Archives for category: AHTS

A sustained period of low oil prices has created a shortfall in offshore support vessel (OSV) demand, at a time when the sector has displayed rapid fleet expansion. Charter rates have fallen significantly, whilst the number of inactive vessels has reached record levels in some regions. An increase in vessel scrapping would seem to be an obvious solution to this problem, so why hasn’t this been the case so far?

Mirror The MODU Model?

OSV demand has fallen – at least 11% of the total fleet was laid up at start September. So far in 2015, 23 removals have been recorded from the OSV fleet (18 AHTS/AHT and 5 PSV/Supply vessels). For AHTS/AHTs this is a 29% increase on 2014 on an annualised basis. PSV removals, however, are down by 46%. In either case, the number of removals seems below what might be expected given the challenging market conditions.

For the AHTS sector in particular, rig moves provide an invaluable source of demand – a decrease in utilisation for these units has not been surprising given the sharp fall in E&P expenditure following the drop in oil prices. Oversupply is also a significant issue for the MODU market. However, the reaction from owners in that sector has been very different, as is evident from a net decrease of 15 units from the fleet so far in 2015.

The decrease in MODU numbers has been achieved in two ways. Firstly, by reducing the number of existing units – removals are currently up by 94% in 2015 on an annualised basis, already surpassing the record number of removals recorded for any full year. Secondly, the addition of newbuilds has been restricted, with the number of deliveries down by 39% in annualised terms in 2015.

Short-Term Gains

A likely reason for the low uptake in OSV removals relative to the MODU sector is that there is comparatively more value in scrapping rigs (in particular, floaters), compared to OSVs, on account of their larger size and steel content. Furthermore, it is relatively easy and cost-effective to lay-up or stack OSVs, which has been the preferred option for owners – at least 340 AHTSs and 254 PSVs are estimated to be laid up, although in reality this number may be even greater. Similarly, the sale of vessels for use in other sectors (e.g. utility support) provides some means of reducing active vessel numbers, although sales activity for OSVs in 2015 is currently down by 25% on an annualised basis.

However, whilst stacking of OSVs provides some respite for owners during times of oversupply, it can only be considered a short-term solution – especially given the size of the current OSV orderbook: the number of OSVs on order is equivalent to 11% of the active fleet and, although some slippage is expected, 293 units are slated for delivery by end 2015.

Long-Term Woes

The OSV dayrate index has fallen by 27% since the start of 2015 and, with no significant upturn in oil prices looking likely, pressures seem set to continue. Fleet growth stands at 2.3% y-o-y, and the issue of OSV oversupply is expected to remain significant. Against this background, the discussion of removals is likely to be ongoing theme.

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The AHTS spot market in the North Sea is notable for the speed in which rates can shift, responding rapidly to supply and demand pressures. In 2014 alone the spot charter rate for an AHTS 18,000+ bhp fluctuated dramatically from a high of £170,165/day in August to a low of £5,819/day in the last week of the year.

Blame It On The Weatherman

Rig moves are the key AHTS demand driver in the North Sea. Pressures that affect the volume of these, along with the supply of units in the North Sea, dictate the number of available units, which in turn determine AHTS spot fixtures rates.

The largest peak in spot rates in the last three years occurred in August and September 2014. It was the result of a temporary removal of some North Sea units for work on exploration campaigns in the Russian Arctic. This caused a drop in the supply of vessels, that was eventually compounded by numerous rig moves, dropping availability and lifting spot rates.

Conversely, during December, a short three months after the September peak, AHTS spot rates in the region had fallen below £10,000/day for the first time since 2010. During the month, North West Europe was battered by a large weather depression resulting in strong winds and high seas, suspending many rig moves and forcing AHTSs to compete with PSVs for supply duty charters, bringing down the spot rates for both AHTSs and PSVs.

Rollercoaster

The price of Brent crude has fallen over 50% since June 2014 to below $50/barrel at the time of writing. As oil companies seek to rebalance their budgets in a new oil price world, exploration budgets have been cut. One of the ways in which drill rigs are utilised is the drilling of exploration and appraisal wells, demand for which has suffered in Q4 2014, negatively impacting AHTS demand in this period.

The drop in oil price has also damaged hope that exploration campaigns in expensive, harsh, Arctic environments will take place. Previously, these campaigns have taken vessels from the North Sea fleet, protecting the market from oversupply. Notably, Statoil has handed back three licenses offshore Greenland and announced that it will slow Arctic and Barents exploration to control CAPEX.

Oversupply in the North Sea can be demonstrated by the increase in the average number of vessels available. This rose steadily in 2012 and 2013, and by 39% in 2014 to an average of 13.1 vessels. This increase in supply has contributed to poorly performing spot rates in most of 2014, aside from the late summer spike. Increasing levels of supply and weaker demand indicators have forced some vessel owners to lay-up more ships in an effort to prevent oversupply impacting spot rates further, even laying-up units built as recently as 2014.

C’est La Vie

Clearly the volatile North Sea AHTS market is highly susceptible to short term demand pressures such as the weather and the whim of oil companies that dictate when rig moves occur. However, there are longer-term supply and demand forces at work, which although often obscured by dramatic short-term changes, can influence spot rates just as strongly.

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