Archives for posts with tag: offshore

Global oil prices were buoyed in Q4 2016 by OPEC’s decision to cut production. Perhaps more surprising still was the extent of compliance with quotas, for an organisation with a past track record of over-production. At their recent meeting, OPEC overcame some members’ objections and agreed to extend the cuts until March 2018. How will this affect the oil price and how does it impact the shipping industry?

Cutting To The Quick

Twenty years ago, OPEC had substantial control over the supply side of the oil market. Today, the rise of shale oil has created doubts that OPEC retains the power to influence the market in a lasting way. This question is still to be resolved, though it is true that the cuts have allowed shale producers a new lease of life in terms of spending (up c.50% in 2017) and drilling (the US land rig count is up 120% y-o-y). However, OPEC are making the most concerted attempt for more than a decade to control supply. As the Graph of the Month shows, past quota compliance has been poor, and indeed for a decade this was effectively acknowledged by the lack of a formal quota.

Cutting Down

The difference recently is that OPEC has actually succeeded in cutting to below the level of the quota, despite allowing some members (such as Iran) to avoid formal cuts. The collective reduction has partly been down to outages (notably in Nigeria and Venezuela). However, it also reflects Saudi Arabia shouldering a lion’s share of cuts (c.0.75m bpd or 55%).

Expectations of an extension to cuts boosted oil prices in the run up to the announcement (though after the meeting, prices fell as investors took profits). Higher prices have a range of ramifications for shipping. One consequence is higher fuel prices, increasing shipowners’ costs unless they can pass this on. Previous periods of high fuel costs pushed owners to slow steam. This mitigated the problem, to some extent, but few ships sped up when prices came down. So currently this would be a difficult trick to repeat.

Cut And Run?

The cuts could also affect tanker demand, either via lower crude and product exports (27% of seaborne trade), or lesser import demand if high prices moderate demand growth. So far, price increases have been moderate, and it seems as if the Saudis in particular have been doing their best to curtail domestic oil usage to protect long-haul export customers (more than 18m bpd, of 47%, of crude trade is exported from the Middle East Gulf).

Perhaps most obviously, the OPEC cuts have brought a modicum of more bullish sentiment to oil companies’ E&P investment decisions. This has helped offshore markets a little, notably through a small upturn in tendering and fixing activity for drilling rigs (Clarkson Research’s average rig rate index is up 2% since end-2016). However, there has been little to no effect on rates in related markets such as OSVs, and most would acknowledge the extreme fragility of any improvement.

So, the widely-trailed extension to OPEC production cuts boosted oil prices during May, although it remains to be seen if shale production quickly offsets this. Oil price dynamics have a mixture of positive and negative effects for shipping, but certainly remain crucial given the key role of oil both for shipping and for the wider economy. Have a nice day!

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The fundamental lying beneath the shipping industry is cargo and its journey, and in many cases the cargoes are the world’s key commodities. In 2014, prices across a range of commodities took a sharp dive, but over the last year or so they’ve started to improve again. So, what do the trends in the prices of the commodities underlying the shipping markets tell us about the shape of things today?

Oiling The Wheels?

Most followers of commodities will be aware of the oil price downturn, with the price of Brent crude falling from an average of $112/bbl in June 2014 to reach a low of $32/bbl in February 2016. However, it has since improved, to an average of $52/bbl in March 2017, with the key driver the implementation of oil output cuts by major producers. Despite this recent price rise, in this case the underlying commodity price trend does not appear to be supportive for shipping, with seaborne crude oil trade growth subsequently slowing, having risen by an average of 3.9% p.a. in 2015-16, and tanker markets easing back. On the other hand, rising oil prices might start to help support an improved offshore project sanctioning environment, though the stimulation of increased shale production in the US poses a risk to its seaborne imports.

Bulk Bounce

On the dry bulk side, the iron ore price fell from $155/t in February 2013 to reach a low of $40/t in December 2015 but has since recovered robustly to an average of $87/t in March 2017. Meanwhile, the coal price fell from $123/t in September 2011 to a low of $50/t in January 2016 but has since improved firmly to an average of $81/t in March 2017. In China government policies and domestic output cuts drove shipments of ore (up 7%) and coal (up 20%) in 2016, helping to support international prices. Demand growth has continued in the same vein in 2017, with ore and coal imports up 13% and 48% y-o-y respectively in the first two months. Average Capesize spot earnings recently hit $20,000/day, and some industry players have appeared cautiously optimistic about the possibility of better markets.

Spending Power?

What does all this mean for the third main volume sector, container shipping? Well, in this case, the previous downward pressure on commodity prices had been felt in the form of pressure on imports into commodity exporting developing economies faced with reduced income and spending power. This had a clear negative impact on volumes into Latin America, Africa and eventually even the Middle East; overall north-south volume growth fell below 1% in 2016. Although it’s early days yet, the recovery in commodity prices should suggest a gradual improvement even if the benefits lag commodity pricing, and the positive impact might not be evenly paced across the regions.

From The Bottom Up

So, it appears that commodity prices have now departed the bottom of the cycle. Alongside the impression of a generally firmer background, inspection of the underlying drivers suggests a mixture of messages for shipping, less beneficial in some instances, but in many ways more positive for volumes. As ever, it’s interesting to take a look at what lies beneath…

SIW1267:Graph of the Week

Expectations at the start of the year that 2016 would be a tough one for the oil industry, and in particular for offshore, were on the whole fulfilled. Overall upstream E&P spending globally fell for the second successive year, and was down by in the region of 27% year-on-year in 2016. Cost-cutting has been a key focus, whether that be through pressure on the supply chain, M&A activity, job cuts or other means. OIMT201701

Lower Spending

Offshore spending has been particularly reined back on exploration activity such as seismic survey and exploration drilling, although 2016 saw weakness spread further to areas such as the subsea or mobile production sectors which had initially shown some degree of protection from the downturn. This was not helped by a 32% year-on-year decline in sanctioned offshore project CAPEX in 2016, despite a small number of encouraging project FIDs, such as that for Mad Dog Phase 2 in the Gulf of Mexico in Q4.

Dayrate Weakness

Dayrates and asset values in those offshore sectors with liquid markets showed further signs of weakening in 2016. Clarksons Research’s index of global OSV termcharter rates declined by 27% in 2016, whilst that for drilling rigs was down by 25% year-on-year. Potential for further falls are, in general, limited, given that rates levels in many regions are close to operating expenses. Owners are doing what they can to control the supply side: just 81 offshore orders were recorded in 2016: for context, more than 1,000 offshore vessels were ordered at the height of the 2007 boom. Slippage has also remained evident, either due to mutually agreed delays with shipyards, or owing to owners cancelling orders. Offshore deliveries were 34% lower y-o-y in 2016.

Despite the severe industry downturn, the oil price actually firmed during the year. Brent crude began 2016 at $37/bbl, before briefly dipping below $30/bbl. However, the price ended 2016 at $55/bbl, helped by a slow firming in mid-year, and then more rapid gains after the 30th November announcement of a concerted oil production cut by OPEC countries.

This is clearly positive news for oil companies’ cashflow, and marks the abandoning of Saudi Arabia’s policy of targeting market share by accepting low prices as a means to hinder shale oil production in the US. However, US onshore companies were already feeling more comfortable with slightly improved prices in Q3 2016. Early surveys of intentions for E&P spending suggest that onshore spending in the US could increase by more than 20% in 2017. It is likely that offshore spending will decline further in 2017.

Some Way To Go

Nonetheless, it is important to stress that the offshore sector is far from dead. The expected multi-year downturn is occurring. However, important cost-control and consolidation has taken place. IOCs continue to consider strategic investments such as Coral FLNG or Bonga Lite. This shows that these companies are planning for better times. Decline at legacy fields will help to correct the supply/demand balance. Meanwhile, optimism is building in the renewables and decommissioning markets, with for example, announcements even in the first few days of 2017 that China is to make an RMB2.5 trillion investment in renewables over five years, whilst another North Sea decommissioning project plan has been submitted.

Nevertheless, the supply/demand imbalance in many offshore vessel sectors will take time to recalibrate. However, the weakness of 2016 also put in place many longer term trends which could lay the groundwork for an eventual change in market fortunes.

Generally, shipping industry watchers spend much of their time monitoring events out to sea: how fleets are evolving, trade volumes growing and freight rates performing. But occasionally it can be worth pointing the telescope in the other direction, and spending time considering how events on land can affect the industry. One such major land-based change has been the development of US shale oil and gas.

What No-One Saw Coming

Back in 2009, few would have dared predict that new fracking technologies would allow the US to add 10m boepd of unconventional output across a five year period. This is roughly the same net volume as was added to global offshore output between 2000 and 2015. The offshore markets have been amongst the hardest hit by the oversupply, and cuts in investment will make it harder to add to the 46.9m boepd set to be produced offshore globally in 2016. Since the oil price slump, rig rates have dropped by more than 50%, OSV rates by more than 35%, and today more than 300 rigs and 1,400 OSVs are laid up.

Shale In The Sights

One of the main factors which helped shale fracking to become widespread was the rapid recovery of the oil price after the 2009 downturn. This, of course, also helped the offshore sector have its day in the sun, before the downturn. But shale’s growth also had an impact on other shipping segments. US LPG exports grew at a CAGR of 71% in 2010-15. The growth of shale gas even led to proposals for the first transatlantic exports of ethane derived from it, and orders for ‘VLECs’ vessels followed.

The rise of shale gas also changed the LNG trade fundamentally. In 2010, US LNG imports were expected to be a major growth area. Today, the US has 117mt of under-utilised LNG import infrastructure (imports were just 1.86mt in 2015). Some projects have been converted to liquefaction, and up to 250mt of export capacity was mooted. One new project, Sabine Pass, is now exporting.

Telescoping Tank Capacity

Growth of US shale substantially reduced US import demand for light crudes. This primarily affected imports from West Africa. The transatlantic trade on Suezmaxes and Aframaxes fell from 1.8m bpd in 2010 to 0.3m bpd in 2014. But a 1975 ban on US crude exports prevented tanker exports of surplus oil, much of which is light grades for which US refineries were not ideally configured. US Jones Act tankers and tank barges benefited, as limited fleet supply for upcoast voyages sent coastal timecharter rates as high as $140,000/day in mid-2015, but there was no similar effect on international trade.

The US government has now eased the export restrictions, but this has come as lower oil prices have hit the rig count and output onshore. The lower oil price has caused shale to go into decline. Yet it has provided a nice boost for tanker trades, as low oil prices have stimulated oil demand from transportation and industry.

So, developments in the mid-west of America have had major ramifications for energy shipping and offshore markets globally. This is set to continue as the industry waits to see how shale responds to the slight oil price gain over Q2 2016. This only goes to demonstrate the need to keep this related land-based industry under surveillance. Have a nice day.

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With the Test cricket season in England just starting, there’s plenty of attention on batsmen facing up to tricky deliveries. In the world of shipping, however, much of the supply-side discussion so far this year has opened up with a focus on the severe lack of contracting or the increased levels of demolition, whilst the examination of ship deliveries has remained down the order…

Testing Times

The delivery run-rate is a vital supply-side lever. As part of the ‘market mechanism’, when the earnings environment gets tough deliveries will typically moderate to adjust, either in the long-run as a result of reduced ordering or in the short-term as scheduled deliveries are delayed or cancelled. In this way, market conditions mitigate against the addition of further capacity, attempting to rebalance supply with demand, and a range of drivers come into play. Testing market conditions incentivise owners to attempt to delay or cancel existing orders. Difficulties in finalising finance also put pressure on the completion of deliveries, and in addition yards can also run into problems in perilous markets, impinging on their ability to deliver capacity on time or at all.

On The Back Foot

One way of measuring the stress on deliveries is to look at ‘non-delivery’ due to slippage (delay) or cancellation of orders, comparing actual deliveries to the start year scheduled orderbook. In 2015, in dwt terms, non-delivery of the shipping orderbook stood at 35%. With the sector under extreme pressure, bulkcarrier non-delivery stood at 42% in 2015, and is running at 56% in the year to date. In another sector under pressure, containership non-delivery stood at 13% last year but has since then increased dramatically. In offshore, where market conditions are the worst since the 1980s, non-delivery in unit terms last year stood at 42% and in the year to date stands at 60%. Clearly non-delivery is a significant supply side lever, and in the year to date, across all types it stands at 51% (in dwt).

Deliveries Fast Or Slow

So even though overall deliveries as a whole are projected to grow marginally by 5% in 2016 to 102m dwt, the impact of non-delivery is clear. Across the full year it is projected that 40% of the start year orderbook won’t get delivered. World fleet growth looks set to slow to around 2.7% (from 3.3% in 2015), compared to the 6.4% that would have been the case if the start year orderbook had been delivered to schedule in full this year. The missing 67m dwt of projected ‘non-delivered’ capacity is more than 25% larger than the full year demolition projection, so in the here and now delivery dynamics are having at least as big an impact as the recycling of tonnage.

Balancing The Attack?

So although in general the majority of ships on order still get delivered in the end, it is crucial to track delivery trends. This year every 10% of orderbook ‘non-delivery’ is equivalent to about 1% of growth in the world fleet. That clearly matters, and with the orderbook not necessarily a great guide to supply growth in difficult market conditions, deliveries, as well as ordering and demolition trends, remain essential to understanding the development of the market mechanism.

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2015 was clearly a very challenging year for the shipping markets. With earnings rock bottom in many sectors, investors shifted into a lower gear with respect to the placement of new vessel orders last year. But whilst for many this might be seen as a step in the right direction in terms of rebalancing supply and demand, for the world’s shipbuilders it might feel like a most abrupt adjustment.SIW1206

Contracting Contracts

Overall contracting of new vessels in 2015 dropped by 40% to 1,306 units from 2,162 in 2014, with estimated newbuild investment falling from $113bn to $69bn. In the largely difficult market conditions investors eschewed newbuild opportunities, and the overall newbuilding price index fell by 5% over the year. The number of tanker orders increased by 14% to 424 and containership ordering increased to 224 units, but these positives were outweighed by the rapid slowdown in orders in the most challenged sectors. Orders for (ship-shaped) offshore units fell by 73% to just 127 last year and bulkcarrier ordering, so often a shipbuilding mainstay in the past, dropped by 68% to 250. To put this in a wider context 1,243 bulker orders were placed in 2013.

Broken China?

Korean builders maintained their volume of orders in dwt terms with 32.5m dwt booked, backed by significant tanker ordering and the tail of the surge in ‘mega’ boxship orders, and Japanese yards even expanded their order intake by 3% to 28.9m dwt. The drop in order volume was felt the hardest in China, where yards saw a 46% fall to 29.2m dwt, as the demand for new bulkers evaporated.

One Hand On The Brake

The drop in ordering left the orderbook down by 7% on its start year level at the end of 2015. But output from the world’s shipbuilders increased last year for the first time since 2011. Deliveries were up by 6% to 96.2m dwt, with output edging up in the major volume sectors, as many of the units ordered back around 2013 were completed. However ‘non-delivery’ of the start year orderbook schedule also increased (to 35% in dwt terms), with a ‘brakes on’ approach from many owners with units scheduled to enter the fleet.

 Not Hard Enough Yet?

Few of these trends could be construed as good news for the world’s shipbuilders, many beleaguered by financial problems. Yet the brakes haven’t really been put on hard enough to help market conditions. Overall demolition did increase by 15% to 38.6m dwt, but scrap prices have remained depressed due to a surplus of Chinese steel around the world. World fleet capacity growth slowed marginally to 3.3% in 2015, with European owners holding their own, and the number of units changing hands on the S&P market (1,334) remaining steady. But against seaborne trade growth of 2.0% this wasn’t enough to stem surplus capacity in the markets in general.

Where’s The Accelerator?

Into 2016 things still look tricky. Owners are facing up to the reality of the tough market conditions, and for them the supply side brakes may not yet have been applied robustly enough. But it has been plenty firm enough for builders, leaving demand for new units thin on the ground, and the trend could continue. Niche requirements and the need to replace older tonnage with new, more ‘eco-friendly’ units in some parts of the fleet might help, but like so many in the industry, the world’s shipbuilders find themselves hoping that somebody, somewhere finds the accelerator. Have a nice day.

Vietnam has the third largest proven oil reserves in the Asia Pacific region – but much of its existing offshore production is from declining shallow water fields. So the country’s first deepwater discovery, made in October, is a potentially exciting development. Could deepwater E&P activity in Vietnam be set to take off, or will weak oil prices and disputes over territorial waters prove problematic?

Shallow Beginnings

Most of Vietnam’s 0.28m bpd of offshore oil and 0.99bn cfd of offshore gas production is derived from fields in the Nam Con Son and Cuu Long basins, all of which are in less than 200m of water. The Cuu Long basin is perhaps the most successful area off Vietnam as it is home to many large fields, including Bach Ho, Su Tu Vang and Rang Dong. The dominance of shallow fields has skewed development towards fixed platforms. 88% of all active Vietnamese fields are exploited as such. Of these fields, the Bach Ho field accounts for 34 cor 37% of the total found on active fields.

Operators in Vietnam mainly consist of local and regional NOCs as well as IOCs (most commonly via joint operating companies in partnership with Petrovietnam). While significant market reforms have increased foreign investment in Vietnam’s offshore sector, further improvements to its transaction and tax systems could quicken the pace of foreign participation in the future.

Wading Into Deeper Waters

No significant shallow discoveries have been made recently, meaning that there is little to offset Vietnam’s depleting shallow water reserves. This highlights the need to break into deepwater frontiers, which could hold substantial levels of undiscovered hydrocarbons. The VGP-131-TB well, Vietnam’s first discovery in water depths >500m, was drilled in October 2015 by the Vietgazprom JOC, at depths of 1,600m in the Saigon basin. The ultra-deep find could provide momentum for Vietnam’s push into deepwater exploration. However, unlike China, which is able to independently bring deepwater fields like the Lingshui 17-2 online, Vietnam could still need to rely on foreign cooperation to jointly develop such finds in the short term.

Shaky Prospects

Vietnam’s hydrocarbon resources mainly lie in the South China Sea, with the most recent discovery at the southern end. The sea is an area of multiple disputed territorial claims by many countries, including China. This could impede any deep developments, if international partners were to view overlapping sovereignty claims to be an excessive business risk. Perhaps more importantly though, the post-downturn attitude of IOCs is one of cost-consciousness given lacklustre economic conditions. This could skew near-term interest towards safer EOR projects instead of unproven deeper water development in the South China Sea.

Since Vietnam’s historical track record is in shallow waters, even if further deepwater discoveries are forthcoming, then the chance of rapid deepwater developments in the South China Sea is probably going to take time. It is likely to need outside expertise, and the current energy markets may well not be conducive to this. That said, the discovery of Vietnam’s first deepwater field marks a new chapter in the country’s oil and gas story.

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