Archives for posts with tag: offshore installations

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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For many of the markets covered by Shipping Intelligence Weekly, the first part of 2015 was relatively kind. Rates for crude and product tankers were riding high, boxship charter rates picked up for the first time in years and VLGC rates have hit levels above 2014 averages. Even Capesizes have recently shown signs of life. But spare a thought for the offshore sector, the hardest hit by the oil price decline.

Price Drop

Back in the downturn of 2008/09, most commodity and shipping markets felt the negative impact and the offshore markets were no exception, with dayrates dropping by an average of around 35% (see graph).  Moving forward to the current time, however, the 50% decline in oil prices since mid-2014 has brought some relief for merchant vessels, in the form of cheaper bunkers, and stimulated oil demand, helping trade. But cheaper oil has meanwhile put heavy pressure on the offshore sector, where field operators already faced cashflow problems as field developments ran late and over-budget. The response has been sharp cuts in exploration and production (E&P) budgets. It is estimated that spending on offshore E&P will fall by 19% this year.

Investment Cuts

This means investment decisions on new projects have been deferred, whilst expenditure to enhance recovery from existing fields has also slipped. Accordingly, drilling demand has fallen, just as deliveries of new jack-up and floating drilling rigs have accelerated. Rates for ultra-deepwater floaters are now almost 50% below their late 2013 peak, at around $300,000/day. This reflects the reduced demand in frontier areas for exploration and appraisal drilling, not helped by the corruption investigations in Brazil. Meanwhile, jack-up drilling rig rates have been equally hard hit, with shale gas production killing demand in one of their traditional major markets, the shallow water Gulf of Mexico. Utilisation of jack-ups is below 80%, and rates have fallen more than 35% to around $100,000/day.

Less Support For Vessels

This has had rapid knock-on consequences. The 5,365 vessels and 1,133 owners in the OSV market are also exposed to the downturn in exploration drilling and operational field maintenance. Fewer active rigs harms the AHTS market for rig towage and positioning, whilst PSVs rely on the growth in active offshore installations (drilling rigs, plus mobile and fixed production platforms) to add to demand. Rates for OSVs are down in all regions, by over 35% on average in terms of the index on the graph. PSVs have a further problem of a robust supply growth to contend with (and close to 40% of the fleet on order for the largest units over 4,000 dwt).

Of course, markets are cyclical, and the offshore sector had its moment in the sun during 2012/13, at a time when several of the merchant shipping markets were in the doldrums. Although the current oversupply in world oil markets of around 1.5m bpd is a clear short-term hurdle, projected demand trends suggest that higher oil prices remain a likely prospect in the long-term, and the improvement in other sectors suggests that there will eventually be light at the end of the tunnel for offshore too. It’s just that it could be a little way off yet. Have a nice day.
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