Archives for posts with tag: offshore market

North West Europe is a key offshore area, accounting for 3.2m bpd of offshore oil production (12% of the global total) and 17.8bn cfd of offshore gas (14%). Whilst 10% of the active jack-up fleet and 23% of the active floating MDU fleet are deployed off North West Europe, these are harsh environment units. The region is also home to c.400 OSVs, or 11% of the fleet, but hosts 30% of all PSVs >4,000 dwt.

For the full version of this article, please go to Offshore Intelligence Network.

 

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Conditions in the offshore sector have been challenging for several years now, and many on the outside might presume that market signals would still be very negative. But key offshore metrics appear more varied, with some parts of the market having seen greater improvements than expected whilst others remained stubbornly weak. Why do the indicators seem a little mixed, and what do they really tell us?

For the full version of this article, please go to Shipping Intelligence Network.

Since 1.73m bpd of oil output cuts were orchestrated by OPEC in November 2016, oil prices have risen from under $50/bbl to $70-$80/bbl, stimulating the upstream sector but making for a gloomy backdrop to challenged tanker markets in the last 18 months. With this context in mind and following the latest OPEC meeting, it is worth looking in detail at some of the ways OPEC policy has been influencing oil markets…

For the full version of this article, please go to Shipping Intelligence Network.

 

Since the 2H 2014 offshore downturn, when investment in new exploration and development dried up, many offshore vessel owners will have tended to agree with the child heroine of the 1976 musical Annie: “It’s a hard knock life”. However after three years of setbacks and weak markets, some are now starting to see positives, as a few indicators show encouraging signs. But does that mean it’s time to invest?

For the full version of this article, please go to Shipping Intelligence Network.

Global excess oil supply still looks likely to average 0.5m bpd in 2016 – sufficient, it would seem, to stop oil prices rising much above $50/bbl and therefore to forestall a recovery in E&P activity and the offshore markets. On the supply side of the equation, US shale production and Saudi policy tend to be seen as the key “swing factors”. However, an appreciable degree of relief could also come from elsewhere.

Taking A Swing At Production

West Africa, a fairly mature oil producing region, accounted for 6% (5.3m bpd) of global oil supply in 2015, including 17% (4.4m bpd) of world offshore oil production. To put this in context, world oil oversupply in 2015 stood at around 1.7m bpd – 2% of total supply, i.e. 95.8m bpd, to which the US contributed 12.6m bpd (13%) and Saudi Arabia 12.4m bpd (13%). Saudi Arabian production so far in 2016 has been stable, while US shale oil production in May 2016 was down just 8.9% on May 2015, representing a far slower decline than many observers anticipated. It follows, then, that a severe disruption to West African oil production could have significant implications for the global oil supply-demand balance. Such a scenario seems to be unfolding in Nigeria, which in 2015 produced an estimated 2.3m bpd – 43% of West African oil production. In a series of high-profile attacks, the Niger Delta Avengers (NDA, a new permutation of the old militant group MEND) have sabotaged pipes and wells in the Niger Delta, crippling onshore and shallow water output. At the same time, only 12,000 bpd of offshore capacity (from the Antan field) is set to start up in 2016, and even fixed platforms further from shore, like “Okan NWP PRP”, have come under attack. As a result, Nigerian oil production reportedly fell to 1.1m bpd in May, and 2016 production is projected to average 1.8m bpd – a production loss equivalent to 28% of oversupply in 2015.

In Full Swing No Longer

Political risk is thus one reason West Africa can be a “swing factor” in oil production; another is project economics, especially over the medium term. Angola, for instance, accounts for 43% of West African offshore oil production and 33% of projects in the region yet to reach EPC. However, most of these are deepwater FPSO hubs with high breakevens. In fact, the last project sanctioned off Angola was the $16bn Kaombo Ph.1 project in April 2014, with a reported breakeven of $74/bbl. Given the dearth of project FIDs since 2014, a paucity of start-ups is expected in 2018-21, which would feed into weaker world oil supply growth.

The Swinging Sixties

In the long term though, West Africa has the potential to act as a swing region for (offshore) oil production in the opposite direction. Given stronger oil prices, c.$60-$80/bbl, prolific projects such as Chissonga (Angola, 150,000 bpd) could be feasible again, while an oil price of c.$90/bbl would unlock the potential of many of the 39 Equatorial Margin frontier fields discovered offshore since 2010. West Africa could thus, in a favourable price environment, make an important contribution to world oil supply growth once again.

Of course, political risk and costly projects make West Africa a challenging region at present. But taking a macro view, that could actually be positive for oil prices. West Africa is clearly one among a range of important swing factors in the world oil supply-demand balance.

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The offshore industry is heavily dependent on the well-being of the oil and gas sector, and with oil prices remaining below $50/bbl, the offshore market is largely full of doom and gloom. However, there is one sector for which headlines in November have been positive: offshore wind. Could this renewable energy source provide some owners with an alternative market and an opportunity for specialisation?

Something In The Wind

As the Graph of the Month illustrates, historically offshore wind farms have been located close to shore in shallow waters of less than 50m. Today, the industry appears to offer potential for the offshore market as both approved and proposed projects are getting increasingly deeper and further from shore. Following a slowdown in investment due to regulatory instability in key markets such as UK and Germany, future final investment decisions (FIDs) have been looking less certain. Indeed, in 2014 the number of turbine installations in the UK fell by 35% during the first six months of the year in comparison to 2013. Yet, November’s headlines might indicate a wind of change. Statoil has reached a FID for a pilot floating wind farm, Hywind, moored to the sea floor offshore Scotland. The departure from traditional fixed turbines opens up the opportunity for more ambitious, deepwater projects. DONG also made a FID regarding the Walney Extension in the Irish Sea, which will become the largest fixed offshore wind farm yet.

Vessel Requirements

The installation of offshore wind farms requires the use of number of construction vessels, particularly cablelay and heavylift units. Estimates suggest that around 100km of cabling is required per wind farm. However, self-elevating designs currently dominate the installation phase due to their stability. Although most existing self-elevating platforms can be used, an increasing number of units are specifically designed for operation within the wind sector: the wind turbine installation (WTI) fleet grew at a CAGR of 11% over 2005-2014. A peak in WTI vessel orders in 2010 following a third licensing round in the UK resulted in a record number of 10 units entering the fleet in 2012. As of November 2015, 31 WTI vessels were active globally. As wind farms move further from shore into rougher waters, requirement for larger WTI vessels is likely to increase.

An Alternative Market?

On the other hand, the maintenance phase of offshore wind farms has the ability to absorb more traditional vessels in the North Sea. A handful of PSVs and MSVs have been converted into accommodation vessels for maintenance personnel. However, in reality the main demand is for small crew transfer vessels, usually with a LOA of <25m. The crew transfer fleet has grown substantially from approximately 40 units in 2010 to over 200 in 2015.

For now, offshore wind remains a niche market rather than a viable alternative for the mainstream fleet. Future growth is largely dependent on how attitudes of governments and private companies will evolve. However, technological advances, such as Statoil’s floating wind farm, at least push the industry in a helpful direction for offshore as a whole.

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The level of ‘forward orderbook cover’ is one indicator of the state of global shipbuilding. When times are tough, yards can find the race for the limited amount of ‘cover’ available difficult, but when times are better ‘forward cover’ can seem very supportive. In the face of slowing ordering volumes, the shipbuilding industry might take a look at this indicator as part of its regular health check.

Medical History

‘Forward cover’ shown in the graph (see graph note for the exact calculation) reflects the number of years ‘work’ yards have on order at recent output levels. In the 1990s yards averaged 2.5 years cover but following the ordering boom of the mid-2000s forward cover rose to over 5 years. The onset of the global recession saw ordering levels decrease significantly and orderbook cover had dropped below 2.5 years by 2012. But with yard output having adjusted downwards, a pick-up in ordering in 2013 helped cover expand to 3.5 years. However, investment slowed again in 2014, instigating a downward trend, and by early 2015 orderbook cover had adjusted to around 3 years.

Chinese Check-Up

Chinese yards have seen the most dramatic reduction in forward cover. As capacity created to meet boom demand came online between 2009 and 2011, output doubled. But investment levels decreased, the orderbook declined, and China’s forward cover briefly fell below that of its competitors in Korea and Japan in 2012, as Chinese yards were not as able to attract the increased ordering in the more specialised sectors. However, cover has since increased as active capacity has adjusted downwards and Chinese yards have regained the majority share of orders, slowly diversifying their product mix. Although overall cover has returned to pre-boom levels (3.6 years today), the situation varies substantially. Whilst state owned yards and a handful of private yards have a strong orderbook cushion, the vast majority of smaller local yards have limited cover.

Offshore Emergency

South Korea and Japan did not expand shipyard capacity to the extent as China, and their industries are much more consolidated across fewer yards. As such their forward cover did not swing so dramatically. The largest Korean yards responded to the downturn in merchant vessel ordering by entering the high value offshore market (the ‘big three’ Korean yards grew their offshore orderbook to around two-thirds of the value of all units they had on order). Yet whilst this provided relief for yards in 2011 and 2012 the downturn in offshore ordering in 2014 has contributed to forward cover at Korean yards (2.7 years today) falling below that of Japanese yards (3.0 years) for the first time. Japanese yards have been slowly improving forward cover partly due to a revival in export ordering backed by the depreciation of the yen against the dollar.

Today, whilst a long way from boom time highs, ‘forward cover’ looks more comfortable than two years ago. However, that’s not the only part of the health check and global shipbuilding has been through a period of immense turmoil and financial pressure. Moreover, with output stabilising and ordering currently suppressed, builders could well be checking their orderbook cover closely once again.

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