Archives for posts with tag: offshore sector

The shipping markets have in the main been pretty icy since the onset of the global economic downturn back in 2008, but 2016 has seen a particular blast of cold air rattle through the shipping industry, with few sectors escaping the frosty grasp of the downturn. Asset investment equally appears to have been frozen close to stasis. So, can we measure how cold things have really been?

Lack Of Heat

Generally, our ClarkSea Index provides a helpful way to take the temperature of industry earnings, measuring the performance of the key ‘volume’ market sectors (tankers, bulkers, boxships and gas carriers). Since the start of Q4 2008 it has averaged $11,948/day, compared to $23,666/day between the start of 2000 and the end of Q3 2008. However, earnings aren’t the only thing that can provide ‘heat’ in shipping. Investor appetite for vessel acquisition has often added ‘heat’ to the market in the form of investment in newbuild or secondhand tonnage, even when, as in 2013, earnings remained challenged. To examine this, we once again revisit the quarterly ‘Shipping Heat Index’, which reflects not only vessel earnings but also investment activity, to see how iced up 2016 has really been.

Fresh Heat?

This year, we’ve tweaked the index a little, to include historical newbuild and secondhand asset investment in terms of value, rather than just the pure number of units. This helps us better put the level of ‘Shipping Heat’ in context. In these terms, shipping appears to be as cold (if not more so) as back in early 2009. This year the ‘Heat Index’ has averaged 36, standing at 34 in Q4 2016, which compares to a four-quarter average of 43 between Q4 2008 and Q3 2009.

Feeling The Chill

Partly, of course, this reflects the earnings environment. The ClarkSea Index has averaged $9,329/day in the year to date and is on track for the lowest annual average in 30 years. In August 2016, the index hit $7,073/day, with the major shipping markets all under severe pressure.

All Iced Up

The investment side has seen the temperature drop even further. Newbuilding contracts have numbered just 419 in the first eleven months of 2016, heading for the lowest annual total in over 30 years, and newbuild investment value has totalled just $30.9bn. Weak volume sector markets, as well as a frozen stiff offshore sector, have by far outweighed positivity in some of the niche sectors (50% of the value of newbuild investment this year has been in cruise ships). S&P volumes have been fairly steady, but the reported aggregate value is down at $11.2bn. All this has led to the ‘Shipping Heat Index’ dropping down below its 2009 low-point.

Baby It’s Cold Outside

So, in today’s challenging markets the heat is once again absent from shipping. And, in fact, on taking the temperature, things are just as icy as they were back in 2008-09 when the cold winds of recession blew in. This year has shown that after years out in the cold, it’s pretty hard for things not to get frozen up. Let’s hope for some warmer conditions in 2017.

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Two high-level indicators of vessel and structure demand in the offshore sector are energy prices and oil company E&P spending. A third, slightly more specific indicator is estimated offshore project capital expenditure, or CAPEX. While this metric does not capture demand arising from, for example, offshore exploration campaigns, it can be a key proxy for demand resulting from offshore EPC activity.

CAPEX Defined

Since the start of 2010, around $980bn of CAPEX has been committed to some 669 offshore projects globally. But just what makes up offshore project CAPEX? As defined herein, it consists of estimated capital invested in the development, redevelopment or decommissioning of offshore fields; it excludes spending on licensing rounds, seismic surveys and exploration wells, as well as operational expenditure arising from manning and IMR at active fields. CAPEX is committed via EPC contracts, usually issued soon after a project final investment decision (FID), for items such as MOPUs, fixed platforms, pipelines and subsea trees, as well as support, installation and development drilling services. CAPEX also translates into field developments that create durable demand for OSVs. CAPEX data collected by Clarksons Research is as specified by project operators; where no definitive figure is given, estimates are derived from assessment of comparable projects with known CAPEX.

Measuring CAPEX

One advantage of CAPEX as a metric is that, unlike a count of project FIDs, it reflects the differing ‘weight’ of projects. Indeed, project CAPEX can vary by several orders of magnitude. The B-173A Expansion project off India, for example, entailed the installation of a second shallow water fixed platform on the B-173A gas field. The project, which started up in 2015, had a reported price tag of $67m. In contrast, the ongoing 230,000 bpd Kaombo Ph.1 development off Angola has a reported CAPEX of $16bn. This wide variation in costs helps to explain recent CAPEX trends. During the 2011 to 2013 boom years, estimated CAPEX averaged $204bn p.a. globally, supported by high energy prices and rising E&P budgets. As oil prices tumbled in 2014, CAPEX fell by 54% y-o-y. CAPEX in 2015 was steady on 2014, even though FIDs fell by 41%, as a few giant projects with low breakevens, such as Johan Sverdrup (Norway, $12bn) and WND Ph.1 (Egypt, $12bn), received FIDs. However, other FIDs have continued to slip in the downturn. CAPEX so far in 2016 stands at around $40bn, down 34% y-o-y on an annualised basis.

CAPEX As An Indicator

As offshore CAPEX has fallen, EPC tendering has suffered, and hence, for example, MOPU newbuild contracting has dropped from an average of 18 units p.a. in 2010 to 2013, to just eight units in 2015 and two in 2016 to date. Similarly, 16 pipelayers were contracted in the same period, but only one unit has been ordered since 2013, reflecting depressed utilisation and earnings. Until CAPEX begins to increase once more, these sectors are likely to remain challenged.

In terms of spotting a recovery, then, it is worth keeping an eye on oil companies’ offshore project CAPEX plans. For not only is CAPEX one of a range of factors affecting offshore markets; it is a useful indicator with particular relevance to EPC-led vessel activity and investment too.

OIMT201609

The rise of deepwater E&P constituted a boon for the offshore fleet, helping to drive, for example, 180% and 60% increases in the FPSO and floater fleets from 2000 to 2015. However, deepwater development has lagged exploration, and so the offshore sector is fairly exposed to projects with high breakevens – problematic, given the oil price. But could the downturn actually help deepwater E&P in the long term?

Deepwater Exploration

The first deepwater offshore discovery was not made until 1976, by which point 1,018 shallow water fields had been discovered and 350 brought onstream, and it was only in the late-1990s that deepwater E&P really took off. Oil companies began pushing deeper into the US GoM, while the internationalization of the industry in the 2000s saw a spate of deepwater discoveries off West Africa and Brazil. A robust and rising oil price helped sustain rising deepwater E&P until 2015, with India, Australia and East Africa becoming important frontiers too. The average water depth of global offshore field discoveries passed 200m for the first time in 1996, 500m in 2004 and 800m in 2012, and the number of deepwater discoveries averaged 55 per year from 2005 to 2015.

Deepwater Production

However, as the main graph shows, the mean water depth of discoveries rose much faster than did that of start-ups: the former stood at 734m in 2015, the latter at 377m. Indeed, by 2016, out of a total of 998 deepwater finds, just 27% had started up, with deepwater start-ups averaging 19 per year from 2005 to 2015. The divergence was in large part because technological barriers and cost overheads in deepwater production – subsea, SURF and MOPU – are more complex and expensive than in exploration, and efficiency gains seem to have been more limited to date as well. Deepwater project sanctioning was therefore relatively inhibited, and due to limited sanctioning, the backlog of undeveloped deepwater fields grew at a faster rate than that of shallow water fields, as indicated by the inset graph. Thus over time, the overall backlog of potential projects has become more costly and complex. Indeed, some reports suggest oil project average breakevens have risen by c.270% since 2003.

Deepwater Challenges

This is partly why the offshore outlook is challenged at present: deepwater fields have relatively high breakevens (usually $60-$90/bbl) yet also form a major part of oil companies’ portfolios. Some major oil companies have indicated that 2016 E&P spending cuts are to bite deeper off than onshore, where costs are lower (even for shale, in many cases). In January 2016, Chevron decided to axe outright Buckskin, a US GoM project in a water depth of 1,816m with a breakeven of c.$72/bbl. ConocoPhilips, meanwhile, is planning to exit deepwater altogether.

However, in order to make deepwater viable again, many companies are trying instead to cut project costs. Statoil, for example, has reduced the CAPEX of Johan Castberg by 48% and the breakeven by 40%. Some cost savings (in day rates, for instance) are likely to be cyclical; others, such as in subsea fabrication, yielding improved deepwater project economics, are likely to be more lasting. So while exposure to deepwater projects is clearly a challenge given the current oil price, cost cutting now could be to the benefit of deepwater E&P in the long run.

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On July 14th 2015, after 20 months of negotiations, Iran and the so-called “P5+1” signed the “Joint Comprehensive Plan of Action”: in return for US, EU and UN-mandated sanctions against the country being gradually lifted, Iran has agreed to roll back its nuclear capabilities. Should the deal stick, the door will open to foreign investment once more. What, then, are the possible implications for Iranian offshore oil? Should this deal stick, IOCs will soon be able to operate in Iran once more. What, then, are the possible implications for Iran’s offshore sector?

Political Locks

On the eve of the Islamic Revolution in 1979, total Iranian oil production stood at 6.0m bpd, of which around 12% (0.72m bpd) was from 13 offshore fields producing oil, all located in shallow waters and exploited via fixed platforms. The turmoil of the Revolution saw oil production drop to 1.70m bpd in 1980, and in the ensuing Iran-Iraq War, offshore fields like Salman were shut in due to military action. As a result, actual offshore oil production was less than 50% of capacity for most of the 1980s; after the War, production began to recover, peaking at 88% of capacity (0.60m bpd) in 1997. However, as US and then EU economic sanctions on Iran tightened, IOCs were forced to exit the country, depriving Iran’s offshore sector of key investment and technology. Development work slowed and much of Iran’s offshore 2P reserves (30.3bn bbl of oil; 707 tcf of gas) were locked away. At the same time, Iran lacked the resources to implement EOR at brownfields. As a result, the gap between actual and nameplate offshore production was 1.38m bpd by 2014, with production at 0.54m bpd.

Rusty Hinges

Now that sanctions are to be lifted, indications suggest Iran aims to get as much oil production as possible back onstream in 2015/16. Restoring offshore production is likely to require more than just turning the taps though. Iran’s ability to halt decline at brownfields has been curbed, in contrast to other mature producers like the U.A.E. Half of Iran’s active offshore oil fields predate the Revolution (the oldest started up in 1961). Extensive EOR work is likely to be required at such fields – one opportunity for IOCs. Thus, while offshore production is forecast to grow by 7.3% in 2015, this is mostly due to South Pars condensate production ramping up, rather than utilisation of older capacity.

An Alternative Entrance?

Iran is planning an “oil contract roadshow” in London in 2H 2015, with the stated aim of attracting foreign investment in E&P of $185 billion by 2020. However, it is likely that much of the investment will be directed towards stalled onshore projects such as Yadavaran, and to restoring production at mature onshore fields like Azadegan. A spate of onshore discoveries made from 2006 to 2008 may also be prioritised by cash-hungry Iran, particularly those in the Khuzestan province spanning the Iraq border. Some of Iran’s 7 undeveloped offshore fields like Esfandiar (532m bbl) may warrant priority, and the South Pars Oil Layer is scheduled to come onstream in 2018. But even taking into account the Caspian (home to the 2011 Sardar-e Jangal 500m bbl find), offshore oil opportunities for IOCs (and so vessel owners) may be limited at first.

It seems, then, that the offshore oil capacity gap could widen before it narrows. Certainly given its reserves Iran has long-term offshore potential, notwithstanding its troubled history. But observers expecting a quick and big uptick in oil-related offshore activity might need to be patient.

OIMT201508

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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E&P offshore India can be divided into two very distinct species of activity: the one species is typified by shallow water exploration using jack-up drilling rigs, and by multi-phase fixed platform developments; the other species by ultra-deepwater exploration using floaters. The first is concentrated off the west coast, the second off the east coast. But when it comes to CAPEX, which species of activity sits at the top of the food chain in these lean times?

Shallow Water Ancestry

Mumbai High is the ancestor and primordial archetype of the vast majority of field developments offshore India today. Discovered in 1974 in the Mumbai Basin off the country’s west coast, the field was brought onstream in 1976 and was initially exploited via 4 fixed platforms in water depths of around 85m. Subsequent expansions have seen this number rise to 159, with 8 more platforms being fabricated for the Ph.3 redevelopment projects at the field. For the first 30 years of Indian offshore E&P, exploration was focused in the Mumbai Basin while development followed the pattern at Mumbai High. Hence, as of July 2015, 94 fields had been discovered off India’s west coast, all in shallow waters, accounting for 48% of Indian offshore discoveries. Of these 94 fields, 39 are active and 11 are under development. The basin also accounts for 301 active fixed platforms, as well as 13% (18 units) of the jack-up fleet in the Middle East/ISC region. With EOR and redevelopment work underway, the Mumbai Basin remains an important area of offshore activity.

Deepwater Diversification

However, since 2002 the Indian offshore sector has bifurcated to produce a very different species of offshore activity. Exploration campaigns in the east coast Krishna Godavari Basin resulted in 50 new discoveries in water depths >500m (and 51 shallow water finds). Amongst these was KG-DWN-2005/1-A, a field in a water depth of 3,166m, making it the deepest find (in terms of water depth) to date globally. At the height of KG Basin exploration, 12 floaters were active in the country. All this being said, Indian deepwater activity is much less advanced than shallow water E&P: just two deepwater fields are in production and none are currently under development. As a corollary, there are almost no subsea installations offshore India and just one active MOPU.

An Evolutionary Hiatus?

There are, however, 25 ‘probable’ deepwater field developments, including some potentially prolific fields. However, development seems to have been inhibited by the example of KG-D6 (Dhirubhai 1&3), a deepwater (850m) gas field which has shown precipitous production decline. India’s offshore sector is also dominated by indigenous companies like the government-controlled ONGC, who seemingly lack the deepwater technological or operational expertise of many IOCs. At the same time, there are still 88 potential shallow water fields, as well as plenty of scope for EOR at older fields – the sort of projects where Indian oil companies have substantial experience.

Opening up of the upstream sector, as is being attempted in Mexico, might be one means to adapt to the challenges of the “P” of deepwater E&P in India. However, this does not appear to be on the cards for the immediate future. So for the time being, given the hostile conditions of the weaker oil price environment, shallow water activity seems set to thrive best.

OIMT201507

The impact of lower levels of vessel ordering on the size of the global shipbuilding industry has been a hot topic. It’s clear that shipyard capacity has reduced, and global output is down by as much as 20-30% since its peak in 2010. This week we take a closer look through the data archives to see what the characteristics of the industry were both before and after the shipyard capacity surge.

Eastern Delight

By the 1990s shipbuilding had largely shifted to the East. Japan commanded the top spot amongst builders but competition from Korea was mounting. Globally, around 300 yards had units on order (for vessels 1,000 GT and above), with the vast majority concentrating on a traditional marine product mix. During this period Japan had almost twice as many yards as China whose shipbuilding industry was very much in its infancy.

A New Dawn

The ‘size’ of the shipbuilding industry remained relatively steady in the first years of the new millennium. However there were notable changes in the location of available capacity. The Korean shipbuilding industry started to take the largest share of orders and more meaningful levels of commercial capacity were opening up in China. The great ordering boom of 2005-08 saw the shipbuilding industry undergo a major shift. Analysis of the orderbook data published in World Shipyard Monitor over the years shows that more than 400 extra yards came online during the period with the vast majority opening in China. By 2010, 40% of the total number of yards was in China.

Sunset Already?

As the boomtime orderbook was digested and the economic downturn kicked in, the number of yards with conventional tonnage on order reduced quite rapidly. At the start of 2012 the number of yards with an orderbook had decreased by around 20% compared to the peak in 2009. By the start of 2014, the total was 422, bringing the industry, at least in size, back towards pre-boom levels.

Survival Of The Fittest

However, whilst the merchant orderbook was falling, offshore investment was on the up. This was good news for many yards who began to shift their attention towards the offshore sector. As a result, the proportion of yards with an orderbook building ‘ship-shaped’ offshore units jumped from 17% in 2005 to 40% at the start of 2014. The growth in the offshore sector also meant greater demand for ‘non-ship shaped’ units and fixed structures, and some of the surplus traditional marine capacity has also been soaked up by this (or indeed by the growing repair market). Useful survival tactics, although this year investment in the offshore sector as a whole is down about 30% y-o-y, and last year contracting in the marine sector returned to more significant levels.

So there you have it. A look back in time provides some context to where the shipbuilding industry might be today. After a meteoric rise it’s finding its way back towards a more realistic position. Demand for offshore units has helped some yards weather the cycle, but recently they have had a better chance to return to what they know best. Have a nice day.

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