A sector in recovery – is this the new norm?

Day one of the 2020 Offshore Support Journal Conference & Awards looked at industry developments over the past 12 months, the status of the oil markets and their impact on the OSV sector.

A keynote address was delivered by the winner of the 2019 Industry Leader Award, Seacor chief executive John Gellert, who outlined some of the trends that will impact the sector over the coming year.

Decarbonisation is on everyone’s agenda, including the oil majors, Mr Gellert said. This is resulting in a concerted push for lower emissions, growth in offshore renewables and rapid advances in technology.

And with the increased regulatory focus on decarbonisation, Mr Gellert said OSV owners are under pressure to find ways to achieve better fuel economy and lower emissions on their vessels.

New technologies are particularly important in reducing emissions, but ultimately, the transition to hydrogen and zero-carbon fuels will be an incremental process, according to Mr Gellert. He said the industry downturn remains a barrier to widespread change in the form of newer, more efficient vessels.

"The industry is contracting. There really is no new capital entering the industry. The only option is to refinance existing debt," he said. "It is a continuing challenge and it will be a long time back to profitability, but you need to get to profitability before you can consider newbuildings."

Mr Gellert did however anticipate some market fundamentals improving and highlighted the nascent American and southeast Asian regions as bright spots on the horizon. He also cited further development of offshore wind projects in the North Sea as a positive for the industry.

Analysis: E&P investment and the OSV sector

Oil companies could be primed to invest heavily in 2020, but oil prices remain the determining factor. Westwood Global Energy’s head of offshore, rigs and wells, Thom Payne, noted oil companies had done well in recent years, seeing gains from supply chain cost rationalisations that are familiar to most in the OSV sector.

These rationalisations have reduced opex and field development costs per barrel and resulted in improved margins for oil companies, despite mediocre oil prices.

As such, Mr Payne said he expected a "step change" in offshore E&P spend in 2020. "These guys have been sitting on portfolios for a very long time, waiting to get them back into the water," he said. "We are thinking about US$131Bn per annum will be spent on new offshore projects over the next three or four years."

Mr Payne pointed to Australia and Brazil as primary focal points for investment.

While Mr Payne’s analysis centred on the benefits of E&P investment for the offshore drilling rigs market, an assessment of the wider oil and gas market by Rystad Energy partner Simon Sjøthun focused on oil company perceptions for the timing for ’peak oil’ demand.

The indications, according to Mr Sjøthun, are that long-cycle projects are at risk of discrimination versus short-cycle projects.

So what does that mean for OSVs?

Mr Sjøthun said both the rig market and the OSV sector needed continued and increasing reliance on fossil fuels in order to rebound. "If you make it up to US$60 per barrel – where we see the oil price will be [in the near-term] – you can find growth, but it will be hard to get back to the 2014 peak," he said.

30 deepwater floaters for Americas

Up to 30 deepwater oil and gas projects with subsea infrastructure tied into floating production systems will boost offshore energy investment this decade, according to classification society ABS. The projects will increase demand for offshore drilling rigs, subsea construction ships and OSVs.

ABS director and OSV sector lead Dr Wei Huang had a positive forecast for offshore oil and gas developments in South America, deepwater projects in the Gulf of Mexico and future demand for OSVs from offshore renewables projects in the US.

“In 2020 there are positive signs for demand growth,” she said, adding, “A bright spot is the outlook for growth in floating production units.”

She forecast there would be 28 floating production storage and offloading (FPSO) projects, with associated investment in subsea infrastructure, ordered by 2025 in Americas. Further, there could be at least one semi-submersible and one spar-shaped floating production system ordered for US projects.

Dr Huang said 21 FPSOs could be ordered for Brazilian deepwater oil and gas projects, with three more in Guyana and three in Mexico, plus one on the east coast of Canada.

These projects would drive demand for mobile drilling rigs and associated support vessels for development wells. There would also be demand for subsea construction, pipelayers and support vessels.

Of the OSV fleet in South America, 63% are active, 12% are idle and 25% remain laid up. In North America, only 53% of the fleet is active, 12% idle and 35% laid up.

Some of these vessels could be converted to support future offshore windfarm projects in the US, said Dr Huang.

US$470Bn earmarked for Middle East offshore investment

Middle East offshore oil and gas expenditure will jump in the next five years, with more than US$470Bn of capital expenditure planned on new and existing fields.

Saudi Aramco intends to spend US$334Bn over the next six years, averaging US$55Bn per year on offshore projects. In the United Arab Emirates, Abu Dhabi National Offshore Oil Co (ADNOC) plans to spend US$130Bn in the next five years.

Synergy Offshore chief executive Fazal Fazelbhoy said this was on top of billions of dollars of investment from Qatar, Bahrain, Kuwait and Egypt.

“[The] Middle East is a hotbed of activity,” he said. “I am optimistic about the OSV market.”

Mr Fazelbhoy said Saudi Aramco intends to boost investment in the existing Marjan and Berri offshore fields and Zuluf Offshore. ADNOC plans to invest in Umm Shaif, Lower Dalma Sour Gas, Hait and Gasha projects and expand the Upper Zakum field.

The investment plans will ultimately result in rising demand for OSVs and improvements in utilisation, according to Mr Fazelbhoy.

“There are shortages of construction support vessels, with anchor handlers being used instead,” he said. “Around 30 vessels have come from southeast Asia.”

Among vessel owners, sentiment is improving ahead of the expected growth in demand. “Owners say the worst utilisation is now behind us and they have optimistic views about activity,” Mr Fazelbhoy said.

However, there are still more than 100 vessels laid up and in cold stack in the Middle East, although some of these could be reactivated if required.

“There is life for these stacked vessels for construction support and supporting dredging,” said Mr Fazelbhoy, noting, “There are good opportunities for vessel acquisitions, especially for distressed assets.”

Riviera will host a series of 45-minute webinars on subjects ranging from maritime propulsion to vessel optimisation, ballast water management, maritime air pollution and maritime leaders among many others commencing 5 May 2020. Find a list of the webinars and register your interest now