If OSV owners outsourced 15% of their fleets to third-party ship managers, they could potentially save over US$86M in opex costs, says V.Group’s Harry Knox
When it comes to outsourcing vessels to third-party ship managers, the offshore sector lags well behind the rest of global shipping. As a result, V.Group managing director for offshore ship management Harry Knox believes that OSV owners and operators are spending millions of dollars in general and administration costs and opex that they would not have to if they were working with a ship manager.
A seasoned offshore professional with years of ship management experience at V.Group and DOF, Mr Knox was part of an Offshore Industry Leaders webinar produced in June by Riviera Maritime Media and supported by V.Group.
Presenting on his analysis of the offshore sector, Mr Knox said only 6% of the fleet is outsourced to ship management firms, according to Clarksons Offshore Intelligence Network. By contrast, 15% of the global shipping fleet is managed by ship managers. “That 9% difference equates to several hundred vessels,” said Mr Knox. “We believe there is a big drive to take cost out of everyone’s operating models.”
“Have owners and operators challenged the fundamental drivers of cost within their businesses?”
The level of opex savings depends on the type of vessel, according to a V.Group analysis. Mr Knox noted that based on a V.Group Benchmark analysis, ship management can yield significant opex reductions across a wide range of offshore vessel types, ranging from large anchor-handling tug supply (AHTS) vessels to platform supply vessels (PSVs) to multi-purpose service vessels (MPSVs). “This is where it really gets interesting,” said Mr Knox. “From a third-party ship management perspective, we estimate, based on experience and internal benchmarks, there is a reduction of up to 57% in management costs alone.”
Mr Knox said that using ship management services could yield cost savings ranging from 24% for AHTS vessels to as much as 57% for a PSV.
He added these cost differences will vary among owners and management companies, but thinks OSV owners can “reduce opex significantly” by outsourcing.
If the offshore sector was to align itself with the rest of global shipping and outsource 15% of its vessels to ship managers, Mr Knox estimated that the industry could reduce its opex by around US$86.2M per annum. “We think this is quite staggering and needs to be focussed on going forward,” he said.
Traditionally, however, OSV owners have viewed safe and dependable vessel operations as one of their core competencies, hiring and managing their own professional staff and seafarers. This requires OSV owners to have operations, safety and maintenance personnel and offices around the world. For many owners, this is one way they differentiate their brand and vessels from other operators to IOCs and charterers. But this global footprint comes at a price, reflected in an operator’s general and administration costs and operational expenses.
Mr Knox feels the time is now right for OSV owners to rethink their traditional business models.
“The offshore market has been challenging for everyone for a number of years. The market conditions are difficult to address with the current overcapacity in the market,” he said.
He continued: “It is time for everyone to accept that the good times we have experienced in the past are not going to return tomorrow, next month or probably next year.”
He noted that shrinking revenues, shrinking margins and high opex costs need to be addressed.
“If you look at the margins the industry has enjoyed over the years, it has been 13 years since the industry has experienced its best margins. Since then it has been steadily declining. Apart from a little bump after the financial crisis in 2008. it has fallen down to historic lows. Revenues are down and margins are down.”
In his presentation, Mr Knox noted that based on an analysis by AlixPartners, incorporating the financial data of 40 OSV operators, margins have shrunk from a high of 41% in 2007 prior to the global financial crisis to about 10% in 2019. This has left OSV owners strapped for cash, imposing tight cost controls.
“The way things are at the moment, there is too much cost in the industry,” said Mr Knox.
A number of factors were cited by Mr Knox to explain the current predicament, including the high cost of debt being carried by OSV owners as the result of newbuild programmes and large fleet expansions over the years, leading to overcapacity, tough competition and aggressive rate cutting. He also noted the pronounced and lingering downturn in the offshore oil and gas market, which has resulted in consolidation and OSV owner financial restructurings.
“OSV owners can reduce opex significantly by outsourcing”
Beyond high debt, Mr Knox cited high general and administration costs and high operating expenses.
“Vessel owners and operators have focussed on financial restructuring, but have they challenged the fundamental drivers of cost within their businesses?” he asked.
“Headcount reductions can be viewed as a very quick way to cut costs, but the actual fundamental operating structure of the business needs to be addressed.”
He continued: “What ship managers can do is provide scalability. They have global footprints.”
From its 60 offices in 30 countries, V.Group manages about 44,000 seafarers and 2,200 vessels across shipping, ranging from tankers, bulk carriers, gas carriers, container ships, chemical tankers and offshore energy vessels.
With a global footprint, Mr Knox said ship managers can quickly adapt to changing operational requirements and market conditions, expanding or contracting as needed. He believes that ship managers can provide scalability, delivering growth with limited capex, and flexibility, enabling diversification in response to market conditions.
During the webinar’s question and answer session, Mr Knox made the point that more collaboration is needed. This starts with transparency between the vessel operator and the oil company or charterer, he said.
“In order to drive increased collaboration, transparency needs to be taken onboard by both parties,” said Mr Knox. “This transparency will allow the oil and gas companies to be more understanding of what is needed to drive the business and what is needed to maintain assets. This is what everyone wants at the end of the day. A safe and well-maintained asset that is delivering the job for the client.”