Spending on offshore development in the Middle East over the next five years will reach US$130Bn, with increasing requirements for local content
Over the next five years, oil and gas mega-projects in the Middle East will require the fabrication, transportation and installation of larger offshore structures in deeper water, creating a robust demand for OSVs. Spending on offshore development over this time is expected to be US$130Bn, with projects such as Umm Shalf gas cap in the UAE, Marjan hases 1, 2 and 4 in Saudi Arabia and North Field Expansion in Qatar ramping up towards the latter half of the period.
“If there is one robust market for offshore construction in the world, it is the Middle East,” says McDermott Middle East marine operations director Douglas R Korth. “The Middle East is where we see a tremendous amount of investment going on, and we don’t see that weakening.” Even better news for OSV owners is that dayrates are slowly rising in the Middle East and North Africa (MENA) region. “We are seeing a slight uptick in the prices, which is acceptable,” says Mr Korth.
McDermott International has won a record number of engineering, procurement, construction and installation (EPCI) contracts in the Middle East, reporting US$4.06Bn in new orders and a backlog of US$6.54Bn in the MENA region during Q2 2019 up to 30 June. Contributing to its record orders were the Saudi Aramco Safaniya Phases 5 and 6, QP Bul Hanine, ADNOC Crude Flexibility, Sasref and Liwa projects.
Among the new awards during the quarter were two mega projects for Saudi Aramco, located in the Marjan field. Safaniya Phase 5 continued with close-out activities, with substantial completion expected in Q3. Safaniya Phase 6 continues to progress, with fabrication of eight out of 11 decks and seven out of 10 jackets completed. The QP Bul Hanine project completed the initial pipelay campaign, with installation continuing through Q3.
While McDermott owns specialised vessels – it has a fleet of 12 construction support vessels and dive support vessels – it charters a number of other OSVs, barges and freight vessels to support its EPCI work.
More cargo barges, fewer AHT vessels
Speaking at the Middle East Offshore Support Journal Conference in April, Mr Korth provided an historical look at the number and types of support vessels chartered for MENA projects since 2014. Anchor-handling tugs (AHT) typically accounted for 13% of the fleet, supply vessels, 14%, cargo barges 24%, tugs, 30%, workboats 8.8%, crewboats 8.4% and other vessels the remainder.
While the fleet composition has been “pretty consistent”, Mr Korth says this will change in the years ahead, driven by mega projects that require the transport and movement of larger structures and installations in deep water.
“Our perception is that we are going to see an increase in the number of cargo barges larger than 250 ft (76 m) starting in 2020,” he says, adding: “We are seeing much larger and more offshore structures, particularly in Qatar.” As a result, he says, many of these structures are being fabricated outside the Middle East, requiring freight vessels to transport jackets and topsides.
Mr Korth points out that the offshore market is also transitioning towards a dynamically positioned (DP) fleet, resulting in “a significant drop in our need for AHTs” and more demand for construction vessels with DP capability. He emphasises, “This is not just McDermott, but among all of our competitors, too.”
The improving market conditions are also attracting more competitors to reposition newer assets to the region. While the Safaniya 5, Safaniya 6 and Safaniya 7 projects required specialised derrick barge and specialised AHTs for operations in 2 to 3 metres of water, new projects are moving out of ultra-shallow waters (less than 8 m). McDermott is bidding on Safaniya phase 8 and phase 9, which are being developed in the North Field where operations will be in 18 to 20 m water.
As a result, between 2020-2023, McDermott expects its chartered vessels to consist 27% of cargo barges larger than 76 m, 9% of AHT vessels, with the remainder of the fleet remaining stable.
Bigger pie, more competitors
While investment in the Middle East has grown considerably, so too has the competition for work. In 2015, McDermott, Italy’s Saipem and Singapore’s Emas were the only companies competing for EPCI work in Qatar and Saudi Arabia. Today, there are 10 marine construction and engineering firms competing in the same market, with more companies becoming qualified under Long-Term Agreements (LTAs).
So while the pie may be bigger, Mr Korth points out that is now divided up by 10, not three. “In an L1 market if you are technically qualified, the lowest bid on the table wins the job. This puts increasing price and cost pressure on us, which in turn must be passed on to OSV owners. It is still a difficult market and competition is not going to weaken,” he warns.
While McDermott forecasts activity levels in 2019 as relatively ‘normal’ in the Middle East, Mr Korth says there will be an uptick in 2020, before “things go completely haywire in 2021 and 2022”. He says: “With the increased utilisation and demand, we expect to see a slight uptick in pricing from vessel owners starting in 2021.”
With the ramp up in activity, Mr Korth warns that the OSV industry could be faced with some significant challenges, which he categorises as safety, mechanical and people. Any of these challenges could result in an OSV being stopped or rejected for work by McDermott. Safety accounts for about 50% of the “stop items” during inspections, topped by issues with emergency lighting systems, fire suppression systems, escape equipment, operating procedures for safety equipment and senior crews’ knowledge of a vessel’s safety requirements.
Typical mechanical equipment issues on OSVs include a lack of available critical spare parts for engines or equipment, leaking gas manifold gaskets on main engines and inoperable anchor-handling equipment.
“Bringing vessels out of cold stack, we are going to have captains, chief mates, and mates in the next year or two who need to get up to speed to pass client inspections and be able to competently operate in the field”, says Mr Korth. “We see this as a major challenge and major danger to all of us to ramp up that quickly with competent personnel.”
Requirements for local content in Middle East projects will also increase, from current levels of 40% to 70% in Saudi Arabia by 2021, which means quickly developing in-country capabilities.
Charterers are increasingly going to be demanding more fuel-efficient OSVs, possibly with all-electric, hybrid or LNG-fuelled propulsion, with faster transits to service multiple spreads, and higher cargo capacities.
Mr Korth emphasises that early engagement and communication is critical in mitigating these challenges, which can result in loss of revenue and delay, impact offshore spreads, increase injuries and collisions and damage reputations for those involved.