Spot markets for AHTS and PSVs in the UK North Sea have trended lower, dragged down by a dramatic fall in offshore drilling activity
With only six wells drilled in the UK sector of the North Sea in 2020, offshore drilling was at its lowest level in more than 20 years. This weighed heavily on the anchor-handling tug supply (AHTS) vessel spot market. While vaccines are now being rolled out globally, the impact of Covid-19, combined with low oil prices, will endure for some time, continuing to diminish prospects for 2021 in the North Sea, according to offshore oil analysts.
“Rarely has it been that E&P budgets and plans on a 12-month view have been set during a period of such high near-term volatility,” Maritime Strategies International (MSI) associate director offshore Greg Brown tells Offshore Support Journal. Mr Brown says that as a result of that volatility, expectations for 2021 are muted – translating to continued downward pressure on OSV and offshore drilling rig owners.
“The near-term impact of those lower E&P budgets will be reflected in subdued levels of activity, and logistical constraints, the cost of which is typically passed through to vessel and rig owners. We’d hope that these abate in the long term, but they will remain a feature of the market for some time yet,” he says.
2020: data reveals the damage
To gauge the impact of the demand destruction caused by Covid-19 and the low oil price environment in 2020, you only have to look at the data. While 16 wells were drilled in the UK North Sea sector in 2019, only six were drilled in 2020 – five for Apache and one for Total. As a result of this precipitous fall, Mr Brown says: “AHTS vessels have trended down materially as exploration and appraisal activity has fallen dramatically. That demand side destruction has materially impacted the AHTS spot market and aside from work related to towing rigs ashore, there has been few bright spots over the course of the year.”
“There is significant room for improvement when it comes to reducing carbon intensity on the UKCS”
Mr Brown says the PSV market was more resilient during the year, but not immune. “Ample availability is unsurprisingly continuing to put extreme pressure on spot rates, and clients have but few term opportunities into the market,” he observes.
He says that while utilisation fell for both PSV, anchor-handling tugs (AHT) and AHTS vessel benchmarks over the course of the year, PSVs outperformed: “Our figures, based on movements data, suggests that around 60% of the AHT(S) fleet was active as of Q4, compared to more than 70% of the PSV fleet.”
According to MSI data, there were a total of 313 AHT, AHTS and PSVs active in the UK North Sea, with another 54 inactive and 74 laid up, translating to an aggregate 71% utilisation rate. ‘Inactive’, as defined by MSI, means vessels that have not moved for more than one month.
In particular, ship brokerage Seabrokers notes October was a rather sobering month for AHTS owners in the North Sea: “While average fixture rates increased substantially through August and September, those heady heights left a hangover in their wake, with day rates plummeting again in October.”
With only four semisubmersibles on hire in the UK market at the end of the month – as compare with 13 for the same period year-on-year (yoy) – there was a drastic reduction in demand for AHTS vessels. “Fixture rates in October were primarily around the £10,000 to £12,000 level (per day) in the UK market,” says Seabrokers.
By comparison, yoy average days rates for AHTS < 22,000 bhp were almost three times as high: £34,305 per day, and £29,220 for AHTS >22,000 bhp in October 2019.
Opportunities in 2021
If there is a silver lining for OSV owners, 2021 should see more offshore drilling activity in the UK North Sea sector. Mr Brown points to the Core Project Phase 1 undertaken by Independent Oil and Gas (IOG), which is acting as operator for the project, with a 50% interest. The remaining 50% stake is held by joint venture partner CalEnergy Resources (UK). In early November, IOG secured a jack-up rig from Noble to drill the five Phase 1 production wells, one each of which are planned at the Blythe and Elgood fields and three at the Southwark field. The fields all lie in shallow water, 20 m to 30 m deep, in the UK Southern North Sea. The Phase 1 drilling campaign is expected to start in Q1 2021, and last more than a year.
However, Mr Brown notes that it will be several years before dormant projects return to lift the spirits of a beleaguered industry: “We believe there is more pain to come. 2021 is still going to be challenging as the impacts of the pandemic and lower oil and gas prices endure.”
“We believe there is more pain to come”
While greenfield prospects seem few and far between, Mr Brown is more upbeat on the maintenance market, despite volatility delaying some projects until 2021.
One of those projects is the planned maintenance of the Forties Pipeline System (FPS) – which carries about 30% of the UK’s oil. FPS owner Ineos had originally planned a three-week shutdown of the pipeline in June 2020, but deferred the project until Q2 2021.
“The pipeline carries around 450,000 barrels of oil per day (bopd) of production from 80 fields and while the facility remains online, several planned maintenance campaigns slipped to the right,” says Mr Brown. “We’d expect those to come back to the market in 2021, providing a fillip to demand.”
Offshore wind gains
Beyond oil and gas, OSV owners could benefit from a buoyant renewables sector. Once a doubter of the potential of offshore wind, UK Prime Minister Boris Johnson has fully embraced the potential of the renewables sector to help meet the UK’s ambitious decarbonisation efforts and net zero emissions by 2050. He foresees every home in England, Wales, Scotland and Northern Ireland being powered by offshore wind by 2030. This will translate into massive investment in the sector, increasing the government’s target in the Offshore wind sector deal announced in 2019 from 30 GW to 40 GW, with growing opportunities for the OSV sector.
“We see several opportunities in the renewables market, with OSVs having a role to play in the installation and O&M phases of a windfarm, and the broader green industry that will include both carbon capture and storage and electrification projects,” says Mr Brown. “We see significant long-term opportunities in the floating wind market for AHTS vessels, but these are more a feature of our market outlook post-2025.”
While the challenging offshore oil and gas sector may push OSV owners to seek opportunities in renewables and other less traditional sectors, Mr Brown cautions that “near-term demand looks insufficient to plug the gap and get utilisation back up to the point where owners could look to achieve pricing power.”
Reducing CO2 emissions from operations
While offshore wind is likely to underpin the UK’s efforts in the clean energy transition, oil and gas operators are coming under increasing pressure to reduce their carbon footprint from E&P operations.
“There is significant room for improvement when it comes to reducing carbon intensity on the UKCS,” says Rystad Energy’s upstream analyst Olga Savenkova. “We already see that priorities are shifting toward greener solutions from both sides of the decision-making process, and many operators and investors are now including an additional carbon cost in their capital allocation decisions,” she says.
Rystad Energy estimates CO2 emissions from oil and gas production on the UK continental shelf were 13.1M tonnes in 2019, more than Norway (10.4M tonnes) and Denmark (1.4M tonnes) combined. Examining the data more closely, based on emissions intensity, the UK’s 21 kg of CO2 per barrel of oil equivalent (boe) is behind Norway’s 8 kg per boe. Denmark had the highest intensity in the region, with 27 kg of CO2 per boe, while the global average was 19 kg of CO2 per boe.
This could mean the UK would benefit from following Norway’s lead, moving towards electrification of its offshore platforms, says Rystad Energy.
There are currently eight oil and gas fields partly or fully electrified in Norway, and another eight fields with sanctioned electrification projects. Rystad Energy expects that 60% of Norwegian continental shelf (NCS) production will come from electrified offshore platforms by 2025.
Several operators in the UK are conducting feasibility studies targeting platform electrification across the central North Sea and west of Shetland. A low-emission design will become part and parcel of new field development plans.
The ramifications for OSV owners are clear. “With charterers themselves increasingly committing to lower carbon intensity in the medium to long term,” says Mr Brown, “it seems inevitable that the supply chain will have to move in step. Encouragingly, owners are adopting greener measures as a matter of course and using it as a competitive differentiator. We’d expect to see more of that, and the North Sea is well ahead of other regional markets in doing so.”