Owners of mobile offshore drilling units (MODUs) and offshore support vessels will continue to be roiled by the turbulent energy market in 2021, shaken by the reductions in capex spending by energy majors and the effects of Covid-19
“Covid-19 has decimated the offshore industry and pushed what was an already fragile market further into the floor,” VesselsValue head of offshore Robert Day told Offshore Support Journal.
While vaccines have now begun being distributed and inoculations are underway globally, a number of nations kicked off the new year by imposing national lockdowns and travel restrictions. A new, more contagious coronavirus strain and rising infections led UK Prime Minister Boris Johnson to announce on 4 January a strict national lockdown that will last six weeks. The US continues to set daily records for coronavirus cases, hitting 278,920 on 9 January. Coronavirus-related deaths topped a record 4,110 on 7 January.
Mr Day said “It’s very difficult to predict how long the effects of Covid-19 will weigh on the market until we have a clear idea of when we can get this virus under control on a global level. What we do know is that the offshore industry has been in a state of shock retraction since the early part of 2020 and it has been, and will continue to be, a very large stress test for the whole industry.”
Covid’s impact on oil and gas development is revealed by comparing the pre-Covid-19 budgets and post-Covid-19 budgets of the energy majors. ExxonMobil originally planned to spend US$33Bn for 2020 and has now issued guidance its capex could be as low as US$16Bn in 2021. Chevron announced capital guidance of US$14Bn for 2021, down from US$20Bn, with expectations of spending US$14Bn to US$16Bn annually to 2025. This was well below its previous guidance of US$19Bn to US$22Bn.
“A reduction in E&P spending directly affects MODU owners, we’ve seen drilling contracts cancelled, renegotiated or in some cases terminated,” said Mr Day. “This increases overall financial pressure on the MODU owners, and as a result rigs are put into lay up or scrapped (as they have no place in the new market). Any reduction in oil major capex or MODU numbers and contracts will have huge implications for OSV owners whose work is dictated by their activity,” he added.
As an example, Mr Day cited the current low levels of drilling activity and oversupply of OSV tonnage in the US Gulf of Mexico. “The US Gulf already suffers from an oversupply of tonnage, and investment cuts and reduction in drilling contracts will certainly tip the supply and demand scales further out of favour,” he observed.
Data from the UK ship valuation provider bears that out. One of the hardest hit offshore oil and gas sectors, the US Gulf has current active fleet utilisation rates of 59% for OSVs, 57% for offshore construction vessels (OCVs) and 81% for MODUs. VesselsValue define ‘layups’ based on the recency of a vessel’s AIS signal and filters the data appropriately. Vessels that have not signalled for over eight weeks are considered to be in layup.
“By observing the figures, we can see the market with the highest layup is the US Gulf. Even with the increased scrapping seen in this region, the US Gulf is still suffering, especially within the OSV (41% laid up) and OCV (43% laid up) sectors. At the other end of the spectrum is northwest Europe, with a layup of 16% for OSV’s and 6% for OCVs,” said Mr Day.
While scrapping has increased over the last few years, demolition sales are not nearly at the levels needed to correct oversupply. In 2018 and 2019 there were 180 OSVs sent to the breakers, but just 52 last year as of November 2020.
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