The OPEC+ price war and a slump in oil demand resulting from the Covid-19 outbreak are throwing a cloud over the recovery underway in the Southeast Asia OSV market
An oil price war between Saudi Arabia and Russia, in combination with the coronavirus (Covid-19) outbreak has sent Brent crude oil prices tumbling to their worst levels in three years, throwing a pall over the fragile recovery in the Southeast Asia OSV market. The price of Brent crude fell more than 30% to as low as US$33.49 a barrel after OPEC+ alliance partners Saudi Arabia and Russia failed to reach a deal on production cuts. The OPEC+ alliance has underpinned pricing in the oil market since 2016.
The rift between Saudi Arabia and Russia will result in a flood of new production and lower pricing in an already weak oil demand market. And worse is to come. The International Energy Agency (IEA) expects oil demand to fall for the first time since 2009 as a result of the Covid-19 outbreak.
“The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” says IEA executive director Dr Fatih Birol. “This is especially true in China, the largest energy consumer in the world, which accounted for more than 80% of global oil demand growth last year. While the repercussions of the virus are spreading to other parts of the world, what happens in China will have major implications for global energy and oil markets," adds Dr Birol.
The lack of demand and increased oil production from Saudi Arabia and Russia are hammer blows to the fragile recovery in the Southeast Asia OSV market.
|Three-year outlook demand for vessels in Malaysia to support drilling, 2020-2022|
|Standy support vessel||2||2||2|
|Fast crew boat||27||27||27|
|AHTS vessel (<100 t BP)||36||36||36|
|AHTS vessel (>100 t BP)||86||86||86|
|Source: Petronas Activity Outlook, 2020-2022|
“The outlook of the oil and gas industry remains bearish, given the ongoing geopolitical uncertainties, prolonged trade tensions and near-term demand disruptions due to the Covid-19 outbreak,” Malaysian oil and gas giant Petronas said in announcing its fiscal year 2019 results prior to the oil price collapse. These factors are expected to impact the oil company’s financial performance for 2020, said its board.
Prior to the Covid-19 outbreak, Petronas had expressed some ‘cautious optimism’ regarding brownfield activities and expected growth opportunities for OSVs and drilling rigs in its Petronas Activity Outlook for 2020-2022, outlining a potential 37 brownfield and 16 greenfield projects for the oil company’s capital investments in Malaysia over a three-year period. The projections were released in October, prior to the Covid-19 outbreak and the oil price collapse.
For its exploration, production, development and abandonment projects, Petronas estimates in the Activity Outlook report the need for 26 drilling rigs and hydraulic workover units in 2020, up two from 2019. The demand is made up of 16 jackup rigs, three tender-assisted drilling rigs, four hydraulic work-over units and three semi-submersible drilling rigs.
To support its production operations in 2020, Petronas estimates it will need 134 vessels, including 43 fast crewboats, 27 anchor-handling tug supply (AHTS) vessels, 26 landing craft, 17 standby service vessels (SSVs), 14 platform supply vessels (PSVs) and seven utility boats. Demand in 2021 and 2022 will rise slightly to 138 vessels each year. For maintenance operations for underwater services, Petronas expects demand for between 10 and 18 OSVs with dynamic positioning class 2 capability in 2020, dropping to between nine and 14 vessels in 2021 and 2022.
To support drilling and operations, Petronas estimates a need for 256 vessels in 2020, composed of 86 (greater than 100-tonnes bollard pull) AHTS vessels, 58 workboats and barges, 42 PSVs, 36 (less than 100-tonnes bollard pull) AHTS vessels, 27 fast crewboats, four landing craft, two SSVs and one utility boat. Vessel demand is expected to remain steady for 2021 and 2022.
|Three-year outlook demand for vessels in Malaysia to support production, 2020-2022|
|Standy support vessel||17||17||17|
|Fast crew boat||43||43||43|
|AHTS vessel (<100 t BP)||27||29||29|
|Source: Petronas Activity Outlook, 2020-2022|
Vessel demand on rise
The spectres of the Covid-19 outbreak and the Saudi-Russian price war now hang heavy over the offshore oil and gas market, just as the prospects for beleaguered Southeast Asia OSV owners had begun to brighten. Rising vessel utilisation drove Malaysia’s Icon Offshore Bhd back into the black in Q4 2019, after posting a net loss for the same period a year earlier.
Traded on the Bursa Malaysia exchange, Icon Offshore Bhd reported a dramatic turnaround in Q4 2019, posting a net profit of Myr7.4M (US$1.8M) versus a net loss of Myr415.1M (US$98.9M) a year earlier, as revenue rose on higher utilisation of the group’s OSVs. Vessel utilisation rose to 59% in Q4 2019, up from 50.9% in the same quarter a year earlier.
Lower depreciation charges for Icon Offshore’s OSVs were also among factors contributing to its net profit in Q4 2019 (ended 31 December 2019). Icon has a fleet of 32 vessels.
After two years’ worth of loss-making quarters, Alam Maritim Sdn Bhd reported a profit of Myr114.6M (US$27.3M) in Q3 2019. Based in Kuala Lumpur, the Malaysian OSV owner had recorded a net loss of Myr21.39M (US$5.1M) in the same period in financial year (fy) 2018.
While earnings slipped back into the red for Q4 2019, when the company posted a loss of Myr65.5M (US$15.62M), the results were a marked improvement from a year earlier for the same period, when it posted a loss of Myr167.6M (US$40M). For fy2019 ended 31 December, Alam Maritim’s revenue climbed 316% year-on-year (y-o-y) to Myr301.8M (US$72M), up from Myr95.4M (US$22.8M).
In February, Alam Maritim announced it had secured a two-year charter to provide an AHTS vessel to Petronas Carigali Sdn Bhd under a contract valued at Myr28M (US$6.6M).
To raise working capital, Alam Maritim announced in January it would undertake two private placements involving about 30% of its total issued shares. From the gross proceeds generated by the private placements, Alam Maritim intends to fund the dry docking, service and maintenance requirements of its vessels, which are subject to class renewal survey and intermediate survey.
Meanwhile, Bumi Armada posted a loss for Q4 2019; the Malaysian OSV owner posted an overall profit of Myr58.6M (US$13.9M) in fy2019, with ‘stable operations’ from its floating production and offloading fleet.