The first quarter of 2020 held some hope that the stronger market seen at the end of 2019 would carry forward. The Covid-19 coronavirus has dashed that optimism
The OSV market in early 2020 was more subdued than one might expect simply from the impact of seasonality. The realities of the Covid-19 coronavirus pandemic were beginning to bite: from working at home to restrictions on crew changes. One thing that did not change however was the lack of new orders for AHTS or PSVs. The last order placed for such vessels was placed more than 12 months ago when Miclyn Express Offshore ordered two, small 200 dwt PSVs at the Shunhai shipyard in China. The vessels are due for delivery in April 2020, although it is not clear if this has been delayed. It is reported that many shipyards have had to delay deliveries, with workers being quarantined at home.
April 2020 was the month that Shunhai was due to deliver an offshore maintenance and support vessel for an unnamed owner and a large AHTS to Icon Offshore Berhad of Malaysia. The large AHTS was ordered by Icon Offshore in June 2014. According to VesselsValue, the market value of the vessel has fallen from US$18M in June 2014 to around US$4M at the end of March 2020.
OSV newbuildings with ever-extending delivery dates is no longer an unusual phenomenon. According to the same database, there are 143 PSVs scheduled for delivery in 2020; 43 PSVs are nominated for delivery in April 2020. This clearly will not happen. Only 26 PSVs were recorded as delivered in the whole of 2019.
The AHTS orderbook paints a similar picture. There are 134 AHTS of all sizes due for delivery in 2020, with 34 expected to be delivered in April 2020. If we examine the 34 scheduled deliveries for April 2020 more closely, the average age of the newbuilding contract is six years old, approximately three times longer than a normal AHTS newbuilding programme. The oldest order on the list appears to date back to 2007 and the newest order was placed in 2017.
"The combined gas reserves of these two discoveries are thought to be in excess of 1.5Bn barrels of oil equivalent, making this the largest discovery of 2019"
That said, exploration for new oil and gas fields continues and the demand could soak up some of the excess supply of current and new OSVs at every stage of development. In 2019 discoveries included Gazprom’s two major gas discoveries on the shelf of the Yamal Peninsula in the Kara Sea, Dinkov and Nyarmeyskoye, these two fields being situated in adjacent Gazprom operated blocks, Rusanovsky and Nyarmeysky respectively. The combined gas reserves of these two discoveries are thought to be in excess of 1.5Bn barrels of oil equivalent making this the largest discovery of 2019. Another significant discovery took place off Cyprus: Glaucus-1 well was drilled in 4,200 m of water. Preliminary estimates by ExxonMobil put the reserves of natural gas to be between 5 to 8Trn cubic feet. This follows on from the 2018 Calypso discovery by Italian major Eni in neighbouring block 6.
In early 2020, new oil fields crossed significant thresholds. Guyana exported its first VLCC cargo of crude oil. The first large cargo from the Liza oil field is destined for loading on the Chinese-built, owned and operated VLCC New Melody from the FPSO Liza Destiny. The destination of the crude oil has not been revealed, but it is widely assumed to be China. According to ExxonMobil, the Liza crude oil is produced offshore Guyana by a joint venture operated by ExxonMobil’s affiliate Esso Exploration and Production Guyana Limited, holding a 45% interest in the block, together with Hess Guyana Exploration (30%) and CNOOC Petroleum Guyana Limited (25%). The Liza oil field is located offshore Guyana in the Stabroek Block, approximately 190 km northeast of Georgetown.
Another is the giant Johan Sverdrup crude oil field in the Norwegian North Sea. The field came on stream on 5 October 2019, more than two months ahead of the original schedule and Nkr40Bn (US$3.8Bn) below the original estimate for development and operation. According to the operator, state-owned oil company Equinor, the break-even price for the full-field development is below US$20 per barrel, and expected operating costs are below US$2 per barrel. The field is already producing 430,000 b/d. By May 2020, it will reach 470,000 b/d, with the expectation of peak plateau production of 690,000 b/d.
The operator is aware of the timing of bringing such a large volume of crude oil to market during a drop in the oil price and a downturn in demand due to the Covid-19 coronavirus. “Johan Sverdrup is an important project to the companies, the industry and society at large,” said Equinor’s executive vice president for development and production Norway, Arne Sigve Nylund. “The project was sanctioned during the oil price fall in 2015 and resulted in important activity to the supplier industry in a demanding period. With low operating costs, Johan Sverdrup provides revenue and cash flow to the companies and Norwegian society at large in a period affected by the coronavirus and a major drop in the oil price. In today’s situation, co-operation between operators, suppliers and authorities is more important than ever to maintain activity and value creation.”
Johan Sverdrup’s low opex will help, but for other crude oil production facilities, maintaining “activity and value creation” is going to be a challenge. IHS Markit, which specialises in providing data and information on capital-intensive industries, estimates the global oil supply surplus on a monthly basis – the amount of global oil production in excess of demand – could range from 4-10M b/d from February to May 2020. It warns that demand in March and April could be down as much as 10M b/d, but oil fields and refineries cannot just shut production overnight. The result will be more crude oil and oil products passing straight through into storage on land and at sea. IHS Markit estimates that global available storage will be overwhelmed by the middle of 2020. From that point onwards, the reduced capacity would reverse back down the supply chain and oil fields will be forced to shut production.
That said, holes still need drilling and rigs need moving and March 2020 saw a swift pick up in charters. There were 84 charters recorded in March, with Norwegian state-own Equinor being responsible for a third. The 28,000 bhp Skandi Iceman was booked for two consecutive charters of 14 days each. The first charter was at NOK35,000(US$3,300)/day and the second, ending in mid-April, was at NOK12,000(US$1,100)/day. In a similar fashion, the 22,000 bhp Island Vanguard was chartered spot for 14 days at NOK35,000(US$3,300)/day in the early part of the month but the following spot charter, which runs to mid-April 2020, was also at the reduced rate of NOK10,000(US$1,000)/day.
Norwegian offshore vessel shipbroking group Seabrokers have assessed the March 2020 spot rates at GBP25,500(US$31,300)/day for AHTS below 22,000 bhp and GBP21,200(US$26,000)/day for those more powerful. For the smaller category, this represents a 28% increase in rates over the same period in 2019.
On the time charter/term business side, 1,000 m2 PSV Normand Leader was taken for three years by Woodside Petroleum. The smaller PSV Ambrosius Tide gained a two -year time charter with Mobil Producing Nigeria. In both cases the day rates were not reported.
"The issues caused by the pandemic are being compounded by the actions of Saudi Arabia"
Beach Energy of Australia, which is active in exploration off Australia and New Zealand, has the 1973-built semi-submersible Ocean Onyx on charter from Diamond Offshore. This is to be joined by three Siem AHTS Pool vessels. The trio of 28,000 bhp AHTS were built at Kleven, Norway between 2010 and 2011; Siem Amethyst, Siem Aquamarine, and Siem Topaz have been fixed for one year, ending 28 February 2021. The rate was not recorded.
The sale and purchase market was slow but encouraging, with five reported sales. Three involve Bourbon selling three small PSVs (Bourbon Liberty 10, Bourbon Liberty 11, and Bourbon Liberty 12) of around 10 years out old of the trading fleet. These have been picked up by an undisclosed buyer for conversion into fish farm vessels. Seabrokers also report that Sevnor has purchased AHTS Bourbon Borgstein and AHTS Bourbon Surf. These are to be re-activated after being in layup since 2015. Both are UT 722 LX designs and were delivered in 2003, from the Langsten Shipyard in Norway.
Looking ahead, Covid-19 coronavirus is clearly going to have a huge impact on the OSV market. At a personnel safety level, crew rotations will be affected as companies try to minimise close quarters. Oslo-based subsea services provider DeepOcean has released extensive guidelines for its employees in response to the coronavirus, outlining travel restrictions to and from areas of high outbreaks and precautions for handling suspected infections. Travel bans are imposed by the guidelines to areas in China, Austria, Asia and southeast Asia, and bar personnel, suppliers and clients in certain cases returning from those areas after visiting company sites. DeepOcean also shared medical guidance on managing suspected coronavirus cases on vessels, including medical staff precautions and patient quarantine.
The issues caused by the pandemic are being compounded by the actions of Saudi Arabia, in both expanding production and discounting the price it is selling crude oil. At a macro level, this raises the possibility of a shut in of oil production which will have a huge impact on those economies reliant on oil. According to the IEA, Norway is estimated to derive less than 20% of national GDP from oil and gas, which contribute 40% of exports, whereas oil and gas are 100% of Iraq’s exports and over 90% of national revenue. Collectively, revenues for the oil- and gas-producing nations could fall from US$287Bn in 2019 to US$70Bn in 2020, according to IEA projections. For the OSV market, this means that having seen the foothills of a recovery towards the end of 2019, the whole sector is now being hauled back into the trough stage of the cycle.