More Hong Kong Convention-certified yards, lower oil prices and higher residual values create ideal conditions for rig recycling, writes GMS Dubai senior trader Faidon Panagiotopoulos
Recycling has been widely described as the ’fourth pillar of the shipping industry,’ behind the newbuilding, chartering and sales and purchase sectors. Most shipping professionals have heard of, or were involved with an asset that had to be recycled, was about to be recycled, or liquidated an asset in a constantly active market to guarantee the minimum residual value of their vessel. Despite the fact that everyone has heard of recycling bulkers, tankers and container ships, when it comes to offshore assets (jack-ups, floaters, rigs in general, offshore support vessels), the understanding of the industry is not the same as for normal commercial vessels.
The reason behind the fundamental lack of experience in this sector can be justified.
Such units are not considered part of the normal shipping industry, but part of the oil and gas/energy sector, as they have been used on exploration, drilling and support, not in the actual transportation of the commodities.
Owners of these assets have not been considering the residual value of their units, since the spread between newbuilding prices and recycling rates is the biggest across the shipping sector. For comparison, while the price of a VLCC tanker in the newbuilding market would be US$70M-US$80M, its residual value would be US$16M-US$20M, indicating approximately a 25% return when selling for recycling.
On the other hand, if the newbuilding price of a jack-up rig is US$250M, its recycling value will be on average US$3M, which indicates a 1%-1.5% return on the investment. Commercially, rig owners were never dependent on the recycling market for cashing out on their units.
Regarding the charter hire for the offshore units, ’when it rains, it pours.’ Re-examining the jack-up rig as an example, the units, depending on the region and specification, when on charter – can easily earn from US$50,000 to US$150,000 per day, exceeding the typical historical average earnings of commercial vessels. In times of turmoil in the oil industry – when oil prices fall to between US$25 and US$30/bbl – the decision was clear for owners to lay up their units and wait for the next upside instead of immediately sending them for scrap; who would get rid of a cash cow, if it can be laid up cheaply and have proper maintenance at logical rates to avoid huge reactivation bills?
On the two points above, we have taken only the example of the jack-up rigs. When looking into floaters, such as semi-submersible rigs, or even drill ships, the newbuilding prices as well as the daily earnings, are even more significant.
Furthermore, let us not forget the ownership of these units. Rig owners tend to be either mainly state-owned companies or stock-listed companies – both of which have easy access to substantial financing lines to perform their operations and stockholders that need to be involved in the process. Owners described above have always been hesitant to sell their units for recycling, especially in the subcontinent, in view of the lack of a necessary framework and regulations governing the recycling activity. Owners had to wait for the IMO guidelines of the Hong Kong Convention to be exercised and implemented, with India leading the charge and Bangladesh slowly following, for considering the recycling of their assets as a viable solution.
Additionally, we cannot avoid the logistical nightmare of transporting these assets. Most drilling rigs operating around the globe are located in the middle of oil fields, or in layby berths/anchorages in jurisdictions and locations far away from the recycling destinations. Taking into account the weather restrictions on transporting the units (US hurricane season, COGH winter season, monsoon season in the subcontinent), the principal dimensions (ie, leg protrusion on jack-up rigs, thrusters in semi-submersible rigs, increased beam, heavy draughts, reduced stability), the means of transportation (wet or dry tow), transporting these units is never a ’stroll in the park’ compared with normal towing of a ship-shaped unit. It requires tremendous logistical preparation and increased costs to bring these units to subcontinent destinations. Adding to the above, the low ldt of such units (ie, jack-up rig has on average 6,000-10,000 ldt) can make the exercise futile, and the transportation cost may overcome the residual value of the asset.
Finally, the values of the drilling rigs in terms of recycling are heavily dependent on the extra equipment that remains on board at the time of the recycling, which is included in the recycling sale. While price fluctuations in normal vessels could be in the range of US$10 to US$20/lt for two similar-sized vessels, two rigs are most probably never the same, and one can observe US$40 to US$50/lt differences in the recycling rates for two similar rigs. The main reason behind this is the extra equipment, especially on the drilling side. Riser pipes, BOP, cementing units, mud pumps, raw water towers, and thrusters are equipment that can considerably increase the value of the asset if left on board. Rig majors though, due to the value of these items, tend to remove the equipment for further use in other assets (or due to these being third-party-hired items), literally stripping them and leaving only the basic shell to be recycled, which will not demand any premium over a normal, more accessible to cut, bulk carrier. Discounting the already reduced recycling price of a rig does not lead owners towards seriously considering the demo market.
But the tide is turning
Over the past six to seven years, GMS has observed that oil prices have not been anywhere near the US$100/bbl levels, which would make exploration and drilling highly lucrative for owners. The two significant downturns of the oil price, in 2015-2016 and just recently during Covid-19, have normalised the prices in a prolonged period of ‘lean cows’. Rig owners have been forced to look more actively into the recycling market, especially for their unemployed laid-up assets.
Locally, the tolls for improving the recycling industry are well known and adhered to. The Hong Kong Convention has strong roots in India, with more than 80 yards being certified by IACS as compliant to the relevant guidelines, for which the yards are vetted regularly for certification renewal. This is a token to an evolving industry that has come a long way since 2014 when only four yards had taken the initiative to invest in such a direction. With only a handful of yards not yet certified, but working towards this, India has emerged as the primary location for recycling offshore assets, with many owners also opting for a third-party monitoring reporting service during the recycling process.
Following India, Bangladesh already has its first HKC-approved yard, with several more yards working towards certification. For those who have experienced the early stages of HKC implementation in the subcontinent, GMS hopes we will see Bangladesh rapidly increasing the number of HKC-compliant yards within 2021-2022 and Pakistan to join, providing more solutions to offshore rig owners for recycling their assets.
Closing this explanatory article, I need to mention that what many believe to be a super cycle for commodities has affected the residual values. We are currently experiencing the most robust recycling market of the past five to six years, with prices well above US$500/lt for normal commercial vessels and the mid-high US$400s for offshore assets, and rigs. In such an environment, the conditions are ideal for rig owners to get the best residual value in many years for their assets.
At the time of writing, there are more than 20 offshore rigs in the recycling market, either being marketed or already sold to cash buyers, which is a historical high for the offshore recycling industry and a sign of things to come.
Everyone is looking forward to an era where offshore assets recycling will no longer be a ’terra incognita’ but rather a ’terra nova.’
This article was originally published by Mr Panagiotopoulos as “Offshore assets: the ‘terra incognita’ of ship recycling.” Mr Panagiotopoulos is the Dubai senior trader for GMS, one of the world’s largest and first ISO 9001-certified cash buyer of ships for recycling. Established in 1992, GMS has offices in the US, Germany, Greece, Dubai, India, Singapore, South Korea, China and Japan.
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