The Middle East remains the global bright spot in the OSV market and the oil price is hovering around US$75 a barrel. Still, the industry is not out of the woods, as Westwood Global Energy Group director Thom Payne told Riviera’s Middle East Offshore Support Journal Conference in Dubai
Oil prices have been on a sustained rally this year and this is pushing forward exploration and production spending. But delegates at the conference were told that the industry faced mixed signals on a future recovery.
Speaking in the conference’s opening session, Mr Payne told the gathering that the uptake in oil prices is yet to resonate to the offshore marine sector.
“We are starting to see a greater volume of offshore drilling projects being sanctioned around the world, but drilling will not start for another 18 to 24 months, so we are still a little bit off from seeing that big meaningful recovery in global rig counts,” he said. The exception is the Middle East which has proved a resilient market and over the past few months has experienced an uptick in new tendering and rig activity. “We expect that uptick to continue over the next one to three years,” said Mr Payne, adding “there are certainly very ambitious plans in place across most Middle East countries in terms of new field development. We expect [this] to translate into increased demand for jack ups and subsequently increased demand for OSVs.”
That said, Mr Payne cautioned the market against giddy optimism, offering a conservative perspective on the short- to medium-term outlook.
“Starting with the good news, consumption, the base for any meaningful oil price recovery, is at unprecedented levels,” he said. One of the big drivers of this has been China, which has experienced significant GDP growth this quarter; indeed, 2017 was the best year on record for Chinese car sales and 2018 has started strongly.
The last few quarters have seen an increase in restructurings and companies emerging from Chapter 11 and that has been a game changer and a source of positive momentum. “But it is too early to tell whether [the market] has restructured sufficiently or if there is more to come,” said Mr Payne.
At the same time, he drew attention to the elephant in the room: the US shale industry. “The [shale] market feels like the OSV sector of 2013, with double-digit inflation and a scarcity of equipment,” he said. “We have seen a rapid surge in demand for fracking horsepower and this has translated into the addition of 1M b/d of additional crude supply from shale fields or shale formations across the USA.” He noted OPEC was seen as the industry’s ‘best weapon’ in meeting this challenge.
One of the other big uncertainties in the market today is the actual possibility of reactivating a lot of the older tonnage that is in layup, said Mr Payne. A lot of Chinese-built tonnage has not seen the market yet.
“Of the 3,600 OSVs currently being tracked around, one third are in layup and around a further third are above 30 years old and will never come back to the market. But there is still quite a large number that are less than 15 years old; a lot are potentially in Chinese yards and never really had owners and could fall away as well,” he noted.
Mr Payne shared a future projection which saw fleetwide utilisation moving to around 62% by 2019, 80% by 2020 and around 85% by 2022. Concluding on a positive note he said “there are the makings within the market to fix itself within the next five years.”