North Sea tendering activity is up but rates remain flat; is well decommissioning the answer?
“Offshore markets have started to inflect, but the pace of recovery will likely disappoint many.” This is the opinion of London-based Maritime Strategies International associate director Gregory Brown, who feels current exploration plans appear insufficient to drive the market back to the highs of the last cycle. “To date, any increase in demand has been met with the reactivation of tonnage – as with the North Sea last year where demand increased by about 20 vessels but utilisation was broadly flat,” Mr Brown explains, adding, “We think vessel owners reactivating tonnage without a firm contract are far too optimistic about the broader industry.”
Some OSV owners have reported increased tendering activity in the North Sea. In reporting his company’s FY2018 results, Nordic American Offshore (NAO) chairman and chief executive Emanuele Lauro said he was “encouraged that activity and daily rates for PSVs in the North Sea have increased markedly in the past month, indicating improved fundamentals and boding well for the remainder of 2019.”
He said the average utilisation rate for NAO’s nine operational vessels during Q4 2018 was 70%, which was the highest quarterly utilisation during 2018 and much higher than Q4 2017, when three vessels were laid-up and the corresponding utilisation for the seven vessels trading was 53%.
Mr Lauro reported that during Q4 2018, NAO secured long-term charters for two PSVs: “So far in 2019, we are seeing a steady stream of tenders. Although rates are still below levels that are required to be sustainable, rates are generally on the rise compared to last year,” he said.
There are currently about 50 PSVs in lay-up in the North Sea. Mr Lauro pointed out that the cost of reactivating these vessels “will demand substantially higher earnings in the spot and term market than what the market is currently yielding.”
Gregory Brown (MSI): “There are several headwinds to large-scale sector consolidation”
While the OSV market looks ripe for more merger activity, Mr Brown says there are several headwinds to large-scale sector consolidation – mostly notably involving sector balance sheets. “The industry remains far more leveraged today relative to the last major consolidation round,” he explains. “That leverage is both preventative – there is a lack of financial liquidity and apparent waning appetite to provide acquisition finance to the energy industry – and prohibitive, [because] potential consolidators have little appetite to consolidate debt.”
He goes on to point out that the ‘white knight’ deals seen often through the global financial crises have been largely absent in this downturn, and the industry has instead been forced to restructure aggressively or been left to hit the wall. “The latter could be a course of future activity, as banks look to recover losses on debt written off,” he warns.
On recent evidence, notably Tidewater, it appears that well-capitalised players are looking to take advantage of the distressed nature of the competition and are able to close such deals.
“We think vessel owners reactivating tonnage without a firm contract are far too optimistic about the broader industry”
In discussing consolidation in the OSV market, VesselsValue’s head of offshore Robert Day says Scorpio Group only just missed out after its acquisition of NAO, which he describes as a potentially “behemoth” deal.
In explaining why the combined Tidewater and Gulfmark merger was so attractive, he says the historic worth was outlined as the most important aspect when looking at an acquisition and highlights the spread of value, taking GulfMark as an example: peaking at US$2.23Bn with 82 vessels in 2013, he observed a US$2Bn spread to Gulfmark’s value today, of US$285M, with 66 vessels.
The company’s discounted cash flow (DCF) of US$1Bn was also cited as a stark buying signal; DCF analysis calculates what can be earned in the remainder of a fleet or asset’s lifetime. With market value being lower in comparison, there is potential; Mr Day describes DCF as “sitting nicely in the middle of the best-and-worst case scenario”.
He notes that the marriage of geographical coverage between the two OSV owners was almost perfect. Tidewater’s operations spanning the US Gulf, West Africa, the Middle East and East Asia and GulfMark’s presence in the North Sea ensured a global footprint. The result of the merger is that Tidewater has a fleet of 253 vessels, with combined assets of the deal totalling US$1.143Bn.
Mr Day also brought attention to US-based Harvey Gulf International Marine’s recent desire to merge with a European OSV owner. Mr Day speculates that Norway’s Solstad, Bourbon and the UK’s Vroon would be the “most eligible bachelors”.
Following Tidewater’s lead
According to Maritime Strategies International, around 30% of the OSV fleet, or about 1,665 vessels, are currently laid up globally. Around 60% of these are more than 15 years old. “We think it’s increasingly unlikely that these vessels will return to the active fleet, says Mr Brown.
“For those younger vessels that are in layup, their potential return to the market depends on the state they have been kept in. We think that the low hanging fruit – those vessels which were kept in good order – has yet to be exhausted but is dwindling as vessels get back to work.”
Scrapping of OSVs and mobile drilling units (MODUs) hit record levels last year, according to VesselsValue senior analyst Court Smith. It was the fourth year in a row that vessel scrapping in the OSV sector has risen, with 105 OSVs and 37 MODUs heading to shipbreakers.
“There are three main factors that will cause an owner to remove a ship from service,” said Mr Smith. “A higher price being offered by recycling buyers, current, as well as expected, spot market returns and the cost of drydocking a ship at its next yard period.”
The dollar per lightweight ton cost of recycling ships is driven by demand in the physical economy and correlates with the price of raw steel. Prices per LWT rose throughout 2017, but most recycling occurred when prices were essentially flat in 2018.
“Hopefully, 2019 will see a continuation of this trend in vessel scrapping,” said Mr Smith. The top shipowners selling vessels for recycling were US-based Tidewater, which sent 21 vessels to demolition, followed by South Korea’s Sinokor, which disposed of 11 and NAO, which sent 10 to the scrapyard.
Tidewater president, chief executive and director John Rynd made a point to tell delegates at the Annual Offshore Support Conference in London that his company was going to continue to rationalise its fleet and had plans to sell or scrap another 40 vessels this year. The idea, Mr Rynd said, was to “right size” his fleet in preparation for a market rebound. It was focusing on trimming those older vessels from its fleet that would soon face costly surveys and drydockings.
“Let’s get rid of a liability and make it an asset,” said Mr Rynd.
Last year, Tidewater activated five vessels and, according to Mr Rynd, has 24 other “Tier 1” vessels staged for reactivation as market conditions improve. The 24 vessels include platform supply vessels with clear deck areas of more than 700 m3 and AHTS vessels with bollard pulls of 80 tonnes or more. All of the vessels are DP2 class and less than 10 years old.
“Tidewater’s steely focus on scrapping non-performing vessels should encourage more owners to follow suit,” said Mr Smith. “The benefits of reducing oversupply will be felt throughout the industry and help bring balance sheets back into the black.”
However, it is a bitter pill to swallow. Many of these vessels will be sold at levels far below the purchase price achieved prior to 2014 and owners will have to take haircuts on these vessels.
In reporting its FY2018 results, which showed a 19.9% drop in adjusted revenues year-on-year – tumbling from €860.6M (US$972.4M) to €689.5M (US$779.2M) – France-based Bourbon said it sold 15 vessels, six of which were scrapped. One of the largest OSV owners, Bourbon has tried to apply a tourniquet to stop the red ink by selling or scrapping the non-core assets in its fleet. It reported that its “net non-current assets decreased by €312.2M (US$352.8M), in line with our will to streamline our fleet by disposing of ‘non-smart’ and non-strategic vessels.”
Bourbon said its results reflected the fourth year of the industry’s cyclical downturn. The silver lining was that for the first time since 2014, its utilisation rates and daily rates stabilised over the last three quarters of the year, showing a gradual recovery in its customers’ activity.
““Let’s get rid of a liability and make it an asset”
Mr Brown thinks that while scrapping levels have increased, they remain insufficient to balance the market. “We remain of the view that due to the fragmented nature of the market, scrapping levels may disappoint stakeholders – older vessels owned by small entities remain in the market and are unlikely to be removed.”
“We think this year will see a gradual improvement. On a global scale, we think AHTS vessels should hover between 50-60% this year, before improving to around 65% in 2020. For PSVs we think utilisation will be broadly flat this year at around 50%, but could move higher to about 60% through 2020-21.”
Amid increased environmental regulatory pressure, Mr Brown thinks that dual fuel and LNG-fuel vessels will look to capture market share in Northern Europe.
One particularly bright spot in the North Sea is the well decommissioning market. Designed to operate for decades, some oil and gas wells have been in the water since the 1970s. Of the 7,800 wells drilled in the UK North Sea, hundreds are now past their original design life and many others are approaching the end of their useful lives.
Mr Brown feels strongly that the decommissioning of these wells represents an opportunity for European OSV owners: “We think that OSVs have are real part to play either through the actual P&A campaign itself or through the adjacent markets, such as towing barges, removing mattresses and subsea structures or monitoring requirements. The market is robust and it will be for the long term.”
From 2019-2028, MSI estimates that spending in the global decommissioning market will be US$78Bn, with the largest European markets accounting for about for 45% of the total, led by the UK with US$23.4Bn, followed by Norway (US$8.6Bn) and the Netherlands (US$3.1Bn). In the UK North Sea, decommissioning accounts for about 8% of spending as compared with an average of 5% globally.
While OSV owners wait for capex in greenfield and brownfield projects to recover, the decommissioning market is real and here.
One of the first large steel jacket platforms to be removed from the North Sea was the North West Hutton platform, which had begun producing oil since 1983. Back in 2008 and 2009, BP hired Heerema Marine Contractors Netherlands BV for the decommissioning, removal and recycling and disposal of the North West Hutton platform. Some 20,000 tonnes of steel was recycled as a result of the removal. BP currently has three decommissioning projects underway in the North Sea.
“On pure fundamentals alone, plug and abandonment represents an attractive play,” says Mr Brown. He notes that decommissioning activity over the next five years is going to be driven by 240 exploration and appraisal wells that require permanent abandonment, 310 shut-in wells, 44 plugged wells and another 400 wells that were plugged prior to abandonment.
He says exploration and appraisal drilling in the North Sea has been in decline since 2008, while development wells have been halved since the downturn in 2015. While there was some fairly robust development activity in 2018, there is not going to be a recovery to pre-2009 activity levels, even in the best-case scenarios.
Mr Brown notes that the North Sea oil and gas market reached a tipping point in 2017. “More wells were plugged and abandoned than drilled in the UK continental shelf. There were 163 wells decommissioned in 2017 at a cost of £446M (US$591M) in comparison to 76 abandonments in 2016. We expect considerable growth over the next five years – an average of 200 abandonments per year to 2023.”
He said decommissioning these wells is a costly challenge, but one that the industry has accepted and is now getting on with.
The average cost of a decommissioning a well is falling globally as the market matures. As well as lower drilling rates, this reflects the efficiencies that have been realised through the downturn.
In terms of overall spend, 49% is focused on the three main phases of decommissioning: reservoir abandonment; intermediate abandonment; and wellhead and conductor removal.
“On pure fundamentals alone, plug and abandonment represents an attractive play”
In a typical P&A project, a vessel or mobile rig is mobilised to the well site, the well is killed, tubing is pulled and completion lowered, the reservoir is plugged and the primary and secondary barriers are set. Then the surface plug is set, the upper part of the conductor, wellhead and casing strings are removed and cut, and finally the site is demobilised.
While a semi-submersible rig is typically used for P&A operations, Mr Brown sees real opportunities for OSVs. A riserless well intervention vessel (RWIV) is limited to areas where it does not have to pull well strings or do any heavy lifting; anything that requires section milling or cutting is out of bounds. However, the setting of the surface plug and the upper part of the conductor and the casing strings are very much achievable using an OSV and an RWIV.
The unknowns are the biggest challenges when planning a P&A campaign, such as what the inside of the well looks like, collapsed tubing and casing, or inclement weather.
Mr Brown thinks that RWIVs can handle the full P&A on low- and medium-complexity wells in shallow waters, but that operators will still prefer to use semi-submersibles when section milling and section lifting are required.
There are similar P&A opportunities in the Netherlands and Norway, but on a smaller scale, with the expectation of activity ramping up in 2023.
“In Norway, the vast majority of work will centre around Equinor’s infrastructure,” says Mr Brown, adding that given the scale of the work and the operator concentration, there might be the opportunity to perform under a batch campaign.