The pain continues to be felt by those operating in the offshore industry. While oil prices have been boosting profits for the oil majors, the cash is yet to trickle down to the contracting industry. But could a crunch be coming?
The industry has reshaped itself significantly over the past three years, with significant consolidation, scrappage and vessel lay-ups. As such, there now appears to be some semblance of light at the end of the tunnel.
Globally, scrapping activity has increased; in 2017, 16 vessels were scrapped, compared with 12 in 2016 and 10 in 2015, according to data from IHS Markit. Scrapping activity was dominated by dive support vessels, with the main contractors, such as Subsea 7 and TechnipFMC, actively scrapping to renew their fleets.
Up to the end of April, five vessels had been scrapped this year, with a sixth due to be scrapped in May. It is all older tonnage being taken out of the market, said IHS Markit decommissioning and subsea analyst Catherine MacFarlane, but it still leaves a lot of spare capacity. For example, there are still 227 ROV support vessels in the market globally, all built in the “boom time,” so they are fairly new and high specification. “Even though the fleet has been reduced, there’s just not enough work and there will not be for some time,” she said.
Despite this gloomy outlook, “most people agree that we are through the worst,” she added. “But in terms of a proper recovery it will not be until 2019 before we see anything, and it will not be back to the previous normal.”
Archer Knight executive director David Sheret agreed. He expressed the view of the Aberdeen-based consultancy when he said: “We doubt the equilibrium will fully recalibrate, therefore adjustment will continue and unless you do something very niche or clever, the vessel market will remain tough for a few years yet.”
“In the last couple of months there has been renewed optimism in the sector, with all the active UK North Sea fleet almost sold out for the month of May (as at the end of April), based on the spot market,” said F3 Offshore Services director Yul Thomson.
But, there are still many vessels in lay-up, he said , and for the most part, vessel owners are not bringing them back into the market until they can secure longer contracts of four to six months. This means there has been a tightening in the availability of active vessels, resulting in an increase in prices. He said that vessels that were going for £20,000 to £25,000/day (US$27,000 to US$34,000) earlier this year are now getting £25,000-£30,000/day (compared with £100,000/day a few years ago for a larger construction vessel).
Archer Knight predicts just a 1.3% increase in inspection, repair and maintenance (IRM) campaigns on the UK Continental Shelf in 2018. But Mr Sheret, who was previously general manager, global business development at Bibby Offshore, said 2019 will improve further, and points to an increase in sanctioned oil and gas projects in the UK North Sea (13 to14 expected this year, compared with three in 2017).
Others are finding work elsewhere, such as offshore wind, where the younger fleets, including ROV support, can be put to good use in oil and gas. “Norway’s Olympic Subsea has been successful in this area,” Ms MacFarlane said. Subsea 7 recently acquired Siem Offshore Contractors and Saipem has also been focusing on this area. However, the work pays less and in some cases vessels are being put to work at below break-even costs.
US Gulf of Mexico
The large number of stacked vessels – warm and cold – has become a feature in the US Gulf of Mexico. While several vessels have been very active over the last two to three years, even in the downturn, “more are now idle than are being used,” said IHS Markit senior data specialist offshore North America Greg Rivera.
By late April this year, including DSVs, there were 30 vessels in service, said Mr Rivera. Of those 30, eight were listed as cold stacked. Of the remaining 22, about 18 are actually active. Utilisation rates, from a 50%-58% average in 2010-2014, dropped to 34% in 2015, 25% in 2016 and 21% in 2017.
A large problem is the excess tonnage (even with a large proportion of the fleet stacked and the Jones Act limiting the use of foreign-flagged vessels) and the lack of work for it. “It’s got to the point where some service providers say we can’t go any further on prices,” said Mr Rivera. “A lot of companies really tried to strengthen relationships with specific services providers, but there’s no reason to sign long-term contracts when you can get low rates on spot markets.”
One company that has bucked this trend is Edison Chouest’s subsidiary C-Innovation, which recently signed a three-year deal with BP to provide construction vessel services.
US vessel operator Bordelon Marine’s reaction to this environment has been to convert three platform supply vessels into ultra-light intervention vessels. The third of these, the Connor Bordelon, was completed in March and is now chartered to Oceaneering. “All three have had the same conversion treatment, so that they are easy to maintain”, said Bordelon.
“They’re smaller, lighter, faster, cheaper and more efficient. They don’t have free deck space, and crane capacity is lower at 60 tonnes. But they have picked up tremendous activity,” said Mr Rivera. In contrast, two newbuild multi-purpose support vessels that were due in the market in 2019 (part-built in Gulf Island Fabrication’s construction yard) were recently cancelled by Hornbeck Offshore Services (HOS).
“Looking forward, the best hope to get these vessels back in to service is offshore wind,” said Mr Rivera. But, unlike in Europe, this work is still minimal and work at scale is still a number of years out. This has not put off Europe’s DeepOcean, which has acquired Delta SubSea to gain access to the growing US windfarm market.
“In the Asian subsea market, demand for support and diving vessels remains sluggish, with supply exceeding demand,” said Kreuz Subsea CEO AJ Jain. “Many of our customers are now looking for long-term locked-in pricing and we are seeing high-specification vessel owners willing to trade down in price, to secure vessel utilisation.”
He continued: “We are in a fortunate position to have six saturation dive vessels currently working for Larsen & Toubro and Oil and Natural Gas Corporation. Our new-build DP-2 DSV Kreuz Challenger was also recently deployed by Brunei Shell Petroleum Company directly to Negara Brunei Darussalam's territorial waters. This vessel was built to the client’s standards and requirements, which is becoming more common in today’s market and it will be utilising the DSV for IRM work.”
Despite global over-capacity, new vessels are still being built. In total, 76 vessels are on order, although only two orders were placed this year, said Ms MacFarlane. Of the 76, 56 are due for delivery in 2018, but IHS expects delivery dates to be postponed until market conditions improve. Most of the newbuilds are accommodation units (37), followed by ROV support vessels (10).
For some, the real challenge is going to come as work picks up. Aberdeen-based KD Marine owner and managing director Hamish Petersen said so many people have left the industry or let their certificates lapse that it can be hard to get staff when you want them. Furthermore, operators are also starting to lack experience and as a result are paying more for third-party assurance firms.
In addition, supplier stocks are low, said Mr Petersen, leading to long lead times for even simple items. Some suppliers have closed and 24-hour service has gone. F3’s Mr Thomson agreed, adding that the availability of support equipment is already becoming an issue. Mr Petersen concluded: “The price of recession will come home to bite as things recover. It’s very messy and a problem stored for the future.”