The Middle East offshore oil and gas sector remains under pressure from a massive oversupply, according to Synergy Offshore FZ LLE chief executive Fazel A Fazelbhoy
Speaking to delegates at the Annual Offshore Support Journal Conference, Awards and Exhibition in London in February, Fazel A Fazelbhoy chief executive of Synergy Offshore FZ LLE explained that the offshore market in the Middle East has experienced “some pretty tough days in the last five years,” with offshore losing capital allocation to onshore conventional oil and to shale.
“We’re treading water,” said Mr Fazelbhoy. “We’re not taking water on board, but we’re not doing great either.”
Fazel A Fazelbhoy (Synergy Offshore FZ): "The Middle East has remained the bright spot because the activity has remained consistent"
Oversupply in all OSV sectors – about 100 of the 450 vessels in the Middle East have been repositioned from Southeast Asia – continues to depress day rates and lower contract renewals and extensions. There are 60 vessels stacked and utilisation rates have averaged between 60-65%. OSV owners’ balance sheets have taken a beating and there has been a number of mergers and acquisitions, restructurings and consolidation in the market.
The good news is that “day rates have bottomed out and utilisation rates have started creeping up,” said Mr Fazelbhoy, “and there are a few companies claiming utilisation rates over 90%.”
While utilisation has stabilised and is edging upwards, the day rates in the market are not expected to recover until the end of this year and possibly 2020.
Taking a closer look at regional activities, Mr Fazelbhoy said the Abu Dhabi National Oil Co (ADNOC) plans to ramp up its production to 4 mbpd by 2020 and 5 mbpd by 2030. Over the next five years, US$130Bn will be spent on offshore development, with Italy’s Eni and Thailand’s PTTEP being named as the first awardees of offshore production under Abu Dhabi’s first competitive open block strategy. “These companies are spending 100% of their own money for exploration activities,” said Mr Fazelbhoy. “If the fields prove productive, ADNOC has the opportunity for 60% of the equity in the producing fields. At this point, there is no risk, no loss to ADNOC whether the field exploration is successful or not,” he added.
Besides the offshore oil and gas production work, work is underway on the Hail and Gasha artificial island projects that call for support from 118-156 vessels for a period of two to four years. As many as 71 barges, 12 shoalbusters, 42 tugs, five emergency response and rescue vessels, four survey boats and three crewboats will support the work.
Local content increasingly important
Mr Fazelbhoy also highlighted the increasing importance of local content in projects in the Middle East. Under the In-Country Value (ICV) programme, all ADNOC contractors have a “number” based on the degree of local content. For each tender, the bidder with the highest ICV number is given the opportunity to match the lowest bidder’s price. He noted that he has seen cases where non-industry players with high local content numbers have won tenders, only to then retender them out.
“This is a tremendous advantage to the companies that have invested in infrastructure and content in the UAE,” he said.
“We’re treading water; we’re not taking water on board, but we’re not doing great either”
Investment in Saudi Arabia is also ramping up after it held its own Davos in the desert in November, attracting major contractors interested in developing Saudi fields. It resulted in US$34Bn in 15 new deals. Additionally, the In Kingdom Total Value Add (IKTVA) forum, the fourth such event in the series, confirmed another US$27Bn for 31 commercial collaborations. The goal of the IKTVA forum is to increase local content to 70% by 2021, up from its current 40%.
Saudi Aramco plans to spend US$334Bn across the oil and gas value chain over the next six years.
Saudi mega-yard to open
The “big event” in Saudi Arabia, Mr Fazelbhoy said, is the opening of the first phase of the $US5.2Bn Saudi mega-yard. Located at Ras Al-Khair, International Maritime Industries (IMI) is 51% owned by Saudi Aramco, 19.9% by Saudi Arabia-based shipping company Bahri, 20% by Dubai-based Lamprell and 10% by South Korea-based Hyundai Heavy Industries (HHI). Divided into four zones, IMI will offer rig fabrication, merchant ship construction, boat building, and general ship repair.
Its facilities will include a 490 m x 90 m rig dock, a 550-m long ship dock, a 25,000-tonne-capacity Syncrolift and two massive cranes. The facility has already solved one of the biggest challenges for shipyards: sales. Over a 10-year period, Bahri will place orders with the IMI yard to construct a minimum of 52 different vessels including 20 VLCCs, plus use IMI for most of its vessel maintenance, repair and overhaul requirements.
Zone D, its rig fabrication yard, will be operational by the end of this year, where technical partner Lamprell will complete the construction of the first two jackup rigs that will be assembled at the shipyard. Lamprell will undertake most of the fabrication work for both jackup rigs at its Hamriyah yard in the UAE while maximising work in Saudi Arabia to approximately 15% of the scope of work. Lamprell will also be the technical partner for Zone A, the general ship repair facility that will be open in 2021.
Zone C, the shipyard facility, will have a capacity to produce three VLCCs plus 15 other merchant vessels per annum and be operational in 2020. Zone B, the boatbuilding facility, will have a capacity of 15 OSVs per annum and will be operational in 2021. HHI will be the technical partner for both zones.
IMI is a cornerstone of the Saudi government’s Vision 2030 programme that aims to diversify the country’s economy, employment and revenue.
Local content is going to be a key when competing for work in Saudi Arabia said Mr Fazelbhoy.
In June 2017, the UAE, Saudi Arabia, Egypt and Bahrain severed diplomatic and economic ties with Qatar, over allegations that it supports terrorism, which it vehemently denies. As a result of the trade embargo between the countries, all of the OSVs from Saudi Arabia and the UAE have been terminated by Qatar Petroleum and forced to leave Qatar.
As a result, Qatar-based Hallul Offshore Services Co, a subsidiary of Milaha, and Bourbon Gulf have both filled the vacuum. Bourbon Gulf is a joint venture between Qatari entrepreneur Nasser Saeed A. SH AL Hajri and Paris-based Bourbon Marine & Logistics.
A large discovery of 80Bn barrels of oil and 13.7 tcf of gas reserves has put Bahrain into the offshore spotlight, said Mr Fazelbhoy. “It currently has production of 49,000 bpd but can reach the potential of 200,000 bpd, which should provide offshore development work for the next five years.
“The Middle East has remained the bright spot because activity has remained consistent,” said Mr Fazelbhoy. “There are about 115 rigs operating in the Middle East, which is about 40% of the global contracted supply and rig utilisation is about 75%, compared to the global average of 60%. That has been a good indicator. We’re still treading water, but for the time being, we have a direction and the direction is generally upwards.”
Mr Fazelbhoy will be one of the presenters at the Middle East Offshore Support Journal Conference in Dubai 24-25 April 2019.