Cold Comfort

Offshore operators struggle to stay afloat amid the worst downturn in decades.

By Wendy Laursen

Indonesia is one of the very few bright spots in an otherwise deflated and downtrodden offshore service vessel (OSV) market. Tender activity is on the rise there, and shipbroker Fearnley Offshore Supply reports that utilization rates for some owners have crept up to around 60 percent. The controlled influx of vessels due to the nation’s cabotage laws and cautious reactivation of layups may give owners there a head start on other markets on the long road to recovery.

But that’s cold comfort for operators in neighboring countries such as Australia. In its Spring 2016 market outlook, the lobbying group Australian Mines and Metals Association says that offshore petroleum exploration in Australia plummeted between April 2015 and March 2016. Expenditure in the March 2016 quarter fell by 49 percent compared to the same period in the previous year.

The driver of the decline is, of course, the 70 percent drop in the price of oil.

Cutting Deep

Australia’s Mermaid Marine Offshore (MMA) is one of the largest operators on the local scene. In its recently released annual report, the company announced it had cut staff by 50 percent and headquarters’ overhead by 24 percent. Earnings from vessels have been hit savagely.

“At June end they had sold 17 of their smaller vessels, recovering a total of A$40 million against a target of A$78 million,” says Peter Bremner, Director of consultancy Strategic Marine Group. “MMA’s position was further hampered by its unfortunately timed acquisition of Jaya Holdings of Singapore and a drop in the utilization of its Dampier Slipway. The Dampier facility docked 46 vessels in 2015 and only 28 in the year ending June 2016.”

Operators are cutting deep, says Bremner. They are refinancing debt, selling vessels, and in many cases achieving improvement from regional diversification. Norwegian operator DOF Subsea, for example, has successfully enlarged its footprint in Australia and New Zealand, and MMA sent some of its vessels to the Middle East and Africa.

Farstad’s and Tidewater’s Australian businesses are suffering a severe downturn, he adds: “It’s difficult to establish net changes in vessel numbers as some operators are deploying to other parts of the world, but it seems likely that at least 50 and probably more have been laid up or stacked.” Tidewater reported vessel revenue from the Asia/Pacific region in the June 2016 quarter of $8 million, down from $30 million in the corresponding quarter last year.

“Like ducks paddling, everybody is looking cool, calm and collected,” Bremner says. “Below the surface, however, there’s a lot of energy being spent on survival. As always, it will be the fittest left standing after this tough game.”

In Europe, senior executives from Island Offshore, Remøy Shipping and Bourbon Offshore have indicated that the increasingly onerous vessel specifications required by oil companies are not being reflected in their charter rates. Håvard Ulstein, Managing Director of Island Offshore, had considered converting the LNG engines on the company’s two gas-fuelled platform supply vessels (PSVs), Island Contender and Island Crusader, to diesel engines. That plan has now changed.

“Contender is on contract with Lundin. Crusader is in lay-up,” says Ulstein. “For now, we will not do anything with the vessels but try to keep Contender working. We are off course trying to get work for Crusader, but unless the rate covers the opex and part of the financing cost she will remain at the dock. It is a disappointment that these vessels are not more valued by customers.”

Gradual Improvement?

Ulstein foresees gradual improvement in the market over the next two or three years: “For all the OSV companies, the challenge is to stay afloat during the next two years. We have a comparatively healthy contract backlog for now. If the upturn comes in or before 2018, we should be all right. The light well-intervention segment is proving very valuable for us now, and it will be the first segment that will take advantage of the upturn.”

He also sees the subsea maintenance market making an early return and adds: “It will take a long time before ordinary supply vessels see good times again. The companies that are represented in several segments, including subsea, will have the best chance of survival.”

Bourbon has had success with its specialist AHTS Bourbon Arctic, delivered this year from Vard’s Brattvåg yard in Norway. Boasting a bollard pull of 307 tons, unrivalled winch and storage capacities and an A1 ice-class hull, the Bourbon Arctic is one of the most powerful and versatile vessels ever built, says Bourbon.

The vessel is designed for advanced anchor-handling and towing operations in remote regions and can operate in 80 centimeters (31 inches) of ice. ROV capabilities have also been added. Operating generally with a crew of 18 including trainees, the vessel has accommodations for 60 people and can serve as a floatel if required. Should the vessel ever take part in a rescue operation, she can take up to 300 people on board.

Bourbon Arctic’s first contract was unmooring the Island Innovator for Lundin Petroleum Norway and recovering its six-anchor spread. The second customer to commission her was Songa Offshore, followed by Shell U.K., Apache, Dong Energy and Statoil for the Songa Dee rig move, and Total U.K. At the end of June she started a new midterm contract with Lundin Petroleum Norway for operations in the Barents Sea.

Elsewhere, layups are more common than charters. Andrew Pointing, Group Director for Marine Assurance & Risk at LOC Group, says that many owners are laying up vessels either warm or lukewarm, with others stacked completely cold. In general, the longer and colder a vessel has been stacked, the more expensive it will be to reactivate, and the financial investment required to do this can be significant.

“We are now seeing that the rate of vessels going into layup is starting to reduce,” Pointing notes. “It is not easy to say how many vessels or what percentage of the global fleet is currently in layup, but there are around 100 vessels stacked in and around Norway and a similar number in Europe.”

Many newbuilds from Asian yards have gone straight into layup. Often built on speculation, the prevailing spot market rates have not been strong enough to support them. In Europe, most OSVs are built on the back of a contract, so immediate layup from the yard does not happen as often. “We are also seeing vessels being stacked as a result of contracts being cancelled or terminated early, particularly in Brazil, Australia and Europe,” Pointing adds. “Where the spot market is weak, owners are opting to stack vessels to reduce their fleet size and minimize operating costs and, hopefully, shore up spot rates.”

No New Orders

Yards are facing high rates of cancellations, even sometimes for vessels nearly built. Holger Dilling, Executive Vice President for Investor Relations at shipbuilder Vard, says the company sees very little demand for PSV newbuildings in the short term and even in the medium term. The situation is slightly better for AHTSs, with a possible recovery in the medium and high-end markets (suitable for use in the North Sea and High North, including the Arctic) within two to three years.  

“Common for all OSV segments is that we have not secured any newbuilding orders during 2016, and there are very few active projects in the market right now. Aside from a broad and sustained oil price increase, only trigger events such as a lifting or relaxation of the Russian sanctions could improve demand,” says Dilling.

He adds that “For the owners of existing assets, it is of course beneficial if they have flexible vessels in the portfolio in order to chase market opportunities. However, from a shipbuilder’s perspective it is also important to maintain focus on highly specialized vessels that stand out from the existing tonnage because if anything will be ordered in the near term, it will be for specific tender requirements that are not fulfilled by vessels in the current fleet.”

Damen Shipyards has adopted that approach with the announcement in July of its specialist decommissioning range. In order to deliver maximum flexibility, the concept design includes modular add-ons so it is not tied solely to the decommissioning market.

Damen believes its new Walk 2 Work windfarm support vessel currently being built for Bibby Marine could also play a role in the decommissioning market. The 90-meter vessel is longer than a conventional PSV, and Damen says the hull is designed to make stern-to-weather operations more comfortable than on a PSV. The design includes a diesel-electric main propulsion system powering twin azimuth thrusters and requiring less installed power than a conventional PSV.

A Dark Shadow

For now, though, new orders are few and far between. Fearnley Offshore Supply notes that about 140 AHTSs are under construction worldwide and 200 PSVs and adds: “In the midst of renegotiations with both banks and bondholders, an increasing oversupply of vessels seems to cast a dark shadow over the industry, with limited new hopes in sight.” – MarEx

Wendy Laursen is the magazine’s News Editor-Asia Pacific.