this is from the Autumn 2015 Newletter put out by the vessel broker Marcon International
OSVs on the Edge of the Abyss
The pressure is certainly building and it appears only a matter of time be-fore it reaches a level of critical mass.
The offshore industry is about eight months into a prolonged downturn after Saudi Arabia unilaterally decided to keep the oil spigot open in the hope of gaining market share. This combined with strong output from US shale and Canadian sands has led to a glut of crude across the globe leaving oil prices languishing. There was a glimmer of optimism in June as oil prices started to creep up again, but this was quickly dampened by early August as prices were back to their six year lows of below $50/bbl.
Simplistically put, many OSV owners and operators rely on drillers keeping their rigs working, who in turn rely on oil companies spending vast sums of money to continue exploring for yet more oil with additional sums spent on field development and production. The oil companies in turn rely on selling said oil for higher prices to keep the whole finely tuned economic engine running. Unfortunately, all of these parties are suffering these days due to the current low price of crude oil.
In the Gulf, OSV tonnage by the veritable mile is now tied to the docks, and when there isn’t enough room quayside, many have dropped anchor out in the bay or up the nearest bayou. Some OSVs are in warm lay-up hoping for work while others are laid up “cold-iron” with all power off and doors chained and padlocked. Revenues are down with CFOs battling to make ends meet. Share prices have slumped by over 50% in some instances and banks and investors are getting nervous as covenants and loans come due.
In Europe things are little better. One broker is now publically reporting the increasing number of vessels in lay-up. By a very rough calculation, over $1bn of high tech AHTSs and PSVs are now quietly gathering dust. Bourbon reported in early August that in the first half of the year they had laid up over 25 vessels, or about 10% of their global fleet according to Sea-web.
Adding to the pressure is the overhang of newbuilds ordered in the 2012 - 2014 period which are still being delivered. At least for the US, this is due to a much anticipated increase in demand post-Macondo. Currently IHS–Petrodata lists over 510 deepwater OSVs worldwide either on order or under construction as of July 2015. Some orders are being delayed or cancelled outright; some deliveries are ending up as fleet replacements as older units are scrapped, but a portion of the newbuildings will further increase the overall fleet size worldwide.
Given that the struggling oil price is the main driver for the OSV market, the question is how and when will the current oversupply in the market get taken up?
The current prognosis by most is not one of optimism for the remainder of 2015 and many are now saying that 2016 could be bleak as well. The question looking further out is whether this is part of the typical boom-bust cycle we continually see in all areas of shipping or maybe the slow start of a much wider structural upheaval across the industry. According to OPEC, long term indicators suggest that demand for oil and gas are expected to rise for the next 25 years but at unequal rates. However they also predict that the world will be producing more oil than it can consume for the next couple of years.
For the industry to realign, we expect to see some rationalization through accelerated scrapping regimes, bankruptcies, mergers and acquisitions and a drastic slowdown in newbuilding orders. This means extremely lean times for shipyards ahead, similar to the mid-late 1980s after North American OSV deliveries plummeted from 301 in 1981 to about nine in 1986. “Déjà vu” as recognized if you read Marcon’s Winter 1987 newsletter article “Offshore Petroleum Forecast”.
In the past, it has taken time after oil prices rebound for projects to come back online and to allow drilling operations to resume. This is what is necessary before we can revitalize the OSV market. In the meantime, there are many vessels for sale, both openly and privately. Prices continue to fall as owners need cash flows now. As in previous cycles, there will be winners and losers. The question ultimately becomes who will be left standing this time when oil prices go back up?
I cannot agree more...this is 1986 all over again only this time with fewer big players each having borrowed a tremendously greater amount of money to build almost as many vessels on spec but this time the boats are infinitely more complex and expensive.