OSV owners are “optimistically pessimistic”

When newbuilds on both sides of the Atlantic are delivered straight into layup, or ‘into stack’ as our colleagues in the US put it, you know that the market is in a bad way, but then it is only to be expected when offshore vessel owners’ clients, the oil companies, are cutting costs and postponing projects in response to the decline in the oil price.

At the time of writing this in early/mid-February, the oil price had actually rallied strongly. Technically, it had risen by around 20 per cent from its most recent low point, but when that low point was around US$40, there is obviously still a long way to go. Earlier, BP had announced that 300 positions would go in its Aberdeen operation, and days later, Talisman announced 300 job losses in its North Sea workforce. Contractor DeepOcean said roughly 30 per cent of its workforce in the UK would be cut. There is real concern about what prolonged low prices might mean for the North Sea as a market, but interestingly, in the US, the effect of low prices continues to be most keenly felt not in the number of rigs in the Gulf of Mexico but on land.

There have been a few ‘silver linings’ to the current crisis: as highlighted in the January/February 2015 issue of OSJ, the decline in the oil price has led to a decline in the value of the Norwegian krone, making the services offered by Norwegian companies more competitive. As Fearnley Offshore Supply AS (FOSAS) noted recently, currencies in countries heavily dependent on a high oil price – such as Norway, Brazil and Russia – have weakened significantly, which has come in handy for owners of the large fleet of Norwegian offshore vessels, making them more competitive in tenders in other parts of the world, although the number of new tenders is falling and the number of bidders is growing. As another well known broker, Westshore, also noted, for yards, the falling oil price has resulted in mixed fortunes, for the Norwegians at least. On the one hand, it has resulted in there being little appetite for ordering new vessels. Speculative newbuild ordering from owners has all but dried up. However, the weak Norwegian krone has meant that suddenly, for foreign owners, building in Norway is a very much more attractive prospect.

In Southeast Asia, there are also glimmers of hope but reasons to be downbeat. Reduced activity and ample supply do not create balance in the short term. “The positive news is that we’re nearing the end of the orderbook for anchor handlers, and there is not much of an upswing required before it will be reflected in rates,” said FOSAS. “Unfortunately, the same cannot be said for the PSVs, as we’re still seeing a substantial PSV orderbook, currently at 24 per cent of existing fleet.” Large platform supply vessels (PSVs) particularly have been heavily ordered in the last few years, with a present orderbook of around 50 per cent of existing fleet. FOSAS does not expect an uplift in rates for PSVs until we have worked our way through the deliveries. Asian day rates stayed flat with a slight dip towards the end of the last quarter. Traditionally less volatile because it is a much more commoditised market than the North Sea, for instance, low barriers to entry have seen yards churning out vessels, resulting in a saturated market. “We are seeing falling vessel values across the board as a result of reduced earning potential,” said the broker.

There are other reasons to be a little optimistic. FOSAS noted that, after being “paralysed” by the sudden change of sentiment, the market started moving again towards the end of 2014, and gradually, earlier discussions and tenders for 2015 and 2016 were reactivated. Things seemed to be getting better in terms of planning operations and sourcing certain types of vessels, said the broker, although the competition is expected to be fierce, with large numbers of available vessels in most segments. Overall, however, the falling oil price has led to a significant drop in rates and reduced utilisation. As FOSAS’s representative in the Gulf of Mexico market put it, “The final quarter of the year will long be remembered for the spectacular fall in the oil price and the resulting change in sentiment felt around the market worldwide. Whilst the Gulf of Mexico certainly felt the strain of that change in mood, it was the fear of what might occur rather than the reality that led to a widespread fall in rates and a slight reduction in utilisation.”

As with any sudden market change, the knee-jerk reaction is to race for utilisation at any cost. October and November saw owners holding firm with a willingness to wait for the ‘mid-sized’ demand to materialise, but in December, many bowed to the inevitable, and 2015 has dawned with low rates for all. Exploration is inevitably the first cost to be cut whenever there is a substantial fall in the oil price, and this time around is no different, so unless there is a quick rebound in the oil price, rather than being cautiously optimistic, said FOSAS, “we are forced to revise our future expectations to ‘optimistically pessimistic’”. OSJ