Oil price only a part of problem for offshore vessel owners

By Bartolomej Tomić

Offshore supply chain has suffered greatly since the oil prices started to fall from $115 a barrel in mid-2014.  

As a result of low oil prices, the oil companies started cutting capital expenditures and pulling breaks on exploration for new deposits, meaning that the amount of work for available offshore drillers has nosedived.

This, in turn, has led to a drop in activity and contracts for the supply vessel owners, providing goods for the offshore drilling rigs.

According to a recent report by Clarksons, there were cases in 2015, where thirty (30) drilling rigs competed for one single contract, moving the dayrates down, both for the rigs and for the offshore supply vessels that would serve the rigs.

Oil price only part of the problem

The oil prices have rebounded somewhat having averaged below $35 a barrel, and even reaching a low of $26 a barrel in January, lowest since November 2003.

Brent crude reached the $47.87 mark on Thursday, following a report by IEA that the consumption is expected to grow.

So, one would say, if the oil prices go back up, the workload for the offshore supply vessels will most definitely increase?

Well, in the long run, that may be the case, however, before that, the owners of vessels supplying offshore drilling rigs will stay in a Catch 22-like situation, where low oil prices are bad, but high oil prices do not necessarily mean immediate improvement.


To explain, Farstad Shipping, one of Norway’s largest offshore ship suppliers, said on Thursday that the market situation in the first quarter was challenging, with no evident improvement in the fundamentals for the offshore oil services industry despite the oil price rising from almost a record low levels.

The company, which owns 57 offshore support vessels of various types, says all regions it operates in, pretty much the whole globe, are still challenged with the continued declining activity.

This means more vessels available, and downward pressure on dayrates, forcing the vessel owners to send offshore service vessels into layup when the dayrates are below break-even.

The catch

So where is the catch? Well, in its quarterly results presentation on May 12, 2016, Farstad shares that the situation will not be enviable for vessel owners even if, and when the oil prices go back up.

Norwegian shipping firm believes that while there is still considerable uncertainty as to how long it will take before the offshore activity recovers, when it does, the supply vessel owners will face the challenge of tonnage oversupply.

This means that OSV owners might have shot themselves in the proverbial foot, as too many vessel orders had been placed during the time when oil prices were high.

“Despite the fact that the contracting activity of new vessels has stopped, there is still a significant number of offshore vessels on order,” Farstad said on Thursday.

That Farstad is onto something speaks the fact that another North Sea vessel operator, North American Offshore (NAO), took delivery of a new platform supply vessel in mid-April, but left the ship in the yard “awaiting improved trading conditions.”

What is more, NAO has one more vessel under construction at Vard, Aukra, slated for delivery in June 2016.

According to Westshore Shipbrokers, there are currently more than one hundred offshore supply vessels without work and laid up in ports in UK and Norway combined.

What’s ahead?

So what is the solution for the OSV market? Obviously, it’s hard to tell.

Siem Offshore, another Norwegian shipowner, recently said it expected that high-end tonnage might have an edge in scooping new project contracts.Oil price only part of problem for offshore vessel owners

Also, as the oil companies are cutting costs, they might prefer younger, more capable and fuel efficient OSVs, which could mean an increased scrapping activity of older vessels, leading to the eventual rebalancing of the market which is currently oversupplied.

However this is only a theory, and we will have to wait and see how it develops, but it might be a long and slow process given the fact that, at the moment, even those high-end newbuild vessels are being left in yards waiting for better times.

Furthermore, there is a sentiment that the oil prices might not go back to the pre-slump level. This could mean that the OSV operators might need to accept the fact that the dayrates will not be going back up significantly either, and that they’d need to come up with ways to significantly cut operating costs.


A new lease of life from Holland?


In the meantime, a Dutch shipbuilder, Damen, says it might have a solution to make the laid up platform supply vessels active and profitable again.
The shipbuilder’s design teams have come up with ideas to repurpose the laid up PSVs across several industries. For example, Damen offered to convert a laid up PSV into a profitable container feeder or, for naval operations, a logistic support vessel, or even a fish carrier.

Damen Sales Manager Remko Hottentot said: “The possibilities are numerous. It will also be possible to transform a PSV into an accommodation and O&M vessel.”Damen_Live_Fish_Carrier_8916

Offshore Energy Today Staff; Images by Farstad and Damen

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