Offshore backlog still to be cleared
With almost 500 vessels of various types laid up in mid-January this year and a further 25 or so confirmed as being sold for scrap, it hardly seems credible that any owner or investor would feel the need to order new ships. And yet there are more than 700 new ships in the world orderbook and optimism in the sector is growing again after several years of declining activity and financial troubles.
While there is growing optimism in the various offshore sectors, it is nowhere near the level needed to actually cause a revival in offshore newbuilding. Most of the 700 ships in the orderbook are not new orders but ships that were ordered some years ago and which have been deferred or delayed by cash strapped and occasionally bankrupt customers.
Almost 100 of the vessels in the orderbook are small crew supply craft although for the yards concerned, which include Damen, Grandweld, De Hoop and several more specialists in small vessels, they are the mainstay of activity and not considered as scraps to see them through to better times. There are also 20 of the largest vessel types comprising 13 gas processing vessels and seven FPSOs included among the figures. The bulk of the order book are mostly AHTS and PSVs with support and construction vessels, drillships and other specialist ships.
The cause of the sector’s recent demise was the fall in oil prices from around $120 per barrel in 2013 to under $30 in early 2016. Two years later, the price is nudging $70 and depending upon whether OPEC and Russia can continue to limit production, some analysts believe that it could end the year as high as $80.
The prolonged downturn has resulted in a number of high profile mergers and acquisitions among ship operators in the offshore sector but on the plus side, the production companies have devised ways of trimming their costs making fields profitable at prices even below what the current price is sitting at.
Another factor affecting the offshore fleet was that when the oil price was in the doldrums, Arctic exploration previously seen as the exciting future of offshore was pushed well down the agenda. In December 2016, in an unprecedented step the outgoing US president Barack Obama used an obscure 1953 law to attempt to impose a permanent ban on new oil and gas drilling in most US-owned waters in the Arctic and Atlantic oceans. Perhaps in anticipation of such a step and unwelcome actions by environmentalist organisations, Shell had already declared its intention to pull out of Arctic exploration.
A year down the line and things could not be more different. A legal action against the Norwegian government by environmental groups which aimed to make oil production in Norway’s Arctic waters illegal was thrown out in January with the judge awarding the legal costs against the plaintiffs.
There has also been a good response to the last round of licencing by Norway. In 2017 the predefined area was expanded by 87 blocks; 34 blocks in the Norwegian Sea and 53 in the Barents Sea. When the application deadline expired in September 2017, a total of 39 companies had submitted a record high number of applications for new acreage. On 16 January 2018, 34 companies were offered a total of 75 new production licences on the Norwegian continental shelf. Of the 75 production licences, 45 are in the North Sea, 22 in the Norwegian Sea and 8 in the Barents Sea.
The day before announcing the awards, the Ministry of Petroleum and Energy launched a public consultation for a proposal to expand the APA area with 47 blocks in the Norwegian Sea and 56 blocks in the Barents Sea. The deadline for comments on the proposal was set for the end of February with a decision to come later in the year.
Also in January the US Interior Department delivered on President Trump’s promise to reverse the Obama decision and announced plans to offer blocks in the Arctic, Atlantic and Pacific oceans for oil and gas exploration in a new five-year offshore lease plan. The proposals would apply to around 90% of the US outer continental shelf and would, if put into effect, be the largest lease sale ever and include areas never before offered. The plan is not without opponents and legal battles with some states are sure to be on the cards.
The prospect of new oil and gas exploration is likely to galvanise demand for offshore vessels, but these are not the only offshore sectors these days and demand for vessels connected with offshore wind is also growing. Offshore wind, until recently mostly European-based, is now being developed in other regions with the US state of Massachusetts and Canada both announcing ambitious plans in January 2018.
An increase in demand is not likely to lead to a sudden new order boom because of the large existing orderbook with its deferred deliveries and the number of vessels in lay-up. However, if increasing demand follows a gradual upward trend then at some point new orders will be needed.
This is because the delayed vessels will have been integrated into the fleet and it will become uneconomic to return laid-up ships to service. A large number of the laid-up ships will have been idle at the time their special surveys were due and with no work and no cash, owners would simply have taken no action.
The longer ships are out of action, the less attractive they become to potential charterers. The ships now on order will be more efficient and cheaper to run and will have better DP systems and other equipment. More than 1,000 of OSVs globally are above 15 years of age and more than half that number 25 years or above. The oldest vessels will contribute little in the way of cash when sold for scrap because of their low steel content. Younger vessels may find buyers in sectors outside of offshore where they can be used for cargo, aquaculture or even a platform for leisure use.
There is still a chance that more vessels in the orderbook will be cancelled. The most recent casualty was Island Offshore’s intended tophole drill ship Island Navigator of a Rolls-Royce UT777 design. The ship was ordered in 2014 when the downturn had just begun and expected to be temporary but was deferred because of Island Offshore’s financial position. Last summer, Kawasaki Heavy Industries the shipbuilder announced that the contract was in jeopardy and was finally cancelled at the end of last year.
Just how hard the downturn hit can be judged from the quantity of delivered ships since 2012. In that year the figure was 387 ships of all types rising to 510 in 2014. However in 2015 the figure dropped back to 404 as owners began deferring deliveries dropping again in 2016 to 277 and reaching a low of just 177 ships last year.
The effect of the deferments already agreed to, is that of the 718 vessels in the orderbook, 661 are supposed to have a 2018 delivery. A further 48 for next year and the remaining nine ships in 2020-2021. Quite clearly it would not be possible for all of the scheduled deliveries for 2018 to be absorbed into the fleet and many will be further delayed or cancelled altogether as was the Island Navigator.
Not surprisingly, China features strongly in the list of build countries accounting for no less than two thirds of the order book by way of 417 ships. Brazil is in second place with 45 vessels and India in third with 40 ships. These are trailed by the US (28 ships), South Korea(27) Vietnam(23) and Singapore (22). The rest are spread over several countries including Turkey, Romania, Spain, Norway and the Netherlands.
While some ships attributed to other countries may be completed in Norway, the country responsible for so much offshore innovation appears to have temporarily refocussed its shipbuilding on to the expedition cruise sector. In January, Rolls-Royce Marine announced that it was considering the future of its commercial marine business which would include many of the offshore equipment suppliers acquired in recent years and the design section. Maine engines would remain within the company’s power division.
On the positive side, some new orders may be expected this year, but they will be for ship types that are either under represented in the current fleet or for definite contracts. Two possible candidates are for Dutch heavy lift specialist Jumbo and Singapore-based Ultra Deep Solutions. Both companies signed letters of intent in December 2017 with China Merchants Industries.
The Jumbo vessel will be a heavy lift construction vessel and will be a customised version of the ULSTEIN HX104 design. If confirmed, it will be the largest X-BOW vessel to date and with its two Huisman mast cranes of 2,200 and 400 tonnes, will be capable to serve both the offshore wind and the offshore oil and gas industry. It is planned to be built with dal-fuel engines.
The vessel for Ultra Deep Solutions is a multipurpose well intervention/construction vessel with a hydrogen saturation diving system and is of a Salt 310 design. It will be capable of well intervention, flex lay and rigid pipe lay operations in 3,000m of water. This vessel will also feature Huisman equipment including a first-of-its-kind ‘Three-in-one’ tower.