Offshore in Meltdown

Malcolm Latarche
Malcolm Latarche

04 February 2016

From a relatively uninspiring beginning when offshore ships were mainly a motley collection of converted or modified fishing vessels, the sector has developed into one where innovation and dynamism have become driving forces. Given the devastation that has visited the offshore sector throughout 2015 it is likely that much of that innovation will vanish or at very least be put on hold to the detriment of the wider shipping industry.

To be viable, the offshore sector needs an oil price around the $70 per barrel mark although some fields can be profitable below that level. In the very first ShipInsight Journal in March 2015, we looked at where oil prices might go. At the time, the price was around $50 and we quoted two analysts’ predictions of movement through the year. It is interesting to look again at those predictions.

Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch, speaking on CNBC in February forecast both WTI and Brent falling toward $30 a barrel. Two days later on the same channel Neil Beveridge, a senior oil analyst at Sanford C. Bernstein, in Hong Kong said “We’ve seen the bottom of the current cycle and prices should go higher through the year and in the short term. We still have an excess of oil supply but that will slow during the year. Also we’re starting to see the green shoots of recovery, with stronger demand in China.” Beveridge predicted Brent crude should end the year at over $70 a barrel.

Through April and May it appeared as though it would be Beveridge’s prediction that would prove to be correct but after touching $67 per barrel in the early days of May, the price has once again headed downhill and in the first week of December was hovering around the $44 mark before dropping to under $38 in the middle of the month. At the same time the number of rigs idled had passed 1,000 and more than a quarter of a million jobs in the oil and gas industry had been lost.

Even more ominous for the offshore industry were two new views issued in early December when Brent crude dipped to under $43 a barrel, down more than 60% since last summer, and US light below $40 a barrel. The drops meant that oil is cheaper than a decade ago.

Patrick Pouyanne CEO of French oil major Total was quoted on the BBC as saying he “doesn’t anticipate a recovery in 2016” and in fact he thinks supply will grow faster than demand next year. On 4 December bankers Goldman Sachs put out a note suggesting prices could fall a lot further. “While forecasting oil prices over the next few months to be near $40 a barrel, or roughly where they are trading today, there could be another 50% to fall,” the investment bank said.

There are good reasons for those views, OPEC which is powerful enough to easily control the price of crude and which still accounts for around 30% of world oil production has so far refused to cut output despite requests to do so by some of its members. A position reaffirmed in early December at an OPEC meeting and in addition Iran looks likely to shortly be able to resume exports following the end of sanctions imposed because of its nuclear programme.

Looking further into the future, the impact of the COP21 agreement reached in Paris on 12 December is unclear. One reading of it would suggest that it is little more than a wish list with no legal force and no sanctions. On the other hand some believe that it could spell the end for fossil fuels. Most realists would not accept that as being an immediate threat but it does beg the question as to what vale untouched oil and gas will have if the world decides it can do without. Perhaps oil-rich countries might see more profit in selling it all while they can even if that means flooding the market at knock down prices.

European countries and in particular Norway have borne the brunt of the sudden drop in offshore activity. Oil and gas and the related services account for a large chunk of employment in Norway and it is the spiritual home and major innovator in offshore ship design. The sense of despondency in Norway is almost tangible and while oil and gas will remain the main revenue earner for the country there are moves to explore other avenues including fishing and apparently also fashion.

Among the big cutbacks announced by Norwegian organisations or the Norwegian arm of multinationals. Even partially state-owned Statoil is not immune and has initiated a programme aimed at cutting costs by almost $2Bn next year. As a consequence over 1,500 jobs and more than 500 consultancy positions have been dropped.

Statoil cut planned investments in 2015 by $1 billion to $16.5 billion and delayed the start of production at its Aasta Hansteen and Mariner fields to the second half of 2018 from 2017. The far north still features in the future though and the company has bid for future licences and has asked the Norwegian government to continue with environmental assessment of areas off the Lofoten Islands.

Another major offshore employer National Oilwell Varco which makes large offshore cranes and drilling equipment announced a further 900 permanent job cuts on 7 December. This is in addition to a similar number of permanent jobs in June when a further 600 contractor positions were also axed. The combined effect is a halving of the 5,000 positions supported at the beginning of 2015.

Norway’s largest offshore shipbuilder, VARD has also been affected and although it continues to win orders, it reported increased losses in its Q3 results adding to losses already recorded in 2014. VARD which has yards in Norway, Romania, Brazil and Vietnam still has a relatively healthy orderbook of over 30 vessels although three are fishing vessels and six are LPG carriers being built for Petrobras at VARD’s Brazilian yard.

While not technically a Norwegian company, Rolls-Royce has major interests there and offshore ship design and equipment makes up the majority of the company’s marine division activity in commercial shipping. In mid-November the company announced it would be restructuring its various businesses but so far no details have been revealed as to what form this might take.

The US-based hedge fund ValueAct, which had been growing its stake in Rolls-Royce and at the time of the announcements owned around 10% of stock, has made no secret of its desire to see Rolls-Royce divest its marine interests and concentrate on aero engine production. ValueAct is only permitted to take its stake as high as 15% under foreign ownership rules drawn up at the time of the company’s privatisation in 1987 so is not able to force its position on the company but given the poor state of the offshore sector and the company’s desire to reduce costs all outcomes are possible.

With existing rigs idled and no new work for the new OCVs and drill ships ordered in early 2014 in anticipation of continuing good times, there is little need for new offshore vessels at the present time. This has major implications for ship designers, builders equipment suppliers and for those involved in developing new technologies. While basic PSVs and AHTS are not in themselves the most innovative of vessels, they have proved to be useful test beds for new ideas in propulsion and manoeuvring over the last few decades.

Examples of the innovation seen in offshore ships include the use of LNG as a fuel for ships other than LNG carriers and coastal ferries and the initial use of battery power. To that can be added improvements in dynamic positioning systems, use of permanent magnet technology in propulsion thrusters and advancements in diesel electric management and control systems. As well as the technology of the ship, there have been major strides in developing new service equipment such as winches, ROV handling, cranes and ‘walk to work’ gangways.

It is easy to dismiss some of these innovations as being unique to the offshore sector and having little or no application in other areas but that is not necessarily the case. Take for example the various new bow forms that have been developed in the offshore sector. Ulstein, VARD, Rolls-Royce and Damen have all come up with new bow forms that are claimed to improve the efficiency, seakeeping or both of the ships built with them.

There are numerous offshore ships now operating with one or other of these new configurations and interest is also coming from other sectors. Rolls-Royce has already won orders for its designs from the cargo and aquaculture sectors and Damen and Ulstein from operators working in offshore wind farming. Cargo ship designs exist for some and while they may still be at the concept stage, it is possible that orders could come at some point.

The power and propulsion systems of offshore ships have evolved at a faster rate than in many other sectors. Dynamic positioning might be more necessary in offshore – including in offshore wind – but as a proven technology it could be employed on cargo ships as a manoeuvring aid that might reduce or eliminate the need for tugs more effectively than bow thrusters alone do.

However it is in the power production and management area that offshore has proven to be so innovative and where lessons learned can be employed in many other sectors. Most offshore vessels are diesel-electric and although in theory that can mean lower efficiency, the fact that the usual choice is for multiple engines means that power production can be better managed and engines only used as necessary and at optimum speed. It may take a long time for operators of large ships to consider diesel-electric but without the offshore heritage they would have little experience to draw on.

Another aspect of power is the advent of battery storage to level out peaks and troughs in demand. The concept has already migrated to the large ferry arena and cargo ship operators are weighing up its merits as well. While cargo ships may not have to cope with fluctuating power demand as much as an offshore vessel in DP mode, there are other aspects to battery energy storage that are more promising.

For example, excess energy produced by running an engine at optimum conditions even if all power is not needed to maintain a desired speed can be stored and used later when the vessel is in port or even entering port. Doing so would reduce the pollution potential of ships in port and reduce noise. Both of these could help reduce the ‘dirty’ image that shipping has unfairly acquired and would reduce the need to buy shore power that the alterative of cold ironing brings. Storing energy in a battery also provides a degree of redundancy in case of engine breakdown and adding a battery into the power mix also allows for other sources of power to be accessed. Without the initiative taken by offshore operators it is doubtful that the benefits of battery would have been considered.

Motion compensation of cranes, gangways and other equipment is an innovation that has applications in other areas. Because motion compensated gangways are still a novelty even in offshore, it may take some time for their benefits in other areas to be assessed. A factor that might help in this regard is the industry standard providing guidance on offshore personnel transfer by gangway developed by DNV GL.

Offshore gangways are used as a bridge between two vessels or between a fixed object and a floating installation to transfer people, cargo or equipment. For offshore operations, offshore gangways provide a safe and cost effective alternative to personnel transfer by helicopter, basket transfer or boat landing. The gangways can take many forms ranging from use for long duration personnel transfer between accommodation units and offshore production assets, to use for short duration transfer between service vessels and unmanned installations such as offshore wind turbines, offshore fish farms and similar installations.

Until now, the ISO7061 standard from 1993 has partly served as a reference document by industry for offshore gangway applications despite only addressing ship-to-shore transfers. Next to the ISO07061, offshore gangways are also certified against man-riding crane standards. The limited relevance and lack of offshore specific requirements has driven the development for a dedicated offshore gangway standard providing in-depth and specific guidelines on offshore gangway operation. The new standard, DNV GL- ST-0358, Standard for Certification of Offshore Gangways reflects the experience gathered on all relevant operating modes.

As can be seen, DNV GL has already identified the application in other areas such as fish farming and offshore wind but there are other areas where use of such gangways could be employed. The cruise industry is an obvious example especially in those ports where the increasingly large cruise vessels cannot be accommodated alongside. Transferring passengers to shore using tenders sometimes involves the use of the ship’s gangways under less than ideal conditions. Transfers using a shore craft equipped with a motion compensated gangway could be much safer.

Exactly how long the offshore industry will be stuck in limbo remains to be seen but as time stretches out it is certain that investment in new vessels and the innovation that comes with them will be postponed or put off completely. Shipping will continue with a smaller offshore sector but it will be the poorer for it in terms of ideas, engineering and experience. W