New normal emerging in offshore marine

Singapore

MUCH has been said about the offshore marine sector taking a hit from capital expenditure cuts imposed by oil and gas companies as a result of persistently low oil prices, but close industry watchers would have noted the inconvenient truth - that the first signs of cracks emerged way before oil price tumbled during the second half of 2014.

Back in January 2014, Shell had already said that it was looking to cut capital spending to US$37 billion in 2014, down from US$46 billion in 2013. This was followed by a February statement from Statoil, spelling out an 8 per cent cut to its investment goal for three years through 2016. Both Shell and Statoil - along with ExxonMobil and other majors - were posting lower profits as a result of rising costs and stagnant oil prices. As a consequence, the focus had already shifted to conserving cash over expanding production by sanctioning more new field developments.

Analysts were quick to pick up from the majors, issuing warnings of offshore drilling day-rate declines on the back of a then-developing supply glut - again another early signpost of a soon-to-come market correction.

It could be said that offshore marine players had seen it coming months before oil prices fell by half from above US$100 to sub-US$50 by late 2014.

Yet, the industry as a whole had underestimated what was to come. Many were still hopeful of a V-shape oil price recovery - perhaps fuelled by the stunning comeback in 2009 from the last 2008 collapse to under US$40 from a peak of US$147 earlier the same year - that did not materialise. Instead, oil price failed to break the US$60 barrier and tumbled to US$40, then under US$40 closer to the end of 2015.

This prompted a reference to the 1980s when oil fell to under US$10 and took decades to rebound to pre-bust level, as one Wall Street Journal report pointed out in January 2015.

Fast-forward to 2015, the offshore marine sector is grappling with supply-side issues over and beyond the demand destruction following the oil price collapse encountered in the 1980s. "There is just too much capacity in every offshore segment as capital investments fall and competition intensifies within the oil supply chain," David Palmer, chief executive of Pareto Securities Pte Ltd - the Singapore branch of leading offshore marine brokerage - lamented at a Markel-organised industry seminar.

Mr Palmer attributed the overcapacity partly to the Chinese shipbuilding industry. "Chinese shipyards (had) irrationally killed any sector of the shipping and offshore markets," the Pareto chief opined, citing 405 vessels on the official order book and potentially another 200 unreported units that could be delivered from China. These include 139 anchor handling tug supply vessels and 266 platform supply vessels, representing 8 per cent and 18 per cent, respectively of the global fleet, he said.

Pareto's statistics also showed 123 jack-up drilling units and another 57 floaters were on the order book at the time of the Markel presentation, but other analyst estimates suggested as many as 132 jack-ups and 71 floaters are under construction.

In two other key segments - subsea and floating production - in which speculative newbuild investment may have been more subdued, vessel owners and operators have also struggled to replenish their order books and upkeep their margins as oil companies delay final investment decisions on new field developments.

The drastic downturn has seen many announcing massive layoffs to cut costs and some companies have gone bust. The remaining offshore marine players have been fighting hard to cope with the reality of low oil prices, evident from a cost deflation, which Energy Maritime Association managing director David Boggs noted, has already been happening across the exploration and production value chain. Data from other industry players supported Mr Boggs's observation - operating day rates were down by up to 60 per cent across all classes of OSVs (offshore support vessels) and offshore drilling rigs. Deep-water assets took a harder hit initially, but this soon proliferated to the shallow-water segment.

"For the first time since that downturn, which came just after the fleet build-up with limited supply-side diversification, day rates for new floaters are expected drop to opex (operating expenditure)," Mr Palmer said.

The fall in jack-up day rates has caught up in some sectors with the floaters, as Clarkson Platou October 2015 data suggested, with West Africa fixtures for the first nine months down over 47 per cent.

The OSV sector is in negative margin territory now and this will continue through 2016. Day rates have come down 40-60 per cent and fleet utilisation is also down 40-60 per cent, Singapore-based marine brokerage, M3 Marine managing director Mike Meade said.

"OSV players are undertaking major cost containment exercises - they cannot control the oil price, demand or supply, the only thing they can do is control their costs and lay-up (stack) idle vessels," Mr Meade observed.

While thousands of staff had been let go by oil majors and large-capped oilfield services providers such as Schlumberger, Mr Meade noted attempts by certain OSV players to mitigate against brain drain from the industry.

"One major OSV player has imposed voluntary no pay leave through the ranks of shore-based and seagoing staff from the managing director to the cleaner and the master to the galley boy," Mr Meade said.

In the subsea segment, large-capped players such as Technip and Subsea 7 have been retrenching contracted-in vessels, he said. They are also seen competing for inspection, maintenance and repair contracts - which are more prone to day-rate fluctuations - against Tier 2 contractors because less engineering, procurement, construction, installation and commissioning (EPCIC) contracts - typically negotiated on lump-sum or project basis - are on offer.

Meanwhile, vessel market values have also fallen under pressure and newbuild prices have come down. Topaz Energy & Marine ordered new ships at Vard in Norway for less than US$70 million apiece. These vessels are comparable to Daya Offshore's Siem Daya 1, which changed hands from Siem Offshore for around US$120 million, Mr Meade said.

Such industry-wide cost deflation - resulting from supplier cost and commodity prices reductions and US dollar appreciation - has already led to 20-30 per cent cost reductions in the deep-water segment, SBM Offshore said in a September 2015 Pareto conference presentation.

Drilling costs were down by 50 per cent, subsea by 30 per cent and others - including well services and equipment marine transportation - by 10 per cent, according to SBM Offshore. The floating production player also indicated 20-30 per cent cost reduction in FPSOs (floating production storage and offloading), in line with EMA's observation.

Mr Boggs said that labour costs in the FPSO segment have fallen by at least 20 per cent, despite flat material costs, supporting an overall 20 per cent segmental cost reduction. He also noted in Brazil, cost deflation has lowered break-even for deep-water field developments, which were economical at US$45 when oil price was US$100 or above. The new break-even pre-salt field developments in Brazil has lowered to US$38 oil price, according to oil and gas newspaper Upstream.

While an industry-wide deflation may have been helpful, an SBM Offshore spokesman in echoing an increasing call within the industry, warned: "Fundamental and sustainable changes (will be needed) to ensure that cost savings are not lost through inflation when the market recovers."

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