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Focus on term charters suggests North Sea market may be improving

Wed 24 May 2017 by David Foxwell

Focus on term charters suggests North Sea market may be improving
Recent activity on the term market in the North Sea suggests that charterers want to fix vessels before rates increase further

Charterers have turned their attention to fixing vessels on term charters, rather than on the spot market in the North Sea, which could be a sign that the market is improving. 

A noticeable increase in tenders and in the number of vessels in the North Sea that are being fixed on term charters is being interpreted by some analysts as a sign that the market has bottomed out. However, brokers suggest that although there has been a noticeable increase in the number of term charters, vessels are still being fixed at rates that barely meet operating costs.   

Inger-Louise Molver, senior offshore analyst at Westshore Shipbrokers, said that as of the end of April, 30 term fixtures has been concluded in the North Sea compared to only 14 in the same period in 2016. What is more, she explained, there are still a handful of enquiries outstanding from Total Norge, Nexen, Providence, CNR, Statoil and Repsol.

“In Norway, activity over the last couple of years has almost been exclusively Statoil. That is no longer the case with the emergence of AkerBP as a major player on the sector plus a handful of other operators with increased activity. ConocoPhillips Norway recently contracted two Solstad vessels – two that will be taken out of layup to fulfil the contract,” she said.

Adding a note of caution, Westshore’s senior analyst said, “Whether or not this is increased demand remains to be seen. Not all term charters are alike.” She explained that a number of vessels fixed on short-term deals, having been taken out of layup, have only been fixed for short periods, sometimes only 3-6 months, largely in relation to platform supply vessel (PSV) support for drilling programmes.

“What happens beyond this point?” said Mrs Molver. “If these vessels come off contract and the owner tries their luck on the spot market, our opinion is that there is no room for more vessels. Ultimately, if no further term work is secured the best option is to put them back into layup.”

The spot market in the North Sea has been relatively tight for the last couple of months and rates have risen to levels vessel owners have long waited for. “Looking at it from their perspective, they will be eager to get vessels out of layup and out working,” said Mrs Molver.  

“Seeing rates at these levels sends a strong signal for taking vessels out of layup – even without a term charter in place. As brokers we understand that, but the fact is some vessels will fare better than others.

“Larger decked vessels will have more luck in securing work, particularly off the back of drilling campaigns, where intense drilling programmes are requiring more and more PSV support. This means vessels with larger decks. In some cases, vessels are being used as floating storage when the deck of a rig is insufficient to accommodate all the necessary equipment and pipe for drilling. Again, this means larger decks are preferred.”

Westshore’s analyst said the increase in term charters can be interpreted as a sign charterers believe that day rates are rising, and that the spot market is no longer the go-to place for vessels. “More term chartering reflects a view on charterer’s side that the market is picking up, but for owners it’s still very much hanging in the balance. Too many vessels taken out of layup will prolong the downturn, so caution is to be advised.”

Another well known broker, Fearnley Offshore Supply AS (FOSAS) noted that demand for anchor handlers picked up in February and March, which led to an increase in rates. In this period, it says, the average rate was about £40,000 (US$52,000) per day – the highest deal it logged was £74,000 per day. However, rates dived soon after, with spot market rates averaging around £10,000/day.

Moreover, as the broker noted, these rates do not take into account utilisation levels. “Today, the anchor handler utilisation rate is below 40 per cent giving owners average earnings which are far below operating costs,” said FOSAS, noting that vessel departures from the North Sea, to the Asia Pacific region and Canada have thus far not given the owners the comfort they had hoped. She said that, to some extent, vessels that have departed from the North Sea market have been replaced by the handful of vessels that have been taken out of lay-up.

FOSAS said it expects the PSV market to remain challenging. Spot market activity in the UK sector has been higher than in Norway, although at times there haven’t been any PSVs available on either side. At times, it says, PSV rates have increased to levels between £15,000 and £20,000/day, but these have been few and far between. It says that between the start of the year until the end of April, spot rates varied from less than £5,000 to more than £10,000, with an average close to £7,000.

It confirmed that the term market has been relatively active with several vessels, especially large PSVs, fixed for periods up to four years firm plus options. It also confirmed that several vessels have been taken out of lay-up, some to commence term charters, although reportedly some charterers are reluctant to take vessels on term charter following a period of layup.

“This is motivating some owners to take vessels out of lay-up – even just to trade the spot market,” said FOSAS. “Lately, the utilisation rate for PSVs has been 80-85 per cent. Term rates for PSVs are still very challenging. Even for charter periods exceeding 12 months owners have shown a willingness to fix tonnage at rates equal to OPEX – that is, £5,000-7,500/day.

“The general consensus is that the hardest and toughest period may be behind us,” FOSAS concluded. “An important reason underlying this unusual term chartering activity is that charterers want to take advantage of the present low rate level.”

 

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