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Offshore Support Journal

Offshore Support Journal

Lean, mean and large is the only game in town

Tue 07 Nov 2017 by David Foxwell

Lean, mean and large is the only game in town

This week saw Brent crude and West Texas Intermediate climb to new 36-month highs of US$63 and US$56 per barrel respectively. It’s arguable that a correction is due, but for the time being at least the price of oil is being pushed higher, not just by fundamentals and by OPEC but by concerns about what’s going on in Saudi Arabia.

Leaving aside for a moment whether a correction is due, when it might happen and how big that correction might be, the consensus is that, as Roy Donaldson, former chief operating officer at Topaz Energy & Marine put it recently, the industry is not ‘home’ yet, but the oil price stabilising at around US$60/barrel is something we could only have dreamed about a year ago.

Life looks a lot rosier – or perhaps less bleak – than it did only a few short months ago. But will it be a rosy future for everyone? I don’t think so. If the market has at least stabilised, the question that needs to be asked is “who is going to be best-placed to take advantage of stabilisation and of the recovery we all hope to see?”

The answer is, as Mr Donaldson put it, that companies who have embraced the challenge of restructuring and impairment will undoubtedly be best placed to take advantage of the turnaround, simply because they are going to be more competitive than their counterparts.

“The recovery, if indeed it is here” – or coming – “will bring interesting times and those that recover quickest will inevitably be the ones who adopted the best strategy in the recession,” Mr Donaldson said.

As another commentator, Jeremy Punnett – whose blog should be required reading for anyone interested in the economics of operating offshore ships noted recently – the reason why companies who have restructured and taken impairment will be better placed than others is because the oil and gas supply chain “had better get used to a low-cost procurement environment for a long time.”

“The fact is for both rigs and vessels there is huge latent capacity, and this will mean the supply chain is under pricing pressure for years,” said Mr Punnett in his latest blog. “Offshore supply has changed structurally: it will become dominated by a few large players with massive fleets and low margins that mean scale is vital.”

As he also noted, subsea contracting looks set to be dominated by a few large profitable contractors, in a flight to quality, while offshore support vessel owners who supply them will find it harder to make money due to long-lived over capacity. “All this is a structural change in the industry and there is likely to be lower industry profitability regardless of how big a rebound is,” he said.

As Mr Punnett notes, when the number of projects starts to rebound – and it will take a long time to re-employ the engineering capacity required to do this – there will be a cyclical upswing as overall demand for these assets increases.

However, this is unlikely to see the entire industry benefit as a smaller number of companies at the contracting end of the market will still be able to use their market power to charter in excess capacity at a low marginal cost.

“Whereas pretty much all business models used to work in offshore, that is patently not the case now,” he concluded.