The construction vessel market has probably bottomed out and has a healthier outlook ahead of it than it has endured in the last two to three years
Market conditions in the construction vessel sector continued to deteriorate throughout 2016 as severely reduced offshore E&P spending bit into project sanctioning and inspection, maintenance and repair (IMR) demand and as work backlogs built up before the offshore downturn continued to erode.
Upstream cost pressures have prompted an uptick in mergers and acquisitions activity affecting the offshore construction sector, especially in regards to subsea engineering, procurement, construction and installation (EPCI) and services contracting.
Figures from Clarksons Research suggest that, as of the start of June 2017, estimated offshore project capex had risen by 23% year on year on an annualised basis – a sign that perhaps things are starting to move in the right direction for the construction vessel fleet, though risks remain.
Vessel oversupply is still a problem though, as even modern subsea support vessels have been put into layup. Rates for a multipurpose vessel with a 100-tonne safe working load crane deployed on North Sea IMR duties were assessed by Clarksons Research at around US$17,000–22,000/day, down from US$35,000–48,000/day at the start of 2014.
“Any improvement in utilisation and day rates is likely to be spread unevenly across the complex and diverse construction fleet of 2,734 units,” said the research arm of the well-known broker. “Vessels in the fleet can be notably idiosyncratic: some units are highly specialised; others are more multipurpose.”
One other positive note sounded by the company is that increased decommissioning activity and chartering opportunities in adjacent sectors – such as renewables – have given some (limited) support to construction units.
As the downturn continued, construction backlogs accumulated by construction vessels in the boom years continued to unwind. For instance, by the start of Q4 2016, the subsea contracts backlog reported by major engineering, procurement and construction (EPC) contractors had fallen to less than US$16Bn, down 60% on the Q2 2014 peak.
As 2016 progressed, increasingly adverse operating conditions piled financial pressure on construction vessel owners and EPC contractors. This resulted in some high-profile mergers that are intended to yield cost synergies in offshore construction, notably between offshore EPC contractor Technip and offshore fabricator FMC, who formed TechnipFMC, as well as the pending merger of Baker Hughes and GE Oil & Gas. (More recently, it has been suggested that Baker Hughes has held talks with Subsea 7 about a takeover.) A number of owners of construction assets, particularly of subsea support units, saw their financial positions weaken in 2016 and 2017 and were forced into Chapter 11 proceedings and similar measures.
Restructuring and refinancing activity is ongoing in some cases, while owners who are on a more secure financial footing are reportedly eyeing up potential distressed asset opportunities with regards to high-specification pipelayers and MSVs.
On the other hand, as highlighted above, there have been some tentatively positive signs for the offshore construction sector in 2017, with project capex increasing and several large EPCI and subsea umbilicals, risers and flowlines (SURF) awards (such as that for the installation of 17 subsea trees at ExxonMobil’s US$3.2Bn Liza Phase 1 project offshore Guyana) having been made.
However, as Clarksons Research also pointed out, energy prices remain volatile, and any improvement in the offshore EPCI markets could be undone if energy prices come under sustained pressure again.
As also highlighted above, much of the offshore construction activity on new field developments and expansion projects is conducted by EPC contractors. Examples of such companies include Aker Solutions, Larsen & Toubro, McDermott, Saipem, Subsea7 and TechnipFMC.
As a general rule, EPC companies compete with each other in competitive tender processes for EPC awards from oil companies. EPC contracts typically involve some element of fabrication work (which may be subcontracted) as well as installation work (the term EPCI contract is sometimes used). SURF contracts also fall within the purview of the contracting process at the EPC stage of a project. EPC contracts tend to be lump sum awards, so the contractors bear the burden of any cost overruns.
In some cases, EPC companies enter into long-term agreements (LTAs) with oil companies to be the ‘go to’ contractor for work at certain fields or clusters of fields. This is quite common in the Middle East, for instance, where Saudi Aramco favours this method of contracting for replacing fixed platforms and pipelines at mature fields such as Safaniya and Berri.
Whether or not an EPC contract is awarded under an LTA or through an open tender process, EPC companies typically deploy a range of large construction assets, including heavy-lift capable crane units, pipelayers, flexlay vessels and subsea support units.
EPC contractors usually own any required higher-specification ‘enabler’ units (resulting in barriers to entry for new players), and hence there is not a very liquid charter market for construction assets, in contrast to rigs and offshore support vessels. However, in some cases, tonnage may be chartered from third parties to supplement the EPC operators’ fleets.
Looking to the longer term, though, a somewhat more encouraging and robust picture is apparent. There are currently 718 offshore projects in the appraisal, pre-FEED and FEED stages of project contracting.
The combined capex of these projects, that is, the investment to be made at the EPC stage of contracting, is an estimated US$1.96 trillion. This capex, which would fuel demand in the construction vessel markets, is likely to be gradually unlocked in an improving energy price environment in which more projects would become commercially viable over time. Clarksons Research says this process is likely to play out well beyond 2020.
It might be expected that the shallow-water segments of the construction vessel fleets will be the first to benefit from any improvement in the oil price, as shallow-water fields tend to have a lower breakeven than deepwater fields. However, so far in 2017, the main change in project sanctioning has been the return of large, deepwater projects where final investment decisions (FIDs) had been delayed since the downturn.
For example, following the FID for the US$3.75Bn Leviathan Phase 1 project off Israel in February 2017, EPCI contracts worth hundreds of millions of dollars covering a large fixed platform, four subsea trees and 234 km of SURF items have been awarded to contractors such as TechnipFMC, Kiewit Offshore Services, Wood Group Mustang and Trendsetter Engineering.
Based on the portfolio of projects on the verge of FID in 2014, this somewhat counterintuitive trend might continue into 2018 and 2019, creating more opportunities to utilise high-specification construction assets such as the 69 large MSVs (with cranes of 250 t SWL or greater) sooner than might otherwise be expected.
Decommissioning could also create work
Further good news could come from the decommissioning sector. Before the offshore downturn, decommissioning had been fairly low key – a trend that was going to take off at some undefined point. There were just two offshore decommissioning projects in the EPC/removal stages of contracting and six in the earlier conceptual/planning stages at the start of 2015, but by the start of June 2017, these numbers had risen to 24 and 28 respectively.
Clarksons Research believes that, if decommissioning demand continues to increase, it could help soak up some of the spare capacity in the construction fleet. Crane vessels, self-elevating platforms and heavy-lift vessels will be needed to remove and transport topsides and jackets. MSVs, dive support vessels and remotely operated vehicle support vessels can be used to assist throughout decommissioning and will be especially important for removing subsea structures and for site remediation, when dredgers will also have a part to play. That being said, decommissioning is still an emerging market with many uncertainties regarding cost, scope and timing.