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Offshore Support Journal

The North Sea: is that a recovery on the horizon?

Thu 10 Jan 2019 by Martyn Wingrove

The North Sea: is that a recovery on the horizon?
Equinor's Mariner oil project provides employment for OSVs and a floatel (credit: Jamie Baikie)

Demand for OSVs in the North Sea suggests 2019 may be a foundation year, upon which growth will build in 2020

Owners of offshore support vessels (OSVs) in the North Sea market are anticipating another tough year in 2019 in terms of revenues and margins. But, after a flurry of term contract awards in December 2018, it looks as though fleet utilisation will steadily improve this year.

That energy companies are increasing their exploration drilling activities and development expenditure this year - driven by a few large projects and numerous small subsea tie-backs - is also cause for optimism.

“Like other offshore companies, we are operating in a difficult market and expect to see similar conditions in 2019,” said Østensjø Rederi chief executive Kenneth Walland. “The offshore segment is our biggest challenge, but we have a solid contract backlog and have achieved almost 90% utilisation of the fleet.”

He said Østensjø Rederi had now recovered from the downturn in OSV demand and rates and is better prepared for a demanding 2019, followed by improvement in 2020. “There are signs of more activity, but we will not notice much improvement yet,” Mr Walland said. “From 2020 onwards, there are several signs that rates and activities may pick up.”

He explained that stability in oil prices at higher levels means “oil companies are taking their previous development plans out of their drawers and launching projects.” There will be a period between project investment decisions and expenditure, which means any sanctions in 2019 will start to deliver contracts in 2020.

“We have reasons to be more optimistic,” said Mr Walland. “We know that the demand for oil will increase and there may be a gap between demand and production,” he explained. “Oil companies have to spend more money and find more oil.”  

This will result in more exploration and development drilling in 2019. To support these projects, energy groups contracted vessels in Q4 2018 on term charters of one year or more, which means fewer vessels will be available for spot charters in 2019.

“Oil companies are taking their previous development plans out of their drawers and launching projects”

Another positive note for 2019 OSV demand is the rise in rig utilisation in northern Europe. According to Seabrokers, rig utilisation had risen to 70% in December 2018, compared with 57% in December 2017, due to rig reactivations in readiness for higher demand and the demolition of outdated rigs.

Term chartering in 2019 will remove vessels from the Northern Europe spot market; nonetheless, the region’s fleet remains heavily over-tonnaged, which will keep a cap on term and spot rates throughout 2019. As will the number of vessels sitting in layup from the start of 2019, which could be reactivated from Q2 onwards depending on demand. According to Fearnley Offshore Supply, there are around 100 anchor-handling tug supply (AHTS) and platform supply vessels (PSVs) stacked in the North Sea region.

There will be times when spot rates for high capacity AHTS and large PSVs will spike to more profitable levels for owners during 2019, but, there will also be periods when spot rates will remain at close to non-profitable levels for owners.

“Looking into 2019, we still see a challenging market for the shipowners,” said Fearnleys. “Although we expect some improvement of the current situation, it is doubtful whether it will be sufficient to ease the pain. A considerable drop in the oil prices during Q4 2018 certainly did not help.”

Brent crude oil prices peaked at over US$80/barrel in October 2018, which was up from around US$60/barrel in the same period in 2017. By January 2019, oil prices had fallen back to below US$60/barrel, reducing profitability of North Sea oil projects and production.

“There are still too many vessels in the North Sea and it is imperative that more vessels manage to obtain employment elsewhere, are scrapped or taken out of service,” said Fearnleys.

During Q4 2018, 10 more vessels were laid up by owners worried about securing employment in H1 2019. Owners appear to have halted plans for scrapping OSVs, with Fearnleys reporting that just six, including two diving support vessels, were sold for demolition in Q4 2018, which brokers said was a low number of attrition.

“The simple fact is that if we are to ever emerge from the dismal oversupply that is currently dictating close to all aspects of the industry, we absolutely have to see this number increase drastically,” Fearnleys said. Its market analysts also highlighted that 12 PSV newbuildings were ordered in China in Q4 2018; however, there was a considerable (40%) increase in the number of term charters signed, compared to the same quarter a year before.

Term market day rates Q4 2018                 

  • AHTS >22.000 bhp: US$20,000       
  • AHTS 16,000-22.000 bhp: US$17,000
  • AHTS 12,000-16.000 bhp: US$14,000
  • PSV (Norway) deck >900 m2: US$14,000
  • PSV (UK) deck >750 m2: US$11,000           
  • PSV deck <750 m2: >US$10,000      

Source: Fearnley Offshore Supply

Term chartering should improve fleet utilisation and affect spot market OSV availability in 2019, which would be a positive, considering OSV employment dropped in Q4 2018 due to a seasonal downturn in offshore operations.

According to Seabrokers, spot market utilisation was as follows:

  • Large PSVs - 65% in December 2018, compared with 80-83% during Q3 2018.
  • Large AHTS - 47% in December, down from around 60% during Q3 2018 and a peak of 77% in August.
  • Medium AHTS - 52-58% from July to October, then fell to 31% in December.
  • Medium-sized PSVs - 72% in December 2018, compared with 58% in July and 64% in October.

In reaction to lower offshore activity levels in Q4 2018, considered by most to be seasonal, spot market rates weakened. For anchor handlers, average spot day rates dropped from around £15,000 (US$19,000) in October to £6,700 in November, before improving in December to about £12,000. Average PSV spot market day rates remained in the range of £5,500-£6,500 during Q4 2018.

Spot market rate ranges Q4 2018 (£/day)

 
 

October

November

December

AHTS >22.500 bhp 

6,000 - 30,000 

4,600 - 20,000 

6,900 - 23,000

AHTS <22.500 bhp 

6,300 - 30,000 

5,000 - 25,100 

7,000 - 34,000

PSV Deck >900 m2 

5,500 - 16,300 

3,700 - 11,000 

4,100 - 13,000

PSV Deck <900 m2 

5,200 - 16,300 

3,700 - 11,000 

3,900 - 9,500

Source: Fearnley Offshore Supply

   

Seabrokers suggested that spot market rates “failed to live up to owners’ expectations” and that “charterers have continued to hold the upper hand on the spot market for both the AHTS and PSV sectors”. This was because average spot rates in 2018 were below that which owners were able to achieve in 2017.

However, brokers noted an increase in the number of long-term contracts awarded for a firm period of one year or more, and a steady stream of multi-well or multi-month charters awarded in Q4 2018.

For example, three vessels that had previously been trading the North Sea spot market (Normand Naley, Sea Supra and Standard Provider) left this market in Q4 2018 to support Allseas’ pipelay operations in the Baltic Sea during 2019.

In the UK, Equinor chartered PSV Havila Borg for at least four months to support its Mariner project, which will keep this vessel occupied during Q1 2019. This was on top of chartering PSV Normand Skipper from Solstad Offshore for two years, plus two one-year options, and extending its charter of Solstad’s PSV Sea Falcon until November 2019.

In Norway, Equinor awarded a three-year contract to Island Offshore to use Island Clipper as a combined PSV and walk-to-work vessel and chartered Tidewater’s 2013-built PSV North Barents for two years.

Solstad and DOF anchor handlers towed Equinor's Aasta Hansteen spar in April 2018
 

Nordic American Offshore (NAO), which became under the control of Scorpio Group in December 2018, secured charters in the UK. NAO operates a fleet of 10 PSVs, delivered from 2012-2016, all of which are based in the North Sea market.

“The North Sea will benefit from a new group of focused players who are breathing new life into the region

Its 2013-built NAO Power was fixed for one year by Premier Oil, with options to extend this contract for another six months until June 2020. NAO also secured a contract from Asco Marine, which chartered the 2015-built NAO Viking on behalf of Team Marine for platform and rig supply work. This vessel was fixed for two years firm, plus two additional one-year options. Both vessels were built in Norway to the Ulstein PX 121 design.

In a separate deal, Asco Marine awarded a multi-year contract to DOF in Q4 2018, for PSV Skandi Aukra, which was already on charter to Asco on a prior contract. This 2012-built vessel has been retained for two more years.

Also in the UK, Perenco chartered PSV Seacosco Yangtze and emergency response and rescue vessel (ERRV) Putford Aries on three-month firm contracts for southern North Sea work. EnQuest chartered Brage Trader, which was acquired by Rem Offshore from Brage Supplier in Q4 2018, until February 2019.

North Star Shipping secured contracts from two energy groups in Q4 2018 for its vessels. Centrica Storage fixed Grampian Talisker for one-year firm for multirole ERRV support at the Rough gas storage facilities in the North Sea; this contract has two further one-year options. In a separate deal, CNR International chartered PSV Grampian Sceptre for a one-year firm contract with six further one-month options.

More offshore projects

Woodmac analyst expect more projects will progress past their final investment decisions (FIDs) this year. “Some key existing players, such as BP and Shell, are still sanctioning projects,” analysts said. “As confidence returns to the sector, we expect another bumper year for North Sea FIDs.”

Equinor's Johan Sverdrup field is the largest oil project in the North Sea for a decade

There are also new investors entering the North Sea, following acquisitions and successful exploration rounds. “New companies have brought fresh investment,” said analysts. “The North Sea will benefit from a new group of focused players who are breathing new life into the region – they will be responsible for 80% of the FIDs being taken in 2019.”  

Woodmac is also expecting an improvement in North Sea exploration: “It’s an exploration renaissance. Budgets are bigger and company portfolios are brimming with prospects matured through the downturn,” analysts said.

Despite this positivity, Woodmac’s analysts cautioned that there remains uncertainty ahead, such as the potential for another global recession and backlash from Brexit on North Sea investments. They do not anticipate any major fiscal or regulatory changes, but they do expect a continuation of cost pressures on contractors, rig owners and OSV operators.

2019 projects onstream

  • Q1 – Oda, Lancaster
  • Q2 – Mariner, Trestakk, Liberator
  • Q3 – Culzean
  • Q4 – Storr, Vulcan, Blythe, Johan Sverdrup

Source: Woodmac


Key market information

Brent oil price: October 2018: US$80/barrel - January 2019: US$59/barrel

40% increase in term contracting in Q4 2018

North Europe rig utilisation: 70%

>100 PSVs/AHTS in layup in Q1 2019

2019 development expenditure Norway: US$16Bn

2019 development expenditure UK: US$7Bn

2019 project sanctions: 23

2019 projects online: 10

2019 exploration wells: >60

North Sea – third of 2019 global subsea contracts

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