When recently watching an episode of Air Crash Investigation, the opening scenes made me ponder the state of affairs of the offshore marine services / vessels market in Southeast Asia. What struck me was the similarity in the attitude of the engineer with regards a faulty switch in the cockpit and the captain’s attitude towards it i.e. just a small glitch that can be ignored, and the workings of many boards and EXCOs in Singapore. It brought to mind that this is an attitude that prevails in a number of Southeast Asian companies when the first indicators of a serious downturn about to hit the market, were largely ignored.
What gave rise to this behaviour and attitude? In general terms, I would argue that two factors played a part. In the first place there is the issue of poor corporate governance, particularly with regards appointments of boards and corporate structures. Furthermore, we would see instances in which meeting agendas were manipulated and the integrity of information supplied to directors was questionable. I can recall sitting in a major offshore company boardroom in 2012 warning that the current indicators were not looking good and that attention should be paid to asset purchases without a business case, with a focus on opex and information bottlenecks. The types of data that were available and ignored included the increased productive output of oil/gas onshore (improved drilling, shale, etc), and the rate of newbuilds entering the market.
Trends that can be clearly seen in the news pages highlight the following:
- Tonnage has been taken out of the OSV market, exacerbating the oversupply in the market.
- Delays in delivery of vessels, some of which are up to three years. This is understandable when you consider that there are up to 600 OSV newbuilds in China, mostly built on a speculative basis
- Near crises levels in terms of debt restructuring– one only has just to read the financial news in the region to see how severe this has become, with the likes of Marco Polo and Swissco unable to meet bondholder repayments and Swiber on the verge of collapse as attempts to refinance meet with difficulty. Today, we read of Ezra having to call a special meeting with bondholders to get leniency for their upcoming $150m bondholder issuance.
Rather than focus on the headwinds being felt in the offshore marine sector, there was a recent headline in Splash that caught my eye: ‘DOF Subsea scores decommissioning contract from Ithaca Energy’. Is this the good news for the offshore marine markets which has seen vessel utilisation rates fall below 50% and in some cases rig utilisation sits at 23%.
After discussing this with players in the Southeast Asian market, it became clear that there was a mixed response, with most saying that this opportunity would have a limited impact in the region. The main reason being that offshore infrastructure in this region is relatively young when compared to the North Sea. There was also the notion that operators were not compelled to decommission. This got me asking whether this was the group think and approach, stated in the introduction, that got companies in the crises that they are in now.
When taking a look at the decommission market in the North Sea , and reading Scottish Enterprises report or Decom World, the following picture emerges.
Supply chain elements that would be impacted on, include the following:
- Rig abandonment infrastructure
- Removal vessels for topsides and substructure
- Ports/ supply base for recycling
- Engineering skills and operations resources.
The size of this market is driven principally by OSPAR decision 98/3 which prohibits the leaving of offshore installations wholly or partly in place. The guiding principle is that decommissioning must leave nothing in place with the installation being fully removed. This is a key driver when one considers that the average age of the North Sea infrastructure is 25 years old. Adding to this only 88 of the installations have been decommissioned to date – not much when one considers that 245 of these installations on the UK continental shelf are over 30 years old.
The financial size of this emerging sector is estimated to be about $3.5bn per year for the next five years, $25bn for the period 2016 to 2022. The opportunity for vessel / rig suppliers include those that can cover the following decommissioning methods:
- Piece work – small piece dismantling and cutting
- Heavy lift
- Reverse float over
- Single lift.
Over and above these supply dynamics are that the key drivers in the decommissioning market are fundamentally different to what is found in the exploration and production sectors. It is likely to be less cyclical in terms of impact as it not driven by the drive to meet production targets. In essence it is removing the element that has driven charter rates to their all time highs in 2014 i.e. supply inelasticity. In turn, better planning and vessel utilisation as there would be more flexibility in the arrangements, resulting in lower charter rates on a more sustainable basis.
An example of how this growing sector opens opportunities is found in recent UKGS statements. They have claimed that they will require jack ups, semi subs and drill ships over the next five years for decommission work. Currently the North Sea, courtesy of Rigzone, has over 90 active rigs that are able to support this activity. This would suggest that there would be a need to introduce other rigs to accommodate production service requirements. Was the recently announced Paragon North Sea jack up contract an indication of the potential benefits of this emerging opportunity?
In conclusion, these changes represent a paradigm shift, not only for this sector but for the boardrooms in Southeast Asia. It will require new thinking and approaches as the best way to take advantage of this new and growing markets based on vessel / rig synergies – after all these assets are mobile. The question is whether those in Southeast Asia can adjust to this in a planned and coherent manner, unlike what is on display at the moment.