Analysis of Supply and Demand in the Global OSV Market

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The demand for OSVs is strongly connected to the number of rigs employed by the exploration and production companies. The demand for certain specialized OSVs may be driven by factors other than the oil prices, but those are the exception rather than the rule. According to Clarksons Research, since the oil price slump, rates for rig have fallen more than 50% furthermore 300 rigs are laid up in June 2016 (Clarksons Research, 2016, pg. 9). As a result, this affected the OSV rates which have fallen by an average of 35% and reports state that there are as many as 1,400 OSVs laid up.

Too Many Vessels, Too Few Active Rigs

The two factors that drive revenue for OSV companies are offshore rig utilization and day rates. A study done by Clarksons Offshore Intelligence and AlixPartners analysis, the number of active offshore rigs is 33% lower than 2014 levels, declining to 474 in July 2018 from 706 in 2014. OSV day rates are 40% lower than in 2014 (Alixpartners.com, 2019). Other than the geopolitical factors and US oil infrastructure issues, abundant shale oil supplies in the near term and the impact of energy transition on oil demand in the medium-to-long term will likely serve as constraints on drilling a substantial number of new offshore wells.

By looking and analyzing these constant changes in the oil industry, the global OSV market seems currently oversupplied by about 1,150 vessels. About 900 vessels are 15 years or older which will have difficulty finding projects and could be retired, as newer vessels are more efficient, less costly, and more compliant with increased environmental regulations.

But there are factors preventing a reduction in the overall supply of vessels. Generally, the sector is fragmented, with the largest operators controlling 30% of the fleet and the remaining 70% controlled by 400 smaller operators with fleets of six or fewer vessels. Small operators have little incentive to retire any of their own fleets and are loathe to take action that would benefit the larger companies or the sector overall.

This decrease in demand has put the industry under significant financial pressure and the OSV operators have adopted strategy in response to the problem. The first reaction naturally will be of cost cutting, which has been taken. It is clear that operators in this area have studied carefully at their expenditure and reduced costs where possible. The next answer to many of the industry’s problems should be consolidation or mergers. However there have not yet seen major mergers or acquisitions in this sector. The below reviews the current state of the OSV market across the major regions

North Sea

The North Sea OSV sector is depressed, with supply exceeding demand, despite a few tenders becoming available in the market. Clarksons Platou expect 50 more OSVs to be laid up by year end with 2016 seeing the bottom of the market. The OSV owners operating in the North Sea are exploring opportunities in other markets both geographically and industry-wise. For example, it has been announced that Deep Sea Supply entered into a joint venture with Marine Harvest ASA which would build, own and operate aquaculture vessels.

Many of the OSV operators in the North Sea are also looking to raise finance. For example, it has been reported that Oslo-listed Solstad Offshore will receive USD 58.8 million in new liquidity from Aker ASA. This investment resulted in unexpected consequences for the Norwegian OSV industry.

West Africa

The OSV rates in West Africa remain low together with the overall reduced level of activity. Topaz Marine has reportedly cut its operations in the region by placing three vessels in Turkey whilst Oceaneering International has experienced early termination of an OSV contract by BP earlier in the year.

Tidewater, reportedly the operator of 93 vessels in West Africa, predicts a shift in investment focus towards natural gas in the region if oil prices remain at levels below US$40 per barrel. It seems that whilst existing oil projects are being completed future developments and resulting demand for supporting vessels will come from the gas projects.

US Gulf of Mexico

The OSV utilization rates in the US Gulf of Mexico fell dramatically in 2015 (below 60% compared to 80-90% prior to the fall in oil prices), which is to be expected given that the rig count in the US Gulf of Mexico decreased by over 25% between December 2014 to December 2015 according to AlixPartners.

Arabian Gulf

The Arabian Gulf is a special case in the global OSV outlook. The fact that companies like Saudi Aramco and ADNOC sustained their production levels benefited the local OSV market even though there may have been pressure put on rates. The rig count has declined only by about 5% between 2014 and 2015.

Tradewinds reported at the end of June 2016 that medium-size platform supply vessels (PSVs) saw an increase of USD 1,000 per day in May 2016 although the market overall remained flat. There were also reports of some 23 vessel contracts being awarded by Saudi Aramco in May 2016.

However, the influx of the OSV owners has created additional supply which is negatively affecting the rates.

Nevertheless, some owners managed to ride the wave. For example, Seatrade reports offshore contractor, GMS (Gulf Marine Services) as a good example of an Owner enjoying buoyant demand for its vessels. GMS is reportedly expanding its fleet and introducing a new class of mid-size vessels whilst others are focusing on surviving the depressed conditions.

To Consolidate or Not to Consolidate

Given the downturn affecting the OSV sector, many have predicted and advocated mergers or acquisitions as a solution to the industry’s problems. The rationale behind the consolidation strategy in an industry that is going through the difficult times is that companies that struggle to survive would benefit from the economies of scale by forming an alliance – the bigger the stronger. Consolidation helps to achieve greater efficiency and to reduce costs and overheads; it can give companies an opportunity for redeployment of the assets, expand their capability and gain access to larger projects and new strands of work.

Other sectors of the oilfield services industry, have shown more of an appetite towards significant mergers, the most notable would have been Halliburton and Baker Hughes.

However, this interest in consolidation has not been as active within the OSV sector. That is perhaps when AlixPartners consultants did a study of major OSV companies, it was found that more than half of those companies were headed toward bankruptcy unless they take measures. Swiber Offshore filing for liquidation at the end of July 2016 is a recent example of the perilous situation companies may find themselves in.

There to be a number of possible reasons for the lack of notable consolidations in the OSV sector. One reason is that the type of assets employed in the OSV industry varies greatly depending on the specialization of the particular operator and their area of operations. This complicates the task of finding a suitable company although it may also be seen by some as an opportunity to grow into a new sub-sector of services.

Another often quoted reason is that the offshore operators are often family-owned businesses who want to remain independent more than they want to be profitable. It is not easy to unite different business strategies and philosophies of the OSV operators where strong personalities are involved. It has also been said they are not experiencing pressure from the shareholders in the same way as other industries, which is usually one of the major drivers for consolidation. Additionally, it has been commented that banks are not putting pressures on the companies to realize the returns that were expected.

The recent acquisition of Rem Offshore by Aker shows that the decision can be soon taken out of the hands of the OSV operators. Having invested in Solstad, Oslo-listed Aker accumulated bonds issued by Rem Offshore and blocked the latter’s restructuring plan unless it agreed to merge with Solstad. Rem’s chairman has called Aker’s move hostile but other sources agree that it would ultimately benefit the Norwegian OSV sector.

The difficult and painful actions that are required now to become more cost-competitive and restructure balance sheets could create stronger world-class companies that can not only survive this crisis, but even thrive if the sector recovers.

References

Clarksons Research. (2016). Offshore – Page 9 – Clarksons Research. [online] Available at: https://clarksonsresearch.wordpress.com/category/offshore/page/9/ [Accessed 12 Nov. 2019].
Alixpartners.com. (2019). Offshore supply vessel companies face continued pressure | AlixPartners. [online] Available at: http://alixpartners.com/media-center/press-releases/offshore-supply-vessel-companies-face-continued-pressure-alixpartners-study/. [Accessed 12 Nov. 2019].
Howard, G. (2016). North Sea OSV lay-ups will rise 50% in 2016, broker predicts. [online] Lloyd’s List. Available at: https://www.lloydslist.com/ll/sector/ship-operations/article520592.ece [Accessed 12 Nov. 2019].
Riviera Maritime Media. (2019). OSV players venturing into new markets. [online] Available at: http://www.osjonline.com/news/view,osv-players-venturing-into-new-markets_42481.htm [Accessed 12 Nov. 2019].
Riviera Maritime Media. (2019). Another OSV operator looking outside of the sector. [online] Available at: http://www.osjonline.com/news/view,another-osv-operator-looking-outside-of-the-sector_43574.htm [Accessed 12 Nov. 2019].
Riviera Maritime Media. (2019). Investment expected to shift from oil to gas in West Africa. [online] Available at: http://www.osjonline.com/news/view,investment-expected-to-shift-from-oil-to-gas-in-west-africa_42199.htm [Accessed 12 Nov. 2019].
Professionalmariner.com. (2015). The Gulf’s offshore hiring boom comes to an abrupt end – Professional Mariner – May 2015. [online] Available at: http://www.professionalmariner.com/May-2015/The-Gulfs-offshore-hiring-boom-comes-to-an-abrupt-end/ [Accessed 12 Nov. 2019].
Alixpartners.com. (2019). Results-driven global consulting firm | AlixPartners. [online] Available at: http://www.alixpartners.com/en/Publications/AllArticles/tabid/635/articleType/ArticleView/articleId/1882/Oil-Price-Drop-Sinks-Offshore-Supply-Vessel-Market.aspx#sthash.GzvOwXs7.dpbs [Accessed 12 Nov. 2019].
TradeWinds | Latest shipping and maritime news. (2016). No hiding place for OSV owners amid global slowdown | TradeWinds. [online] Available at: http://www.tradewindsnews.com/weekly/766623/no-hiding-place-for-osv-owners-amid-global-slowdown [Accessed 12 Nov. 2019].
Regulation • Ports • Owners • Yards • Offshore • Classification • Marine Services Ready to step up. (n.d.). [online] Available at: https://mes.vdma.org/documents/106011/12126279/2_SMME%202016%20-%20Schiffahrtsbericht%20VAE%202015.pdf/401e30ec-fb2a-4326-9805-e101351d4252 [Accessed 12 Nov. 2019].
Tradewinds, 22 July 2016, page 24.

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