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Offshore players call for increased scrapping to clear severe oversupply

Offshore players are calling for a significant increase in the rate of scrapping elderly offshore rigs and vessels if the market is to see any chance of recovery in the next few years, where oil prices are likely to stay low.

Following the plunge in crude oil prices, the entire offshore oil and gas exploration and production chain from the oil rigs right down to the offshore vessels has come under severe pressure from low utilisation and charter rates.

On the OSV side, there could be an oversupply of 600-700 units of PSVs, and 800 AHTS vessels, while global utilisation of offshore supply construction vessels (OSCVs) is down to just 40%, according to data shared by Hassan Assad Basma, founder and ceo of HBA Offshore.

“The industry has a habit of being overly optimistic so people tend not to scrap the excess units but stack them, hoping they can come back into the market since they do not have much scrap value in any case,” Hassan told the Singapore Offshore Finance Forum held late last week.

“But with hundreds of vessels in excess and unless drastic scrapping takes place, cold stacking is not going to work anymore,” he warned, pointing out that the global OSV fleet is projected to grow further by approximately 18% in 2016 and 2017.

“The (OSV) market is terrible,” Venkatraman Sheshashayee, ceo of Miclyn Express Offshore, summed up the state of the market. He urged the industry to scrap old units and take the step of cancelling newbuildings rather than just deferring them. “The payback period of a PSV used to be four to five years but now it is 10 to 12 years.”

Sheshashayee highlighted that while the crash of oil prices has contributed to the offshore downturn, the current slump would have happened regardless of oil prices, as the industry has already overbuilt. “This market is a wonderful mirror and we just need to look at it and see what we have done to ourselves,” he quipped.

Jesper Kragh Andresen, ceo of Axis Offshore, agreed that more scrapping activities would help the market, but expressed reservations on cancelling orders as one needs to consider the stage of construction.

Andresen, meanwhile, shared that the more niche accommodation vessels market has yet to be hit by the same degree of turmoil as its adjacent OSV segment, but the former is no longer a “safe haven”.

“Over the coming years, there could be regional oversupply as newbuildings are coming out, and any asset older than 30 years is a very strong candidate for retirement. The (accommodation vessels) market will get increasingly difficult until at least 2018,” he believed.

Further upstream in the drilling rig market, this year will likely see a number of mergers and acquisitions going on and restructuring of companies hit by losses, as well as more idled rigs heading to the scrapyard, according to Manav Kumar, president and director of Dynamic Drilling Holdco.

“It is no surprise that 2016 will be a challenging year for the drilling rig market. We have seen in the last two years more rigs being scrapped compared to any other year. And as utilisation rates continue to fall, more older rigs get cold stacked, and oil companies negotiate contracts only for higher capacity rigs at lower rates, the rate of scrapping will only increase. Moreover, bringing cold stacked drilling rigs back to work actually require more money and work, so scrapping them would be a better option,” Kumar observed.

Geir Sjurseth, managing director, head offshore finance, DVB Bank, said the offshore sector could be facing another two to three years of severe downturn, in view of the “huge excess of offshore equipment” that is not absorbed by demand. “We seem to be in phase one of the downturn and we do not know how many more phases will there be,” he said.

Sjurseth said that the plan at DVB Bank is to help the industry “breathe for another two years” and he believed that the packages that the bank has put together for clients will take them through 2016-2017.

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