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Offshore to stay under pressure from oversupply even in firm oil market

Offshore to stay under pressure from oversupply even in firm oil market
The severe overhang of offshore oil rigs and related equipment is anticipated to continue weighing heavily on the offshore market even if oil prices rebound, and rigbuilding yards are expected to face prolonged challenges, according to a panel of offshore leaders.

With the collapse of global oil prices, activities in the offshore oil and gas sector have significantly slowed down, leading to depressed utilisation and charter rates for oil rigs and offshore vessels, impacting also yards that construct rigs and OSVs.

“On the rigbuilding side of the business, while I am encouraged by forecasts that oil prices will come back up, I believe there is a still a lag in recovery for rigbuilding due to oversupply,” Chow Yew Yuen, ceo of Keppel Offshore & Marine (Keppel O&M), said at the Sea Asia Offshore Marine Forum held in Singapore on Tuesday. The forum was jointly organised by Seatrade and the Singapore Maritime Foundation.

Chow noted that in China, an excessive number of rigs are currently under construction, with the figure easily reaching 60 units, enough to flood the market even if oil prices rise.

The Chinese market has witnessed few or zero cancellations as rig buyers typically only need to pay 5% or less in downpayment, and they may walk away from the order if the market stays poor once the rig is completed, defaulting on the tailheavy 95% remaining payment.

This points to higher counterparty risks for shipyards, as yards have “suddenly become asset owner and they do not know what to do with the asset”, according to Chow. “There are a lot of risks at the yards now. And when oil prices go up to $70-80, the overhang of equipment will create a time lag on recovery for the yards,” he said.

Global oil prices are currently around $40 per barrel, and in the medium term prices could rise to $105 per barrel by 2020, according to Jarand Rystad, managing partner at Rystad Energy.

“From 2017 onwards, we expect to see new growth in offshore E&P activities, while the oversupply of rigs will persist until 2019 or maybe till 2020. Even with higher oil prices returning, this (rig) sector will lag for two to three years,” said Rystad, who is one of the panellists at the Offshore Marine Forum.

Geir Sjurseth, managing director, global head of offshore finance, DVB Bank, pointed out that his biggest concern is the excessive supply on “every kind of offshore equipment worldwide”, which is the biggest hurdle to overcome if the industry is to recover.

“The breakeven level of oil companies are coming down across the board and we may not need oil to be at $80 per barrel to see market recovery,” Sjurseth commented. As a financier, he said DBV Bank will focus on serving existing clients, and in general not look at financing new projects.

Ron Mathison, managing director of Swire Pacific Offshore Operations, predicted another two to three tough years ahead before an upturn in utilisation and charter rates for AHTS vessels and PSVs. “At the same time we are keeping an eye on opportunities as we move to the latter stages of the downturn,” Mathison said.