Oil price fall could put spanner in the works for OSV market warns S'pore law firm

In a legal update Oon & Bazul partner Kohe Hasan warned that the “steep fall in oil prices of late could put a spanner in the works for the OSV industry”.

The oil price has almost halved over the last six months which will likely lead to oil majors to cancel or delay drilling projects, and it was noted that ConocoPhilips said it would be cutting investment spending by 20% in 2015. This in turn will reduce demand for OSVs and could also see companies trying to exit unprofitable charters as was seen in the crash of the dry bulk shipping market in 2008.

“One possible repercussion of the fall in the prices of oil and the expected fall in demand for OSVs is that charterers may seek to discharge themselves from charterparties which they had concluded prior to this decline,” Hasan said.

“Such a trend was seen from the collapse of the freight market in 2008 which saw many charterers in the dry bulk industry attempt to discharge themselves from unprofitable charters.”

The law firm said there were a number of ways a charterer could seek to discharge unprofitable charters. Hasan said they could argue that “the unexpected and severe drop in the oil price constitutes a supervening event that has frustrated the charter party”.

They could also seek to invoke force majeure clauses, although it was noted this might not be sustainable.

Charterers can also discharge charters where the owner has become insolvent. “In the present economic climate, this is not unlikely as owners face under-utilisation of their assets or rate reductions,” she said.

Another impact the low oil price could have on the OSV market is consolidation.

“Smaller and newer OSV operators may not survive in this harsher economic climate and are likely to become targets of larger OSV operators with a healthy cash flow,” Hasan said.

“For instance, Icon Offshore is currently looking at several merger and acquisition (M&A) opportunities with regional OSV players that are expected to materialise this year.”