Low recycling value means OSV scrapping is not happening

The crash of crude oil prices has resulted in a recession in the offshore oil and gas sector, marked by underutilisation and depressed charter rates of oil rigs and OSVs.

Offshore players have publicly spoken out on the need to scrap idled and elderly OSVs as perhaps the only effective solution to bring the supply-heavy market back to balance, but the low scrap value of OSVs has held back demolition activities.

“The lack of scrapping activities is mainly because there is virtually no steel value (in OSVs) meaning there is not enough cash value. The scrap value can probably only cover the cost of towing the ship to Bangladesh – that’s it,” commented Gunnar Haug, managing director of Ulstein Asia.

The severely weakened OSV market has led to approximately 20% out of more than 3,000 units of the global OSV fleet being laid up. In the Asia region, there could be approximately 200 OSVs laid up in the waters surrounding Indonesia’s Riau Islands, while the waters off Malaysia’s Labuan island is another hotspot for idled OSVs.

“The OSV market is in a panic mood, and we believe that oil prices need to be higher though they need not have to be higher than $80 (per barrel),” said Rezza Hassan, executive director and head of OSV at Malaysia’s Bumi Armada. Global oil prices have hovered around $40 per barrel in recent days.

Duncan Telfer, commercial director of Swire Pacific Offshore Operations, questioned the rationale of owners in laying up so many vessels, especially those that are more than 15 years old.

“The only way is to reduce the number of vessels via recycling, or scrapping. In 2016 to 2017 we are going to see more newbuildings entering the market. For those OSVs more than 15 years old that are cold-stacked, they will be close to 20 years if they are brought back to the market in another couple of years – what’s the point?” Telfer said.

Ulstein Asia’s Haug noted that the lack of incentive to scrap means that owners would still rather wait for the chance to get the stacked ships out to generate money. “Hence I would very much like to see most of those (laid up) vessels sink,” he quipped.