Global demand for oil and gas offshore supply vessels (OSV) will continue its 10% annual decline through 2017, IHS Markit reported in a new analysis.
“Despite a significant decline in operator demand for offshore supply vessels, such as platform supply vessels (PSV) and anchor-handling tug supply (AHTS) vessels, the global OSV fleet continues to grow,” said Erik Simonsen, the company’s senior manager of energy costs and technology and lead author of “IHS Energy: When Will the AHTS and PSV Market Recover?”
“This growth comes as a result of excessive new OSV orders placed during several years of growth before the oil and gas industry went into decline. As a result, we expect overall utilization for these vessels will stay below 60% through 2020, which is extremely low.”
Global demand began its annual 10% falloff in 2014.
PSVs are specially designed to supply offshore oil and gas platforms. The primary function for most of these vessels is logistic support and transportation of goods, tools, equipment and personnel to and from offshore structures.
AHTS vessels mainly handle anchors for oil rigs so the rigs can be towed to their location, anchor them and occasionally serve as an emergency response and rescue vessel. These vessels also transport supplies to and from offshore rigs, especially in the North Sea.
Although demand for OSVs, which includes PSVs and AHTS vessels, is expected to increase beginning in 2018, the market, along with day rates, will not recover until after 2020, Simonsen said. The OSV market has more than 400 managers, IHS Markit said, and is overripe for consolidation. However, the report said consolidation alone will not solve the capacity problem.
“While some OSV managers may consider cold-stacking vessels as a means of buying time while they wait for a better future market, we believe that to bring the market back into balance for both day rates and fleet utilization requires a massive scrapping plan that eliminates older vessels at levels previously not seen in the industry,” Simonsen said.
Vessels built before 2000 will struggle to achieve term contracts, while spot rates in an oversupplied market will most likely only equal daily operational expenses for these older vessels, IHS said. Utilization in the spot market remains below 50% of the fleet, meaning that EBITDA will remain negative.
“These older vessels will not survive until the next up cycle,” Simonsen said. “The scrapping of these vessels, along with our IHS Markit expectation that many vessels currently under construction or those on order will not be delivered, could reduce the current fleet significantly. We believe as many as 1,000 vessels need to be scrapped or permanently removed from the fleet, including vessels under construction or on order, to achieve market balance by 2020.”
What that translates to is the scrapping of as many as 200 vessels per year for the next five years compared with the average scrapping of 25 vessels per year in recent years. Cold stacking of vessels is not the solution, IHS Markit said, because it will actually delay industry recovery and balance.
“The question remains whether the industry, with such a fragmented ownership structure, will be willing to scrap older vessels to address overcapacity in the market, which may benefit other managers with more modern fleets,” Simonsen said. “However, most oil and gas companies are not willing to enter term contracts with vessels older than 15 to 20 years, so those vessels will have to compete on the spot market and that will prove increasingly difficult for those vessels when newer vessels are available at attractive rates.”
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