03-02-2018

Ring Out The Old? Reviewing The Offshore Sector In 2017

After an extremely challenging 2016, parts of the offshore sector had a less harrowing year in 2017. Oil prices, though volatile, trended upwards, offshore project sanctioning picked up and there was a sense that perhaps some charter markets were starting to bottom out. That being said, it was still another very challenging year for the offshore fleet and owners will certainly be looking for improvements in 2018.

A Capital Effort!
Offshore E&P spend fell for a record third year running in 2017, though this was felt more in exploration (field discoveries declined by 31% y-o-y) than in development activity, with estimated offshore project CAPEX rising by 39% y-o-y. Project FIDs were supported on the one hand by higher oil prices (due to a range of factors, Brent ended the year at $64/bbl, up 17% y-o-y) and on the other by project cost deflation, as oil companies have sought to bring down project breakevens. These trends yielded FIDs at large projects such as Liza Ph.1 ($3.2bn) and at a number of developments delayed since the onset of the offshore downturn such as Coral FLNG Ph.1 ($7bn). This was beneficial for FPSOs, with eight contracts awarded, up from zero contracts in 2016, though FIDs have mostly not yet fed into potential work for most of the rest of the offshore fleet, as reflected in the continued erosion of the subsea tree and field development backlogs in 2017. But on the whole, the demand side of offshore does seem to have gained some momentum.

Any Silver Linings?
However, significant challenges persisted on the supply side. Looking at the rig sector, global utilisation ticked up a few percentage points to 66% over 2017. Due to persistent oversupply though, dayrates remained broadly flat y-o-y (outside of the harsh niche) and continuing pressure on drillers saw a rise in M&A activity. This could help speed up rebalancing, though the rig orderbook of 145 units (32% of the active fleet) still looks ominous.

Turning to the OSV sector, vessel oversupply was also a key theme in 2017 and at the year’s end around 25% of the fleet was in lay-up. Even given this level of lay-up, dayrates generally remained depressed, with the OSV earnings index falling to 74 in 2017, half the 2007-16 average. On a slightly more positive note, the rate of deliveries into the fleet slowed as 2017 progressed and M&A definitely moved up the agenda. That being said, the enormity of oversupply situation remains daunting and a key uncertainty is just how many of the units currently in lay-up will eventually return to market versus being ‘scrapped in place’.

Feeling Rather Low
Related to the continuing challenges in the charter markets was the historically low level of vessel contracting: just 75 units were ordered in 2017, down by 88% on the 2007-16 average (though as noted, high-value FPSO orders picked up significantly on 2016). Clearly this still leaves yards in a precarious position but at least it suggests owners are more cognisant of just how oversupplied offshore markets have become, while in the longer term, lower ordering since 2014 will hopefully help with rebalancing.

Happy New Year?
So then, challenges, risks and uncertainties clearly remain for offshore, and there are many factors to keep an eye on going into 2018: oil price dynamics, demolition, consolidation and so on. But the demand side has seemingly ticked up and on the supply side, at least things do not seem to be really getting any worse now. While things are far from rosy, the offshore sector possibly appears to be a little better placed at the start of 2018 than it was one year ago.

Source: Clarkson Research Services Limited

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