The subsea vessel market is currently hindered by oversupply and low day rates, with some vessels being scrapped and many new orders being cancelled. However, the industry is moving toward long-term stability, according to analyst Douglas-Westwood (DW).

“In recent years, the speed with which newbuild vessels have entered the market has amplified the subsea vessel demand/supply imbalance. This has been further exacerbated by sustained low oil prices, as operators defer the sanctioning of new offshore projects, which could have supported vessel utilization,” said Mark Adeosun, an analyst at DW’s London office.

“As a result, the average vessel day rates declined by an average of 35% between 2014 and 2016. The weak market conditions have meant that many low specification vessels have struggled to hold on to existing charter rates, whilst some contracts were cancelled entirely,” he said.

To remain competitive in tough times, several high specification vessels have offered significantly lower day rates.

“A combination of these factors has forced a number subsea vessel providers to rethink their approach and help stem the oversupply by scrapping noncompetitive vessels, whilst also cancelling a number of high-profile vessel orders,” Adeosun added.

As investors’ anxiety grows over the subsea vessel market, DW’s World Subsea Vessel Operations & Hardware Market Forecast 2017-2021 forecasts that subsea vessel operations investment will total US $52 billion, “equating to more than 371,000 vessel days over 2017-2021 period.”

Forecast expenditure is set to grow at a modest 6% compound annual growth rate, following an initial decline of 50% over the 2014 to 2016 period.

The report notes that growth in vessel day demand will be driven by the inspection maintenance and repair (IMR) sector, as any “further delays in maintenance and repairs could compromise the integrity of production facilities.”

During the forecast period, Southeast Asia, the U.S. and West Africa will account for 52% of forecast IMR expenditure.

Consolidating To Balance

“Over the last 24 months we have seen a series of consolidations as well as a number of well-known operators exiting the subsea market, and this will lead to the removal of a significant amount of vessels in the industry, especially the lower specification vessels, while some of the higher specification vessels are going to be acquired by other players in the market,” Adeosun told SEN in a telephone interview.

“The removal of these vessels would actually lead to oversupply in the industry to contracting and improve the viability of subsea vessels in the long term. So these high-spec vessels that would remain in the industry would be much more useful for deeper waters, compared to mid-water or shallow water.

“Everything that has happened over the last three years and everything that will happen over the next three years will continue to support the sustainability of the industry,” Adeosun added.

M&A Activity

The current market conditions have also led to opportunistic merger and acquisition (M&A) activities, with some high-specification vessels being bought at a fraction of their original costs. Such transactions are seen as progressive approach to help expand the technical capabilities of striving vessel owners and help create an integrated subsea solutions market to assure future competitiveness and sustainability, the DW report said.

“I think with M&A activity there are two sides to the coin. The positive side would give opportunity for the acquiring company to offer field operators a more integrated solution. The ability to give this complete package would reduce cost over the long term,” Adeosun told SEN.

“Recent M&A activity, such as the TechnipFMC deal, means that medium-sized players are coming together to form a much larger company. This is done to create better efficiencies. So over the long-term, as well as in the medium-term, these moves help create integrated solutions for operators, which increase efficiency and also increase project economics.”

But there’s a flip side.

“The basic disadvantage of M&A is that it makes some operators bigger fish in the water, reducing competition,” he added. “So for smaller operators that only offer just one solution, it would be a disadvantage when bidding for projects because they will tend to be more expensive compared to a contractor that is offering an integrated solution to operators.”

Day Rates To Stabilize

Day rates for drilling rigs fell during the downturn as operators spent less money.

“Operators have realized that having cheaper day rates and cheaper investment compared to 2012 and 2013—with a 40% drop in expenses to develop the same kind of fields—means day rates for drilling rigs come down.

“So the question operators will ask is: if you can do this at this day rate in 2016-2017, what stops you from doing it in 2018-2019 at the same day rate?” Adeosun said.

But Adeosun believes the day rate has bottomed

“Operators are giving day rates at breakeven, in some cases they are operating at a loss, so going forward we expect to see the day rate to stabilize itself as activity continues to increase,” Adeosun told SEN.

In all, DW expects offshore vessel activity will improve as oil prices recover and operators began making final investment decisions on stalled projects.

Oil Prices Are Key

Operators need stable oil prices at about $55 to $60 per barrel to begin sanctioning projects, Adeosun said, noting many have reengineered projects and have pursued projects in phases to ensure there is enough cash flow to keep projects rolling.

In the past there were massive offshore projects with 40 or 60 subsea trees; however, operators are much more cautious, he added.

“They want to keep developments going to be able to improve their reserves, as well as their cash flows, so they have decided to go for phased developments, which is what is really helping the market right now,” Adeosun added.

“The more operators that are able to sanction projects, the more we expect day rates to be much more stable as well as to increase over the long term as well.”

—Steve Hamlen

Offshore