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Influx of southeast Asian vessels stifling recovery in the Middle East

Mon 09 Apr 2018

Influx of southeast Asian vessels stifling recovery in the Middle East
Owners based in the Middle East have had to contend with a growing number of incoming vessels

Industry leaders in the region agree that the Middle East offshore vessel market has bottomed out but claim that owners outside the region have flooded it with vessels that are keeping a lid on utilisation and rates

 

Offshore shipowners everywhere are searching for utilisation for their vessels, and a number have seized on the Middle East market as one with seemingly greater potential than their domestic markets.

There is nothing wrong with this, of course. The offshore vessel market is an international one, and unless countries adopt a cabotage regime, there is little to prevent overseas vessels entering markets in which their owners perceive there to be opportunities for work.

Well-known owners with their headquarters in Southeast Asia have seized on the Middle East market, but as the number of vessels they have despatched there has grown, so too has oversupply – a situation that some argue is slowing down recovery in the region.

Fazel Fazelbhoy, chief executive officer at Synergy Offshore, told OSJ that there are 400–540 offshore support vessels in the Middle East market, of which as many as 125 currently are owned by companies based in Southeast Asia, primarily in Singapore.

Mr Fazelbhoy believes the presence of so many Southeast Asian vessels in the market is depressing utilisation and will continue to do so. “Right now, he said,” speaking in early April, “utilisation is at about 60%. Without so many vessels from Singapore, utilisation would be significantly higher.” He believes that, if the Southeast Asian market remains depressed, owners based there will continue to deploy vessels to the Middle East seeking work.

Mr Fazelbhoy said rates in the Middle East are 30–50% below their peak before the downturn in the market. This means that rates are at or around breakeven and are likely to remain at that sort of level for the next couple of years.

He points to Saudi Arabia as a potential bright spot for owners and said Saudi Aramco will have a requirement for 200–250 vessels in the next two to three years. That might sound promising, he says, but owners need to know that Saudi Aramco’s requirements are more stringent than they once were. Nowadays, the company tends to specify dynamic positioning class 2 as a minimum and has implemented age restrictions on vessels, although if demand and rates should rise, he said, age limits of vessels employed by the company could relax and become more flexible.

“In 2018, the market will remain subdued,” he told OSJ. “I think that the market has bottomed out but don’t anticipate that rates will pick up much. In the last 2-3 years, when contracts come up for renewal, we’ve seen a lot of deals renegotiated and owners having to accept lower rates, but more recently, owners have managed to secure extensions to contracts on existing terms, which is at least a sign that we have reached the bottom,” he said.

“Even so,” said Mr Fazelbhoy, “I think that, for the next couple of years at least, many owners will remain in survival mode. There’s no cabotage market in the Middle East, so anyone can bring in a vessel as Singaporean companies such as Pacific Radiance and Vallianz have. There are still too many small owners, and there hasn’t been any consolidation to speak of either.”

Not everyone is as downbeat as Mr Fazelbhoy, however. René Kofod-Olsen, chief executive at Dubai-based Topaz Energy and Marine, told OSJ that he is “cautiously optimistic” about the offshore support vessel industry and reasonably optimistic about the Middle East market.

Announcing details of the company’s financial results for the year ended 31 December 2017, Mr Kofod-Olsen said 2017 was a challenging year for the offshore support vessel industry, but he believed the worst of the downturn is now behind us. “2018 will also be challenging, but we are cautiously optimistic as market conditions improve,” he said. “Oil markets are more positive with demand and supply close to equilibrium. The number of projects being commissioned is increasing, with the supermajors reporting improved results for Q4 2017.”

Mr Kofod-Olsen said the company has continued to invest while generating additional cost reductions and efficiencies that have resulted in cost savings of US$20M for the year. The company invested in vessel maintenance, safety, customer relationship management, crew training, competency programmes and initiatives to make Topaz more efficient.

In an exclusive interview with OSJ, Mr Kofod-Olsen said discussions with potential clients suggested that development activity is being planned on the Saudi and United Arab Emirates side of the Gulf. “We are more bullish about 2019/20,” he said, although like Mr Fazelbhoy, he believes that there are too many vessels and too many owners in the Middle East market.

Mr Kofod-Olsen believes the fact that several oil companies have been locking in to term contracts suggests that they don’t expect rates to fall further. He puts utilisation at a slightly higher level that Mr Fazelbhoy. It has picked up since 2017, he says, when it dipped as low as 50% at times.

Asked what might drive higher utilisation and rates, Mr Kofod-Olsen highlighted increased activity by national oil companies (NOCs) and engineering, procurement, construction and installation (EPCI) contractors, for which offshore support will also be required. Now, when costs have come down, is a good time for companies to change out equipment, he suggested. Development activity by international oil companies and NOCs in countries such as Saudi Arabia and the United Arab Emirates will also help drive demand, he said.

In terms of demand, Mr Kofod-Olsen sees growing demand for anchor handlers – it has recently acquired two diesel-electric vessels of this type to bring into the region – and fast crewboats, which he anticipates will win a growing share of crew transfer work from helicopters. The anchor handlers will be phased in to the Topaz fleet in mid-2018. He sees the trend towards increased use of fast crewboats as part of an industry-wide focus on cost-efficiency. Topaz doesn’t currently operate crewboats in the Middle East market but has experience of doing so in the Caspian.

He agreed with Mr Fazelbhoy’s analysis of the trend towards DP2 vessels as a baseline in the Middle East market but sees specification of DP2 ships as part of a global phenomenon in the offshore oil and gas industry, not something that is only taking place in that region. “The Middle East wasn’t an early adopter of DP2, but it has become a given,” he told OSJ. Like Mr Fazelbhoy, he acknowledges that oil companies are placing age restrictions on vessels but expects enforcement of age restrictions to be more arbitrary. It will ultimately depend on the condition of a vessel, the duration of a contract and the state of the market.

Another factor that could influence vessel selection is how long ships have been in layup. “Some oil companies say they don’t want vessels that have been in layup for more than six months,” he explained.

The chief executive of another well-known owner, Halul Offshore’s Vivek Seth, told OSJ that, overall, he is cautiously optimistic about the direction of the Middle East offshore support vessel market. He agreed with Mr Fazelbhoy that rates are at cash flow breakeven level. “Clients are still calling the shots,” he said. “Utilisation is stable, and I think it will remain stable for the remainder of 2018.”

Like Mr Fazelbhoy, he thinks that the market has certainly bottomed out and that the worst is behind us, but the Middle East market is not without its challenges. These include the fact that it can take some time to obtain approvals to work in certain countries, contracts are non-negotiable and very ‘client-centric’ and, should arbitration be required, an owner has to accept that it would be according to the local jurisdiction and in accordance with local law. The operating philosophies adopted vary somewhat across the region too, and there is growing demand for local content in contracts (see below).

Mr Seth agreed that the way that clients are now fixing vessels on term rates suggests that the oil companies know this. “That they are trying to lock in contracts at current rates in undoubtedly a good sign,” he said. “In 2019, I think that rates might creep up a little but not to anything like the same level that they were at in 2014.”

He also believes that, although the requirement for DP2 vessels is probably now firmly entrenched in the region, age restrictions on vessels will be interpreted with greater flexibility should rates rise and clients want to contract vessels at better rates. This is due in part to the age profile of the offshore vessel fleet in the Middle East. According to Mr Seth, 32% of the vessels in the region are 15 years old or older, 23% of vessels are 30 years of age or older, 21% of the anchor handlers in the region are more than 30 years old and 30% of the platform supply vessels are 30 years old.  

He also believes that the influx of vessels from Southeast Asia has influenced the market. “As assets, offshore support vessels are very mobile,” he said. “That mobility is a good thing in some ways but not so good in others, and the Middle East has certainly see its fair share of owners seeking utilisation outside their domestic markets.” It is not out of the question, he suggests, that some kind of informal cabotage regime might come into effect as a result.

He also sees demand being driven by Saudi Aramco and to a lesser extent by clients such as Abu Dhabi National Oil Company (ADNOC), but highlighted another issue that owners need to bear in mind – a phenomenon known as ‘Saudisation’, the Saudi nationalisation scheme, under which companies and enterprises are required to enhance the level of Saudi content in a contract and provide greater opportunities for Saudi nationals.

The policy is part of the kingdom’s National Transformation Programme, as spelled out in the Saudi Vision 2030 plan. Simply put, the idea is that every business initiative should not only be good for business but strengthen the Saudi economy and the sustainable growth of the kingdom. In the long term, the policy is part of a wider programme to enable the Saudi economy to diversify. Ultimately, the aim is the creation of an internationally competitive local energy sector, supported by national champions.

For a Saudi company such as Zamil Offshore, the Saudisation policy could be beneficial, especially given Saudi Aramco’s leading role in driving demand for offshore vessels, but Zamil Offshore’s consultant engineer, business development, international marketing and risk management executive Hassan Abouraya told OSJ that, for the time being, he also expects utilisation and rates to remain low. In such an environment, oil companies can adopt a ‘take it or leave it’ approach to contracting, he said, although he agreed that it is a promising sign that more long-term agreements are being sealed.

In response to the Saudisation drive, Zamil Offshore has opted for 100% Saudi crew on some of its vessels. The company’s first 100% Saudi-crewed vessel became available in January 2018. A second was due to be ready for service with exclusively Saudi personnel in April. The company is also training large numbers of Saudi nationals.

 

Mr Kofod-Olsen and Mr Fazelbhoy will both be key speakers at Riviera Maritime Media's Middle East Offshore Support Journal Conference in Dubai, UAE 7-8 May.

 

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