The news lately for the offshore industry has been good. Crude oil prices have climbed to heights last seen three years ago. Oil company earnings and cash flow prospects are improving with higher oil prices. The Trump administration has proposed allowing drilling everywhere offshore — except off the coast of Florida.

But perhaps most important is a recent analysis by shipbroker Clarksons that predicts the potential for a dramatic change for the offshore service vessel fleet.

According to Clarksons, it sees the potential for as many as 1,000 OSVs over 15 years of age eventually being removed from the market or scrapped. That would have a dramatic impact on day rates by the perception of a reduction in this huge idle vessel overhang. The study’s conclusion comes from reviewing the large number of vessels in layup, their condition, and the deferral of their mandated periodic special surveys and the likely high cost to bring them back into class. In other words, we are talking about the immense cost to restore this ghost fleet to active service.

To appreciate the significance of the ghost fleet overhang, focus on the following: there are 1,389 OSVs for which Clarksons cannot find running class certificates. Of this group, 64% are in formal layup, which, if all were recertified, would expand the active vessel fleet by 25%. Of the 885 OSVs in formal layup, 284 are less than 15 years old, while 601 are over 15 years old. Of the 32% of the laid up OSVs that are less than 15 years old, these are the most likely ones to be recertified because they will draw the most interest to oil company customers. They are also the vessels that should be the least costly to reactivate, although there are many factors that determine the actual cost of vessel recertifications.

The optimistic conclusion of the Clarksons analysis is that if all 885 OSVs in lay-up were permanently removed, the total fleet would shrink by 17%. If only those older than 15 years were taken out of the fleet, it would shrink by 11%. Either of those fleet contractions would have a meaningful impact on the OSV market. The question is whether any of these vessels will really exit the fleet.

The Clarksons analysis suggests that rational owners of OSVs will weigh the cost of recertifying their laid-up vessels — especially the older ones — and decide that the expenditures will not be recouped by working the vessel at the expected day rates they may earn over the next five years, or until their next special survey date. This argument was advanced during the 1980s market downturn, too. At that time, OSV operators held on to the belief that their customers would not hire older vessels. However, as the average age of the OSV fleet reached 15 years old, oil companies merely said that they wouldn’t take a vessel older than 16 years. This then became 17 years, and then 18 years, and so on, until day rates rose sufficiently to prompt speculative newbuilding to begin. The prospect of newer vessels is what ultimately was the death knell for the old vessel fleet. With newbuilds still arriving, the day of special survey costs rationalizing the OSV fleet may still be in the future.

The industry can take heart in the prospect that oil prices of $60 bbl. and above are stirring the animal spirits of offshore focused oil companies, which will lift demand for drilling rigs and OSVs. The prospect of sustained higher oil prices will have more affect on the timing of this offshore recovery than special survey costs.

 

A collection of stories from guest authors.