Crisis batters OSV hub

Dollar output of Singapore’s offshore sector has almost halved over the past two years and the outlook remains bleak

Singapore’s offshore sector is suffering the same agony being felt by most of the world’s owners of rigs and offshore support vessels (OSVs), if not measurably worse.

Much of the recent media attention has focused on the high-profile troubles of Ezra Holdings, its Emas Chiyoda Subsea, as well as compatriot Swiber.

The March filing for US Chapter 11 bankruptcy protection shows that Singapore’s three large banks, DBS, OCBC and UOB, are collectively exposed to Ezra for $640m in mostly unsecured debt.

Outside the subsea sector, the prolonged period of unsustainable day rates and low utilisation has been putting tremendous financial pressure on other large and small Singaporean owners in the core support market of anchor handling tug supply (AHTS) vessels and platform supply vessels (PSVs).

Cash flow negative day rates show exactly what is meant by “unsustainable”. For Southeast Asia, the average day rate for a 10,000-bhp AHTS vessel is now around $6,830, according to Clarkson Research Services (CRS). One Singapore-based owner tells TradeWinds that this size of ship can expect daily operating costs of between $5,000 and $7,000 in the same area.

In effect, OSV owners are being forced to subsidise their clients, who in turn are in the process of destroying their own supply chain — not just in Singapore and Southeast Asia but around the world.

The charterers of OSVs are acutely aware of the destruction wrought by unsustainable rates, as well as the implications for vessel safety and reliability. Tender requirements have been excluding ships that have been in lengthy layups. Some owners will also not be asked to tender for projects because of their financial instability.

The situation has wiped out owners’ equity across the industry, triggering vessel impairments and crashing asset values. A number of 15-year-old AHTS vessels, with 150 tons of bollard pull, are said to be offered in Asia for just $1.5m.

Along with being a large hub for OSVs, Singapore has also held about a 70% global market share each in the construction of jack-up rigs and in the conversion of floating production storage and offloading (FPSO) units.

The Singaporean government’s Economic Development Board (EDB) organises this industry as “marine and offshore engineering (M&OE)”, which includes rig construction and offshore vessels.

Today, exactly one-third of Singapore’s offshore-related jobs have been lost since the peak of 94,000 positions in 2008, according to data from the government’s Department of Statistics (DOS).

M&OE employment was down to 62,800 jobs last year, a 27% fall from the 85,600 jobs in 2014, when the offshore crisis began to take hold globally.

At the same time, the M&OE sector’s output fell to SGD 13.1bn ($9.3bn) last year, an eye-watering 47.4% decline from SGD 24.9bn in 2014, according to DOS.

However, EDB’s latest sector survey is forecasting further, potentially huge quarter-on-quarter declines. The first-quarter of 2017 estimate is pointing to a 55% decline in M&OE output from the fourth quarter of 2016. It is also forecasting a steep 66% fall in M&OE employment numbers over the same period.

After 2014, the offshore downturn devolved into a full-blown, existential crisis for many oil service companies, putting devastating financial pressure on the world’s shipowners, drillers and contractors.

The main factors behind the worst downturn in three decades, or longer, have been described nearly ad nauseam at this point by analysts, brokers and owners alike.

Along with the previous crash in the oil price, one key reason is the severe fall in vessel demand. This occurred after oil companies shelved offshore projects and chopped budgets for exploration and production (E&P) spending, which ultimately pays the charters for OSV owners.

However, if anything, huge vessel oversupply is essentially regarded as the 10-ton millstone around the OSV industry’s neck at the moment.

For the Singaporean OSV industry, it is best to consider Southeast Asia as its market, although its ships are also deployed farther afield. With no significant oil-and-gas resources of its own, Singapore is an offshore hub for many vessels seeking to serve oil-producing countries across the region, such as Malaysia, Indonesia, Brunei, Myanmar, Thailand and Vietnam.

More ships are thought to be available in Southeast Asia than in many other regions, say some OSV owners with global footprints.

“We have seen a rebound in the oil price but forget the oil price for a moment and just look at the oversupply of tonnage,” said an owner in Singapore. “We have around 5,000 OSVs in the market and about 3,000 are working. There are about 40% too many vessels and no amount of consolidation will fix that.”

Excluding crewboats and anchor handling tugs (AHTs), and counting only PSVs and AHTS vessels, there are about 943 ships flagged in these Southeast Asian countries, according to the CRS database.

For March, CRS shows about 308 vessels in these two categories that are now “active” in Southeast Asia.

For “inactive” ships, as a conservative estimate, about 360 OSVs are said to be in layup in Southeast Asia. Some say this number could be doubled and the flag numbers easily demonstrate that possibility.

Broken down by country, a total of 449 fly the Singaporean flag, 242 the Malaysian flag, 184 the Indonesian flag, 44 the Vietnamese flag and 16 the Thailand flag, with eight in Brunei and none in Myanmar. For comparison with adjacent areas, a further 223 OSVs are flagged in China and 138 in India.

At the start of the year, utilisation for mobile offshore drilling units (MODUs), the key demand driver for OSVs, was down to 21% for drillships, 28% for semi-submersible and 51% for jack-up rigs. Global utilisation for OSVs is around 40%.